Monday, October 11, 2021

Michael Mandelbaum: The new forces driving finance are Chinese

Sovereign countries have always sought to control the economics of their societies and govern the economic policies of their people. A land that lacked a strong financial center lost its competitive edge. As a result, many countries recognized the importance of international financial institutions to share the cost of providing shelter and foreign exchange for outlying states, and this led to the creation of the IMF, the World Bank and the WTO, three major global banks for world finance.

That system is long gone.

The IMF and World Bank are now involved in a bitter struggle over whether the principles of international finance should be maintained or whether the new reality, which values growth at the expense of poor countries and diversity, should be embraced. The WTO, with its emphasis on almost total transparency over everything that happens in the multilateral trading system, wants to accept these principles, but most big countries are still resisting them. The tensions reflect major changes in the global economy that created a new generation of captains of industry that care more about winning and wasting than about economic efficiency and accountability.

The changing world’s rise is the natural result of greater opportunities for trading among countries. That has diminished the great power of Western finance and only strengthened the sense of unfairness among emerging powers. However, the deal for these powers to become rich and powerful included a pledge that the status quo in global finance would not change. If this pledge was kept, the world would not soon see new systems replacing the old.

Many emerging powers say the problem is that the developed world increasingly is led by an elite group of bankers and regulators in Washington and London, rather than those serving the interests of their own people. The rules, created for financial markets, no longer serve the needs of the voters who build the economies, the people who come before the bankers and whose interests no longer determine the rules.

As a result, a struggle has broken out between countries and their financial elites to determine the new economic order. The emerging powers argue that because they are growing rapidly, they will soon dominate the global economy, with United States bankers, financial lawyers and bureaucrats running things.

From their point of view, the world now is as lopsided as it was a century ago: financial wealth travels all around the world while nonfinancial strength sits on the sidelines. Financial leaders favor reform that will lead to more equitable economics. They argue that the world economy needs a system of rules and common values that allows countries to prosper without payback to any power.

At a summit this week, presidents and prime ministers from the G-7 countries, as well as the European Commission and ECB, have attacked President Trump’s proposed tariff increase on steel and aluminum — and he has responded by threatening more global tariffs on imported goods. The G-7 group is now threatening to hold their own summit in which all countries’ interests will be represented and worked on by equal numbers of representatives.

Meanwhile, the new world of finance is here to stay. Its rules and values have not changed, but the critical roles played by the United States have diminished. Much of what is being decided now is dominated by Asians, Mexicans and South Africans, rather than Americans. It is in their hands to help shape a new international economic order. The G-7 countries must now find ways to reconcile their influence and financial power with the new realities in the global economy.

The challenges confronting the G-7 are similar to those facing the U.S. Global financial institutions offer a new sphere of influence for the United States, and in this new sphere they have found some common ground with the developing world. And while Americans rightly worry about the rise of great power politics, these emerging powers have argued that trade deals should be based on rules of reciprocity. They are discussing updating the World Trade Organization rules that are now based on the former system.

China is the biggest economy of the new emerging powers, and it supports much of this new global system. China just proposed a World Trade Organization mechanism for eliminating trade tariffs. This means that while individual countries will be able to negotiate their own deals — and America is advocating for its own trade rules — China is effectively in charge of negotiating the rules of global commerce for the entire world. The future of world finance is now in China’s hands. As the U.S. economy suffers the slowest growth since World War II, while Chinese China’s economy is growing at double digits, the balance of power is shifting.

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