Events such as the COVID-19 pandemic and the Russia-Ukraine conflict hit global GDP severely. One estimate by the OECD put the worldwide output loss resulting from the conflict at 1 percent. The world’s collective economic output due to the pandemic, on the other hand, fell by 3.4 percent during 2020, or more than $2 trillion.
These numbers are massive. But they are dwarfed by the loss of the global economic output that could be caused by global economic fragmentation. According to the International Monetary Fund, under a worst-case scenario of trade fragmentation, global economic output could be reduced by some 7 percent, equivalent to the GDP of Japan and Germany combined. With the addition of technological decoupling, the loss in output could be even greater.
The primary driver of global economic fragmentation is none other than the United States. As Martin Wolf at the Financial Times said in a recent commentary, the U.S. is leading the world in trade protectionism. It has abandoned the globalization that the world used to know and increasingly calls for “fair trade,” rather than free trade, which it had long advocated. Interdependence of countries across ideological lines, previously thought to be conducive to world peace, is now viewed in Washington as a national security risk. In the name of creating a level-playing field, the Biden administration has enforced various trade restrictions that make it difficult or even impossible for an increasing number of products to tap the U.S. market.
The landmark Inflation Reduction Act, for instance, discriminates against electric vehicles and batteries from other countries. As such, it incurred the wrath of the European Union, which threatened to sue the U.S. in the World Trade Organization. America’s recent tariff hikes on Chinese clean energy products are also widely seen in the world as a bid by Washington to protect its own uncompetitive industries. Citing those duties, Martin Wolf characterized President Joe Biden as “no slouch when it comes to protection.” Malaysian Prime Minister Anwar Ibrahim urged the U.S. to abandon protectionism and respect the competitiveness of other countries.
The Biden administration justifies its trade restrictions on various false grounds. Most notable is national security. Contrary to the stance of all other WTO members and the WTO’s ruling on Donald Trump’s steel and aluminum tariffs on three EU member states and China, the U.S. maintains that it is the exclusive right of a member to judge when its national security interests justify raising tariffs “or otherwise disregarding multilateral trade rules,” which would give the U.S. free hand to strike any foreign product at will. No wonder that the Chinese goods the Biden administration claims pose national security risks are many, ranging from steel to port cranes to connected vehicles — and counting.
Meanwhile, the alleged “industrial overcapacity” of China is shaping up to be a major instrument for the U.S. and the EU in locking out China’s clean energy exports. Washington and Brussels impose hefty tariffs on Chinese EVs on grounds of overcapacity. Abetted by the Biden administration, leaders of the G7 last week called for collective action against China’s alleged industrial overcapacity. While encapsulating the fear gripping the industrialized countries that they may lose out in advanced manufacturing, analysts say, the move represents their continued effort to push China into accepting the kind of agreement Washington forced on Japan on its car exports in the 1980s.
Washington’s role in fanning the flames of protectionism worldwide is also found in its approach to the multilateral trading system. Despite its professed commitment to the WTO, it is neutering the world’s top trade organization. By blocking the appointment of judges to WTO’s appellate body, it continues to paralyze WTO’s dispute settlement system, which it singlehandedly crippled more than four years ago. The U.S. is also in the habit of contravening WTO rules. Over the past two years, WTO expert panels have ruled at least twice against the U.S. Even though the U.S. took the lead in writing WTO rules (primarily in its own interest), when those rules fail to serve their original purpose, Washington simply ditches them.
America’s trade policies and practices have prompted many WTO members to take their grievances to the organization. As a result, the U.S. has the largest number of disputes lodged against it. According to Warwick Powell, adjunct professor at Queensland University of Technology, there are 171 cases against the U.S. currently in WTO processes — followed (perhaps not so coincidentally) by 106 cases against the EU.
Moreover, Washington contributes to global economic fragmentation by geo-politicizing and weaponizing economic and trade issues against those it considers to be adversaries. It views China, for example, as a major threat to its global hegemonic power and is resolved to do whatever it takes, barring war, to thwart China’s rise. To this end, Washington has taken a slew of restrictive actions against China — actions that are unravelling global trade and economic links.
In what The Economist describes as “economic warfare,” the Biden administration’s semiconductor trade and technology embargo against China is a “high fence” that divides the global market. It has severed the commercial and technological links in advanced chips between China and the West and compelled Nvidia and others to forfeit tens of billions of dollars of annual sales to China. Consequently, globalization in the semiconductor sector is, in the words of Morris Chang, former chairman of the TSMC, “dead.”
Washington has also made a concerted effort to set up trading blocs along ideological lines. It has formed a “Chip 4” alliance with South Korea, Japan and Taiwan, and seeks to set up a critical minerals buyers club with the EU and the Group of 7.
These trading blocs shut off global trade: They create obstacles to the unfettered flow of goods worldwide by trading with “like-minded countries” to the exclusion of countries outside the club. This threatens to split nations into rival blocs and to splinter the world economy. In 6G technology, for instance, as Washington tries to stitch together an alliance with nine other Western countries and exclude China, a world leader in 6G, the weeds of bifurcated 6G systems are being planted.
The Biden administration’s economic “de-risking” moves against China call for the dismantling of existing supply chains in “critical sectors,” of which China is an important part, and replacing them with ones that orbit around the United States. The scheme is likely to lead to significant supply chain disruptions, not to mention huge monetary outlays.
The Chinese economy is intricately interwoven with the rest of the world. China is the largest trading partner for some 150 countries, the most in the world. Furthermore, it contributes around 30 percent to global economic growth. When someone puts sand into the engine of the world economy, he tampers with — if not outright sabotages — the workings of a crucial machine. In pursuit of isolating and suppressing China, Washington is tearing the global economy apart. Clearly, its geo-politization of trade is an example of global economic fragmentation in action.
Creating and perpetuating two parallel economic blocs during the Cold War helped the U.S. bring down the Soviet Union. Hoping to repeat that success, Washington is making global economic fragmentation a fundamental strategy for containing China. But this strategy will have disastrous consequences for the world. The U.S. was instrumental in bringing about the Great Depression in the 1930s by slapping hefty tariffs on imports. The world must now be on guard against the reoccurrence of a similar calamity.
