The likely outcome of the current crisis is a more rapid dismantling of the neoliberal economy and a fragmentation of the international economic system, writes Glenn Diesen, Associate Professor, University of Southeastern Norway. Technological sovereignty is privileged, international supply chains are repatriated, transport corridors become the scene of military rivalries and the remnants of the financial instruments of the Bretton Woods institutions will be replaced.
COVID-19 contributes significantly to the end of neoliberal economics and the fragmentation of the international economic system. At first glance, it appears that the pandemic has imposed a fundamental change on the international economic system. Even if, on closer inspection, the pandemic has only intensified developments that were already transforming the international system. This is an important distinction because returning to the previous international economic system after the pandemic is apparently not possible.
In recent decades, a neoliberal format of globalization has defined the international economic system. Increased market efficiency has made supply chains continually longer and more complex. However, the changing international distribution of power, technological innovations and social fragmentation were already encouraging the dismantling of supply chains and the renationalisation of the economy. The pandemic amplifies this trend by weakening the relative power of the United States, encouraging the implementation of new digital technologies such as artificial intelligence and robotics, and causing a further socio-economic divide within societies based on adaptability.
A new international distribution of power
A liberal international economic system manifests itself only under hegemonic power.
Britain in the 19th century and the United States in the 20th relied on state intervention in the economy to establish dominance over the three main levers of geoeconomic power: strategic industries, transportation corridors and financial instruments. The concentration of economic power creates systemic incentives for hegemony to liberalize the international economic system to cement the asymmetrical interdependence that defines core-periphery relations. In a biased ‘dependency equilibrium’, interdependence maximizes both autonomy and influence.
Liberal economics cements the international leadership of the hegemon’s strategic industries by saturating foreign markets while mature industries (high quality, low prices) prevent the development of infant industries (low quality, high prices) in competing states . David Riccardo argued that an international division of labor based on comparative advantage determines that “corn will be grown in America and Poland, and equipment and other goods will be made in England” (Ricardo 1821: 139).
The laissez-faire economy also increases the value of dominance of the seas because conditions can be established for reliable access to transportation corridors. Finally, the financial instruments of hegemony define the liberal international system by consolidating its position as the banker of the world and by internationalizing its currency.
The rising powers in the 19th century had systemic incentives to reject liberal economics to avoid overdependence on Britain. The United States, Germany, France, Russia and others rose to power by developing strategic industries with tariffs and temporary subsidies, asserting control of transport corridors and establishing financial instruments in mobilizing the capital of their middle class.
The same liberal economic cycle is currently coming to an end as US hegemony fades. The Cold War brought some stability, as the main opponents of geoeconomic hegemony were communist states, while the need for solidarity in the West eased tensions between the United States and allies such as Germany and the Japan which pursued aggressive industrial policies. After the Cold War, there were immense systemic incentives to embrace neoliberal economics to integrate the former Soviet Union and a rising China into an asymmetrical partnership with the West.
However, China and Russia have become proficient in economic policy to rewire global value chains and reduce dependence on the United States. Strategic industries are supported by the state and a Sino-Russian high-tech partnership is formed to decouple from the United States. The China 2025 initiative is obviously more powerful in terms of establishing technological leadership in areas such as artificial intelligence, but Russia is also moving towards technological sovereignty by developing its digital ecosystem and collaborating with China. China also has more capital to develop transport corridors with the Belt and Road Initiative, but Russia is advancing east-west and north-south Eurasian land bridges and a maritime corridor across the Arctic in cooperation with China. Finally, new financial instruments are emerging as Russia and China develop new investment banks, payment systems, trade currencies and accumulate gold.
The economic impacts of COVID-19 represent a tipping point. Some supply chain disruptions are caused by immediate security concerns, for example the United States aims to repatriate manufacturing of medical supplies, while Russia has temporarily suspended exports of grain and medical equipment. These minor disruptions are fueling a stronger trend of renationalizing the economy and the digital space.
