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Two big stories have dominated the global press in recent weeks: US presidential election results followed by the announcement of successful COVID-19 vaccine trials by several drug manufacturers, including Pfizer and its partners. The happy global reaction to the vaccine announcement is no surprise, given the devastating impact the pandemic has had on the world. But the surprisingly optimistic reaction to the presidential election shows, in some ways, just how much the world has failed in American global leadership.
COVID-19 has created tectonic shifts in all aspects of the global economy, altering the internal and external dynamics of every country in the world. There are still significant uncertainties about the trajectory of the recovery and what permanent changes we will see after the dusting. One of the areas of concern is how globalization and, in particular, economic integration will fare, and whether we will need new rules for the new reality. This is where American leadership is key.
Even before COVID-19, under the reign of President Trump and his team, international trade faced multiple shocks in the form of increased protectionism and attacks on the dispute settlement body of the United States. World Trade Organization, both of which undermined the rules-based international trading system. Throughout the pandemic, global merchandise trade has suffereda record drop of 14.3%in the second quarter of 2020. While trade has accelerated somewhat, the WTO expectsan overall decrease of 9.2%in 2020 compared to the previous year. However, the impact on trade of the latest wave of the virus could be even greater if the vaccines are not widely distributed quickly.
Along with trade in goods, global capital flows have also suffered greatly. According to the 2020 World Investment Report of the United Nations Conference on Trade and Development (UNCTAD), global foreign direct investment flows areis expected to decrease by 40% in 2020from their 2019 levels. Developing markets are expected to be hit harder than their developed counterparts.
Reconstructing the global economy after COVID 19 will require restoring confidence in free trade and supporting increased capital flows, especially for developing and emerging countries. These flows have played a key role in lifting many people out of poverty over the years. But this will require the commitment of developed and developing countries, in the form of international cooperation to rebuild the rules-based environment, as well as national policies that minimize the uncertainties associated with the political and economic risks specific to each country. .
Sadly, the lack of leadership by the United States over the past four years sets a precedent and, in a sense, encourages developing countries to follow suit. According to a UNCTAD study, China and South Africa are using national security concerns to put in place restrictive new regulatory frameworks for the screening of foreign direct investment (FDI). Similar to the US position on the investor-state dispute settlement regime during the United States-Mexico-Canada Agreement (USMCA) negotiations, many countries have started to question the fairness of the system and, in some cases, unilaterally withdrawing from bilateral investment treaties, such as Indonesia. made for 20 chords between 2014 and 2018.
There are even other arbitrary actions, like what happened recently in the country of Georgia. After an Azerbaijani company bought a 49% Caucasian share online, Georgian Internet company, the Georgian government decided to change the rules. Although the investors have met with government officials since 2018 without any problems and finalized the purchase in August 2019 with a financial amount of 51 million euros, the Georgian authorities suddenly changed their mind and wanted to abandon the agree, stating the lack of information. In July of this year, the government took further arbitrary steps by amending telecommunications laws and appointing a special director to oversee the company. According to some, these rule changes amounted to a hostile takeover. The case has since been referred to international arbitration.
All of these developments indicate that unless there are significant changes and restoration of confidence in multilateral institutions accompanied by a reorganized global policy of the United States in cooperation with its democratic allies, global trade and FDI flows are likely to remain. lower than previous levels. This vicious cycle will mean more economic malaise in the world, as well as economic interactions based on power rather than rules.
At the national level, smart policymakers can turn the tide for their countries with the right policies. As multinational companies reassess the weaknesses they discovered during COVID-19 and the impact of the pandemic on their supply chains, they are likely to take action to strengthen the resilience and stability of their production chains. . This means capital flows to countries with less overall risk, as we saw during the US-China trade war, which mainly benefited Mexico and Vietnam. A recent survey also shows the influence of politics on global investment decisions. In particular, the investigation of more than2,400 global business leadersin 10 large middle-income countries, government policies can influence decisions on where to locate FDI.
The United States has a vested interest in being an integral part of reforming a rules-based system, as it is the world’s largest recipient and financier of foreign direct investment. Pursuing a broad approach to open borders, paying particular attention to emerging issues surrounding state-owned enterprises, arbitrary actions by countries and abuses of power with a multilateral approach, is the best way forward to build global coalitions against global issues. The reaction to the recent US elections shows that the president-elect and his team will have the national and international support necessary to make it happen.
Pinar Çebi Wilber is Executive Vice President and Chief Economist of the American Council for Capital Formation.
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