Economic strongholds of today: the struggle to maintain its power in the changing economic world order.

Transcription

1 Economic strongholds of today: the struggle to maintain its power in the changing economic world order. For the last decades globalization's technological, trade and financial currents brought about great changes in the economic world order economic wealth started shifting from the West to the newly arisen economic powers. If earlier a vast liberalization of economy was considered as the key to economic development and securing a better future, now it is not that easily acknowledged as an absolute good as it is having a great impact on world income distribution and employment. Growing inequalities over several decades, which have not been particularly worrisome in the context of sustained and dynamic growth, have become a source of economic and political instability. The age of commodities consumption made some countries find their markets conquered by foreign imports and face the fact that their own production is not that competitive any more. On the other hand, one should consider the complexity of global value chains, which makes it harder to formulate policies that allow governments, workers and firms to capitalize on GVCs while alleviate its negative side-effects. Now we are witnessing how deep economic and cultural fissures are developing between the countries who can take advantage of globalization and those who lack the resources or skills to do so. A potent form of neo-isolationism is globally on the rise. One of the most significant events featuring this is the United Kingdom s decision to leave the European Union. This ideological trend is both new and old. It consists of a series of sentiments that run directly counter to the economic, cultural and political liberalization the globe has faced since the 1980s. This neo-isolationist trend has now taken firm root in the United States, the leader of global liberalization. Historically, from the very beginning the United States has tended to be isolationist. This changed with the United States two historical moments: after World War II in 1945 and after the collapse of the Soviet Union in THE US

2 Due to its strong influence and pervasive presence in the modern economic world order the US strives to make the most of its potential and turn their both economic and political assets into real positive outcomes for their economy. The assets are the following: being the forefather of world economic and financial architecture; having a strong economic interdependence with the major world economies; having a great market capacity, leading in R&D, having a great political influence in different regions and sustaining diplomatic relations with the key countries all over the world. As the economic world order changes, the US strives to lead but not to follow the transformations. USA cannot ignore them as these transformations occur due to different objective reasons. Among them, the growing power of other players, and understanding the evidence of economic and structural problems which do not allow the US economy to grow at a desired speed. That is the reason why the current model of economic changes should be, according to the opinion of business and work community enhanced or even transformed. But there is a great debate concerning how to achieve positive changes. The problem is that there is no distinct common understanding among political elite and experts which would be widely acknowledged. Big companies and liberal wing sees it in further market liberalization as a tool to redistribute the benefits from international trade in favor to the USA. Their opponents vote for market protectionism in order to secure its national businesses and workers, as well as traditional industries as there can be no political influence without a strong economy backing up. The environment appears to be favourable, on the one hand, given the US gained political and economic assets, but, on the other hand, very competitive due to the active involvement of other players and lack of common understanding concerning consistent development strategy. The previous US trade strategy to which Donald Trump seems getting back was aimed at mutual higher scale of market liberalization and creation of the belt of mega-regional trade and investment partnerships by seizing, first of all, North

3 America, Europe and Asia, where countries show robust economic performance. According to proponents of this strategy that would help to trigger one of the most large-scale transformations of world economic and trade landscape. Its goal is to redistribute the benefits from international trade in favor of the main participants of the partnerships, first of all, the USA and create more liberal, US-centered global trade. D. Trump s administration argues this concept, blames all the liberalization initiatives taken up by former administrations for the loss of manufacturing jobs in America's Rust Belt. As I see the reasons for that are the following: 1) There cannot be the same approach to the developing countries as to the developed ones. The creation of free borders for commodity exchange and a simplified investment regime will not automatically promote the creation of equal conditions for fair competition and increase the production of export-oriented American goods. Such measures would mainly facilitate the offshorization of production and services, the outflow of capital, the transfer of jobs to countries that can guarantee lower costs. Therefore, the same legal regime and high level of trade liberalization should not be applied to them as to the counties with developed economies. Moreover, according to the conducted study of David Autor on the effect that Chinese imports had on competition in local labor markets in the United States, the mass import of cheap Chinese goods accounts for at least a third of the total reduction in jobs in the industrial sector. 1 The reduction in jobs also contributed to an increase in the social burden: the payment of unemployment benefits, pensions, insurance. The increased unemployment was caused by the "Chinese trade shock" - a sharp and all-encompassing influx of Chinese goods that seized and instantly saturated the domestic American market with a wide range of products and materials. 1 David H. Autor, David Dorn, and Gordon H. Hanson. The China Syndrome: Local Labor Market Effects of Import Competition in the United States // URL://

