This article is part of a series in which the Financial Times asks key commentators and policymakers what to expect from a post-Covid-19 future.
Writer, former US Secretary of the Treasury, chairs the Paulson Institute
Covid-19 has caused more than a deadly pandemic. It plunged the world economy into its most serious crisis since the crisis.
As the spread of the virus slows down and governments rebuild, they face another force that is sweeping its way: isolationism. The impending battle will pit the forces of openness rooted in market principles against those of closure in four dimensions: trade, capital flows, innovation and global institutions.
Dropping an economic iron curtain would jeopardize the recovery and jeopardize economic and social stability. Individual nations must resist efforts to reduce cross-border ties, and global institutions must strengthen and transform.
The world has prospered through integration. But even before the pandemic, the balance was shifting towards closed economies. Now the recession, rising unemployment and China’s inability to manage the coronavirus epidemic transparently embolden these voices. We must recalibrate while retaining the best features of globalization. Good policies are not based on an end but on the continuum between opening and closing.
Intense battles are certainly fought for trade. Multinational companies will ensure that they no longer rely on a single country to source each necessary component. Each country will also need to source crucial medical products at the national level. Taken to an extreme, this could lead to the disintegration of a major industry at a time when the United States has already levied tariffs on steel and industrial products for tenuous “national security” reasons. Governments should protect their essential supply chains, while promoting strong trade and investment across all sectors.
The global banking sector does not have sufficient capital to absorb the impending large credit losses and to provide the loans necessary to stimulate the recovery. We need to ensure that capital can flow to the companies that need it most. These overseas flows will be in the crosshairs of protectionists, but nations should always look for job-creating foreign investment that fosters recovery by building bridges rather than walls.
Technological decoupling also risks favoring the transition to economic closure. Innovation is fueled by disruptive and cross-border collaborations. But the rise of techno-nationalists is the natural extension of a generation of technologies, including artificial intelligence, which are inherently versatile. These innovations will be at the heart of economic success, so governments must invest, provide incentives to entrepreneurs and develop standards that protect national and economic security.
Beijing’s focus on indigenization and Washington on the outsourcing of supply chains and the sequestration of technologies suggest that the future will unfortunately belong to techno-nationalists. But if we go too far by cutting ties and prohibiting technical exchanges and joint research, this will hamper innovation and basic research that could change the world, including on a Covid-19 vaccine and reducing emissions of carbon, which are a time bomb.
Global institutions have a duty and an opportunity to meet these challenges. But they did not live up to it. Their past failures are the result of the fact that member countries have not done the heavy lifting to make them effective.
The United States can lead the way by reinvesting in the very international institutions it has largely sought to emasculate. The World Trade Organization has not kept up with today’s modern trading world. And the Bretton Woods institutions are underfunded and over-governed.
When the G20 meets in Saudi Arabia in November, leaders should commit to market principles and take additional measures to support economic growth. But this is not enough. A sustainable economic future requires an effective set of global rules for trade, investment, intellectual property and technology standards. Multilateral institutions must also play a greater role in helping vulnerable countries to avoid human suffering and political instability.
Major G20 economies also face risks from a wider range of threats. The fact that they were not ready for a very predictable pandemic should be a red flag. They must prepare for other obvious risks such as terrorism, cyber warfare, climate change and nuclear proliferation. Now is the time to start developing a global coordination framework. The world will be a very dangerous place if we do not repair global institutions and establish the treaties and protocols necessary to prevent and alleviate future tragedies.
The forces calling for the closure will resist the strengthening of multilateral organizations. But that only increases the risks for our fellow citizens. Although the prospects for short-term reform seem bleak, I am more optimistic that this crisis will ultimately encourage cooperation between the major countries to start the hard work of building a more peaceful and sustainable future.
The world has faced more daunting challenges than coronaviruses. But the recovery – and the future – can only be assured if the major economies recover. Competitors and strategic adversaries find it difficult to find common ground, even when it is in their personal interest. But there will be no lasting recovery if the largest economies, particularly the United States and China, fail to find a viable policy framework. The world economic order is not perfect. But it’s really too big and too essential to fail.