China appears to be emerging stronger from the pandemic, while the United States has weakened its relative power. The United States therefore has an incentive to repatriate its supply chains, renationalize its industries, and target Chinese companies that challenge the technological leadership of its strategic industries. Uninterested in an increasingly unfavorable status quo, the United States is increasing its protectionism, withdrawing from key international institutions, and becoming increasingly comfortable with the use of economic coercion against allies and adversaries alike. . The information war on narratives escalates as China’s response to COVID-19 is used to mobilize geo-economic alliances against China.
Competition on transport corridors is also intensifying amid the pandemic. For example, the United States is increasing its measures against the Arctic transport corridor. In May 2020, US warships entered the Barents Sea for the first time since the 1980s and NATO is moving towards a more active role in the High North. The competition for control of the South China Sea is also affected by reduced US combat capabilities due to COVID-19 infections among the military.
COVID-19 is also fueling competition in financial instruments. The economic repercussions of COVID-19 are worse than the global financial crisis of 2008-09, a crisis that was only temporarily resolved by adding more debt instead of imposing fiscal discipline. Bailouts and stimulus packages distort market forces and make debt levels in the United States and the wider West even less sustainable. The diminished willingness to rely on the US dollar as a trade and reserve currency will therefore manifest itself in new innovative fiscal policies by Beijing and Moscow.
Both the EU and Russia will have to react to the unfavorable development of a bipolar Sino-American distribution of power. The bloc’s politics are precarious for both the EU and Russia because it undermines the ability to diversify economic connectivity, creating overdependence on a more powerful state. After COVID-19, Europeans will find themselves more divided between establishing collective autonomy or retreating under declining US patronage with greater interest in China. Russia will also need to step up its Greater Eurasia Initiative by cooperating with China to reduce its dependence on the West, and simultaneously improve economic connectivity with all states of the Eurasian supercontinent to avoid overreliance on the regard to China.
Domestic socio-economic disintegration
The neoliberal economic system that defined the post-Cold War era has also been unsustainable at the national level. The trade agreements organized in the late 1980s and early 1990s allowed the United States to consolidate its comparative advantage in the digital sector by extending intellectual property rights and strengthening enforcement. In return, the United States opened its manufacturing sector to foreign competition, such as the British repeal of the Corn Laws in 1846 to establish consent to core-periphery relations.
Predictably, America’s digital companies flourished and the manufacturing base was devastated. Creative destruction has intensified with digital technologies that have shifted economic power from labor to capital. Traditionally, the redistribution of wealth reversed the rise of economic inequalities and social disparities. Yet under neoliberal economics, the state surrenders its ability to balance market efficiency with social responsibility. The political left could no longer redistribute wealth and the political right abdicated the ideological mission of defending traditional values and institutions against unfettered market forces. Predictably, new political alternatives in the form of populism have emerged to fill the void.
COVID-19 amplifies socio-economic tensions, polarization and the demand for political alternatives. The quarantine has pushed small businesses out of business, while larger companies like Amazon with more robust infrastructure and the ability to attract government bailouts are absorbing their market share. Blue-collar workers and the poorest in society who are suffering the most from the pandemic are more likely to oppose quarantine, while the wealthy who are able to weather the economic crisis and work from home often speak out against the poor who do not respect the new powers of the state. Politicians, without the tools to solve economic problems, will be prompted to divert attention to superficial, divisive and often misrepresented social issues and identity politics. The socio-economic disruptions of COVID-19 will likely push polarized societies towards more radical and revolutionary policies.
Predicting the impact of COVID-19 on the international economic system is problematic due to the multitude of unknown variables. For example, if the virus were to mutate to become deadlier and spread more easily, the entire international economic system could falter. However, the likely result is a more rapid dismantling of neoliberal economics and a fragmentation of the international economic system. Technological sovereignty is privileged, international supply chains are repatriated, transport corridors become the scene of military rivalries and the remnants of the financial instruments of the Bretton Woods institutions will be replaced. States will also need to reduce market efficiency to restore social responsibility as societies collapse.