4 B. Obama attributed all these negative effects for American workers phenomenon at the expense of the consequences of the post-industrial era. He proceeded from the belief that technological progress inevitably changes economic reality. For example, automation leads to a reduction in jobs, the emergence of the digital economy increases the share of services in the overall structure of the economy. Thus, a new type of economy requires modernization in all areas of life, "new normality" requires the creation of agreements and partnerships of a new type that will meet the challenges ahead and threats to US economic and political leadership. 2)There is likely no guruantee that market liberalization would trigger irreversible processes of the society democratization. It has not become a trigger mechanism for positive changes in Chinese society obtained economic power has made Chinese political regime even stronger. 3)Legal moments of trade and invetsment agreements These factors may include: a. Non-compliance with the rules and norms According to D. Trump, the mistake of the previous administration was that it had an excessively idealistic faith in multilateral treaties and international institutions. Many countries fail to bring its measure into compliance with WTO rules. There are objective reasons for that. First thing is that the rules are often written with the implicit understanding that countries have free-market principles in the organization of their economic systems but it s not about all the countries. Secondly, trade agreements are often written with the implicit understanding that countries implementing those rules have functional legal and regulatory systems that are transparent and accountable. 2 It is not always true so it brings about the loss of confidence in the system. 2 Defending Our National Sovereignty Over Trade Policy. The President s 2017 Trade Policy Agenda p.4 // URL: %20The%20President%27s%20Trade%20Policy%20Agenda.pdf

5 b. Cheating Important sectors of the global economy, and significant markets around the world, have been at times distorted by foreign government subsidies, theft of intellectual property, currency manipulation, unfair competitive behavior by stateowned enterprises, violations of labor laws, use of forced labor, and numerous other unfair practices. 3 Moreover, there is a large number of measures that allow to covertly subsidize export-oriented production - these things are not regulated by the WTO: cheap loans, governmental programs, infrastructure projects. c. Partial transfer of decision-making Among other things, the president does not accept the partial transfer of the sovereignty in any sphere to the supranational level, since this will mean that the decision-making in the trade and economic sphere will not fully be the competence of the US authorities, in any case, as he was before. In order to combat all this disproportions there is a number of measures that can be applied: sanctions, trade acts (Trading With The Enemy Act Of 1917, International Emergency Economic Powers Act, 1 Trade act of 1974, Title VII Of The Tariff Act Of 1930). For example, tariffs on steel and aluminium imports (steel products face a 25% tariff, with 10% on aluminium goods) were imposed. As the US imports four times more steel than it exports, it is reliant on steel from more than 100 nations. Besides, retaliatory tariffs are imposed on up to $60 billion in Chinese imports: electronics, robotics, aviation, air space products due to forcing foreign companies to disclose their intellectual property in exchange for market access to China. Here he used Trade Act of 1974 Section (unilateral tariffs without approval from Congress). An interesting fact that more than 100 hundred US companies like Walmart, Kohl s etc wrote a collective letter to the president. 3 Ibid 4 Trade Act of 1974 // URL:

