A truth that goes against the current intellectual climate is that modern economies are the most resilient in history. They are so adaptable that the shock of a global pandemic was rapidly overcome, and Europe successfully diversified from its single largest energy supplier. Every day consumers across the world are faced with choice in goods and services unimaginable in the past.
This is essential background to international state attention on economic security. Not to deny issues, starting domestically with growth and cost-of-living challenges then moving internationally to an obviously evolving international order generating new challenges. Just that the starting point should be building on success rather than assuming a need for fundamental change involving direct government management of the economy. Indeed, that could be directly counter-productive.
Accurately Diagnosing Today’s Challenges
While fears over dependencies are understandable this is a fact of development. They may be on domestic production, particular buyers or international suppliers, not least given an economic tendency towards concentration. Shortages of particular products is a very common problem in history, as is having to deal with difficult regimes, often managed with inefficient and expensive stockpiles. A mixed open diverse economy has been the best way to deal with this.
What is different now is that technology has created genuinely global markets over the last 35 years or so, and China has taken particular advantage in manufacturing as the US has for many services. Countries with strong economic positions and political leaders that may use them aggressively must be a problem for others.
Accurately diagnosing the issues is very important particularly for the less known case of China. Its development is clearly encouraged by government support, but also reflects the hunger of individual companies and entrepreneurs. Indeed, when US and Chinese strengths have come together, as with Apple and China, the results have been quite remarkable.
Suggesting that China has only succeeded due to expansive subsidies is offensive and may dangerously lead to a purely negative response rather than adaptation. To focus on the apparent perfection of state-led economic development also ignores those entrepreneurs who dreamed and then delivered major companies.
Indeed one can see parallels with views of Mercosur only becoming a major agricultural producer through deforestation to identify a pattern that Europe just doesn’t like other countries succeeding. There are many countries who will feel little sympathy if the tables are turned on an EU that complains the world isn’t fair like a spoilt child in the playground.
China’s rise in turn plays into US and European politics in their increasing polarisation. Though our economies have been deindustrialising for some time mostly due to technology a considerable body of opinion thinks this is bad and manufacturing a good in itself particularly for young men. Former industrial areas shifting from voting left as the industrial jobs have not been replaced add to a populist story that centrists feel they have to accommodate even if they believe that economies adapt.
Overlaid onto these domestic issues is a new global order in which demand and supply increasingly come from Asia. In this situation the old power of Europe and the US to set the rules has diminished precisely as those advocating the failed Transatlantic Trade and Investment Partnership over ten years ago predicted. Instead the US and Europe are taking out their frustrations on each other as well as third countries, while fear of Chinese domination leads to the demand for protection. Handling this situation is even harder given China’s growing strength as a lead trade partner for countries around the world, the way their cheap solar panels are changing the world of energy, and of course its support for Russia in its territorial demands.
Finding Appropriate Economic Security Solutions
Protectionism while emotionally popular remains a good way to deliver bad economic results. If resilience and economic security is genuinely the aim then this should start by emphasising diversity rather than putting up barriers. Where there is a fear that China or any country is dominating supplies then action should reasonably be taken, though preferably on the basis of international rules existing or new. These should also cover weaponisation of supplies provided of course that the EU would never behave in this way. These are new talks that should launch now.
While noting the needs of defence and supporting individuals to adapt, European economies should be focusing on their undoubted global strengths particularly in services and advanced manufacturing. Rejecting this as somehow not real is misplaced nostalgia that will only serve to make us poorer. We also need to encourage the entrepreneurs with dreams who right now will do better in China and the US, by wanting to win the future and putting in place the framework to do so.
Simplification is part of this but should not be the sterile old deregulatory agenda, which too often denied the need for rules. What is needed now is to aim for single sets of obligations that will allow smaller businesses to spend their time focusing on growth rather than form-filling, as per the 28th regime in the EU. Too often large companies maintain dominant positions solely on the basis of being able to navigate multiple bureaucracies, a fundamentally inefficiency.
This is a far better path than the current one in which economic security is being used by the best lobbyists to demands subsidies and protections, while WTO authority continues to weaken. Without a change of course we are faced with a multiplication many times over of the original idea of the noodle bowl of international agreements.
Government resources are finite. Direct state involvement does not historically correlate well with long-term resilience. European economic success came in large part because government and companies focused on their individual strengths, the first to set fair rules, the second to work within these to deliver goods and services that consumers around the world wanted to buy. This was also the basis on which a certain amount of global trust was placed in the EU as a rule-setter.
Putting in place the wrong solutions due to resenting China’s rise could destroy that trust while weakening resilience leading to a vicious cycle of distrust and decline. There is an alternative positive approach reacting to the world as it has evolved, one that politicians need to grasp now while resisting the siren voices of protection.
This is a critical moment where the wrong choices could linger for a long time to come. Understanding and then adapting to today is crucial to delivering a positive outcome.