U.S. Treasury Secretary Janet Yellen gave a talk at the Atlantic Council last April on the future role of cooperation in the global economy. In October Chrystia Freeland, Deputy Prime Minister of Canada and its Minister of Finance, gave an address at the Brookings Institution that presented a similar perspective on how the global economy must be reorganized to meet security demands. Their speeches raise questions about how the new arrangements would operate, and how the rest of the world would fit into the proposed framework.
Yellen declared that the war between Russia and Ukraine had “redrawn the contours of the world economic outlook…” The sanctions imposed by the U.S., the other members of the Group of 7 and the European Union were in response to Russia’s “…having flaunted the rules, norms, and values that underpin the international economy.” She also drew attention to China’s ties with Russia and declared that “The world’s attitude towards China and its willingness to embrace further economic integration may well be affected by China’s reaction to our call for resolute action on Russia.”
Looking forward, she enunciated several propositions to govern future action. The first of these dealt with the need to modernize the existing multilateral approach. Yellen proposed basing economic integration by confining the “friend-shoring” of supply chains to “a large number of trusted countries…” This orientation would lower our vulnerability to countries using their economic resources to “disrupt our economy or exercise unwanted geopolitical leverage.” Left unsaid were the issues of which countries merited trust, and how to deal with those that do not fulfill that criterion.
Freeland spelt out some of the details in her address. She spoke of “a brutal end to a three-decade-long era in geopolitics,” and proposed a new orientation based on three pillars. The first is a strengthening of the connections among democracies, and Freeland specifically cites Yellen’s “friend-shoring” as one way to accomplish this.
The second pillar deals with “in-between countries” in Asia, Africa, the Middle East and Latin America. Freeland insisted that friend-shoring should be open to any countries that “…share our values and is willing to play by collectively agreed upon rules.” She made the claim that a rules-based order will be valuable to smaller countries “…most susceptible to coercion by larger and more hostile economies.”
Finally, with respect to authoritarian governments, Freeland advocated a sharp break with the assumptions of the 33 years. These states have little respect for a rules-based disorder, she claimed, and are hostile to the democracies. The democracies can continue to trade with the authoritarian states but should avoid strategic vulnerabilities in their supply chains.
Yellen and Freeland, therefore, agree that the economic relationships of democratic nations should be based on common values and goals. This is a major pivot from the guiding principles of the last three decades that more trade and investment would lead to shared prosperity, the development of democratic political systems and a diminution of conflict. It is also much more of a “top-down” approach, with governments overseeing the relationships of domestic firms with the rest of the world and evaluating the entry of foreign firms into domestic markets.
These ambitious proposals have met a variety of reactions. Branko Milanovic has called the trading links “trade blocs,” similar to those in the past such as the United Kingdom’s imperial preferences, and “mercantilism under a new name.” But mercantilism was a characteristic of President Trump’s trade policies, as he saw trade as a zero-sum relationship with trade deficits as a loss for the country that sustained them. The new proposals seek security and freedom from the weaponization of trade.
How will other countries, particularly those in Freeland’s second group, respond to these initiatives? The new lineup of countries bears many similarities to the post-World War II division among the “first world” of advanced economies, the “second world” of the Communist bloc that included the Soviet Union and China and the “third world” that was the category of every other country, which included nations with colonial pasts in Asia, Africa and Latin America. Many of the third-world countries sought to establish their independence from the first and second worlds.
Today there are a wide variety of economic and political systems outside the advanced economies. Many would undoubtedly desire to continue exporting to the U.S., the European Union, Japan and Australasia. But do they qualify for Freeland’s friend shoring club?
Vietnam has taken the place of China for many multinationals as a source of low-wage production, and its trade with the U.S. and other countries has propelled its growth. Its government, on the other hand, is a one-party system led by the Communist Party, and Freedom House ranks it as “Not Free.” Bangladesh is another country where growth has been driven by exports, mainly in garments. The Awami League keeps a firm hold on political power and the country is characterized by Freedom House as “partly free.”
The transition to “green energy technologies,” will require the use of cobalt, and the Democratic Republic of Congo supplies more than 63% of the world’s use of the element, as well as other natural resources. But the inhabitants of that country do not benefit from their extraction and export, and their political system has been volatile at best. Freedom House rates it as “not free.”
Many other countries that engage in transactions with the advanced democracies will not qualify for membership in the friend-shoring club as defined by Freeland. Moreover, they may not want to choose ideological sides between the two sides in the new order. How will Yellen and Freeland’s democracies deal with these countries? Will they be excluded from trade and financial flows? Or will economic relationships with them be allowed to avoid dependence on the authoritarian countries that are viewed as threats to the security of the democracies? The diversity of economic and political systems in the emerging markets and developing countries will resist easy categorization and pose challenges to Yellen’s and Freeland’s configuration of the world’s economies.