6 Beijing announced an additional 25 per cent tariff on 106 American products worth US$50 billion including soybeans, pork and aircraft in retaliation for Trump s plan to impose duties on 1,333 Chinese products did it in a very sophisticated way. These include corn soybean farmers in Iowa, as well as automobile producers in Michigan, tobacco farmers in North Carolina, and sorghum farmers in Texas and Kansas. The impact of a 15 per cent duty on ginseng will be felt particularly acutely in Wisconsin, which accounts for 85 per cent of US exports of the crop to China. The majority is grown in the state s Marathon county, where Trump beat his Democratic opponent Hillary Clinton by 47 percentage points in China chose to precisely target these states exports in the belief that domestic pressure in the US will quickly build on Trump. In the trade and economic policy towards Russia there is to some extent a part of the same approach. By restricting Rusal, the world's second biggest producer of the metal, from doing business in U.S. dollars and thus from exporting aluminum to the U.S., the Trump administration forced to find new markets for metal. The target of Trump's import tariffs might mean the revival of domestic production. It might mean killing two birds with one stone -- punish Russia on foreign policy issue and get a major foreign player off the U.S. aluminum market. Due to the gained huge economic interdependence, there has always been a parallel tendency the search for reliable partners, trade and investment regimes that will create the most favourable external and internal environment for economic growth. For example, though Donald Trump left TPP, he still considers it as a vital tool to deter China, the tool of gaining an American clout in the Indo- Pacific region. Russia The Russian economy has got a certain pattern. In the current moment under Putin s leadership a so-called state capitalism. Even if there are big companies with 5 China fires back, announcing tariffs on US planes, cars and soybeans. CNN. URL:

7 private share still the economy is about state ownership. 6 The role os state here is crucial as has created a vertically integrated national champions: in banking Sberbank, Rosselhosbank, VTB; Gazprom, Rosneft, Transneft in energy; Rosatom and Rosanano in high technology; Aeroflot and Russian Railways in transportation. So targeting these major companies means causing a very serious damage to the Russian economy. The search for a new model of economic growth in Russia has got another character due to certain circumstances. The necessity to create a new model of economic growth earlier was prescribed with the need after the collapse of the Soviet Union to get Russia incorporated into the existing political and economic environment. As the government missed the chance to define its long-term strategy and define Russia s role in the global economy now it appears to be a survival kit to find an exit strategy out of unfavorable economic conditions. The absence of significant private and public investments may make Russian economy stagnate for years to come. The problem is that the exit strategy is being searched in the current situation not within traditional Western-led institutes and partnerships due to its complexity for Russia to be recognized among them as a partner and to develop all sorts of cooperation in a constructive way. Due to its new state of economic order a relative isolation from the major investment flows and GVCs - Russia needs to seek recognition and strike ties with countries in the other camp, among ones who are trying to rebalance the emerged economic order, offering alternative ways of growth and development. First of all, for those countries whose interests were not taken into account or even jeopardized by the existing status quo. So it means a reorient to its Eurasian and Asian allies and partners. In the Russian perspective economic instability is directly related to the political instability. The most important feature of the current stage of development is the politicization of economic life, especially on the international level. The 6 Simeon Djankov. Russia s economy under Putin: From Crony Capitalism to State Capitalism. Policy Brief. Peterson Institute for International Economics. September P.5

8 political factor is increasingly interfering in economic policy, heavily affecting market competition. Sanctions of all kinds are only the manifestation of this trend. In addition to the geopolitical and structural factors, the economic development of Russia was under the influence of external shocks, which have emerged since 2014 and included sanctions (primarily financial and technological), as well as the fall of oil prices and other Russian export goods parts. Besides, Russia was cut off from the significant part of the international credit sources and modern technologies, being under the impact of the artificial constraints. But the biggest problem was the exhaustion of the economic growth model of the 2000s, a recovery model of which was based on the rapidly growing external demand for Russian resource commodities. Now in order to revive Russian economy the government and many thinktanks and business communities come up with ideas which often reflect both current liberal and protectionist trends: all the efforts should be dedicated, in the first place, to the development of manufacturing industries. Foreign trade activities should aim at stimulating domestic production and protect domestic producers; Russia should fight with unfair trade practices; the development of the real sector is a priority over any foreign trade agreements. Observing the rules of the WTO many experts have come to understanding that many countries de facto support their producers with monetary policy measures. Protectionist measures nowadays are not about tariffs any more but about tax regimes, cheap loans, government subsidies and creation of domestic favorable conditions. 7 - Strategy for scientific and technological development of Russia 2035 Strategy for economic development of Russia 2025, 2030 (Chamber of Сommerce and Industry) - Strategy for development of Russia (A. Kudrin) Another idea is becoming popular as it can be integrated with other Asian projects the idea of spatial economy which brings growth through 7 Chamber of Commerce and Industry of the Russian Federation. URL:

9 infrastructure development. Russia has got 17 million sq. km territory and is located between the most powerful markets of 4 billion consumers perfect conditions for creation a global transport corridor. Many experts are afraid that Russia will lose its initiative in such projects and would be just a part of a Chineseled infrastructure incentives bypassing Russia. It is important for Russia to be in good economic relations with the West as Russia also seeks the instruments to balance its economic and security policy, to balance China. I assume that what holds western community from the starting a sustainable relationship with Russia is a concern that once Russia gains economic power and would be fully represented in Western-led economic, trade and financial institutions, it would be much more assertive in its foreign policy. On the contrary, Russia has not got the previous geopolitical goals and ambitions as the USSR had. The assertive foreign policy is motivated by two factors. First, as protective measures to its borders due to the fact that Russia is a big country so it has many areas of concern. Secondly, as Russia still might have a former empire inferiority complex in the same case as, for example, Great Britain. Moreover, I reckon its lack of interest without any bias to provide Russia with the same level playing field in global markets as there is the same degree of disappointment as with China: China hasn t changed its regime in the way the West wanted though being fully integrated in the liberalized economic system as it happened with Germany, Japan, South Korea. It has become only stronger, because, for instance, it had a sheer pragmatic, task-oriented and consistent approach which brought them economic success. At the time when they gained sustainable economic growth there was a distinct signal of being not interested in politics. Of course, the impetus for that, in case of Germany and Japan, was their defeat in World War II but at the end of the 20 th century and China being politically very vulnerable.so such a go-slow approach worked and brought them many benefits. That is why China with its political ambitions has risen as a great surprise. Having worked on its industrial sector and becoming a world factory, they have

10 developed into a major economic and then political player. At the current moment, Russia appears to be substantially engaged in world affairs for but economically being a very small entity. Nowadays it is impossible to stay a major power without a strong economy. CONCLUSIONS: The USA and Russia have got something in common: both countries face a similar challenge to find and adopt a new model of economic growth. Though the starting point and the long-term goals are not the same. No movement will be able to roll back all globalization s liberalizing effects. Finding the balance between new protectionist, neo-isolationist ideas and effective liberal economic policy is a current trend: liberalizing markets goes in hand with robust tax cuts and governmental initiatives to support domestic production. Thus, the foreign trade strategy is only a part of a large-scale national strategy for reforming the structure of the economy, which also includes reforms in the areas of taxation, financial regulation, energy and infrastructure. The shift of economic growth to Asia predisposes a growing huge interdependence with it where the boundaries between the economies become more and more eroded. So it starts to be harder and harder to protect the internal market and sensitive domestic areas from the outward external influence. The US has started to deter China as its major economic rival and to seek cooperation and support among its traditional allies. That means either stating a sort of a trade war or the return to the Obama s liberal trade projects. There is a big demand for economic changes and serious structural reforms in Russia, where the emphasize is put on boosting the manufacturing industries. Here we see many intersections with the economic platform of the Republicans. Being also competitors in some areas of export-oriented production it is not easy for Russia and the US find a common economic ground (though there were very positive examples of it) in the current political situation. Notwithstanding Russian wants to go towards deeper economic integration with Europe and with the West, on the whole, it is pushed into the arms of China, so it has to seek for new

11 economic model within Eurasian integration and the China-led projects. The creation of the Eurasian Economic Union appears to be a reaction on other megaprojects and is a protective measure to secure their own bargaining position on foreign markets.