Author: Editorial Board, ANU
As Ralph Waldo Emerson once wrote, one of the blessings of an old friend is being able to afford to be stupid with them. Stupidity is perhaps a harsh word for the general direction of international economic policy in the era of COVID-19 and the Russian invasion of Ukraine, but it is not entirely inappropriate either. The idea that international trade and investment should be conducted primarily between close geopolitical friends – increasingly popular among policy makers, especially in the West – is a solution to a darkening geopolitical environment. It seems like a tactic, but the economic impact can be as dire as the rhetoric is clever.
To concentrate trade and investment in locations less likely to be threatened by geopolitical manipulation, because we cannot trust all our trading partners to have our best interests in mind. On the surface, it might appear that there is something to this idea: China is trying to win political concessions from countries as far afield as Australia and Lithuania. We tried to use that weight in trade. Surely it would be better for countries to focus their attention on where the geopolitical risk of doing business is minimized?
The first problem with this idea is a practical one. How does a country diversify its trading partners?Trade and investment may be recorded by statistical agencies as being between his two countries, but in reality these transactions are is done in Even if it makes geopolitical sense for a country to have more diverse trading partners, the means by which governments can influence these decisions are traditional state-subsidized industrial policies and protections. limited to doctrines. make the economy better. Even if governments can persuade companies to change where they do business, why are governments at least better at identifying and mitigating risks than game-savvy entrepreneurs? do you want?
More broadly, the renewed enthusiasm for “friendshoring” is not a panicked political reaction, but the result of a gross overestimation of the extent to which geopolitical risk itself threatens national economies. Nearly a year after Russia’s invasion of Ukraine, hopes that economic coercion could come to force the Russian army back behind its borders have greatly diminished. Russia will still pay a high price for gratuitous aggression with unprecedented sanctions, but the bill only has a medium-term deadline. And most importantly, the concept of onshoring or friendshoring production runs counter to the most basic principle of economics: comparative advantage. The possible consequences are higher costs, higher inflation and little additional security.
Russia’s attempt to blackmail Western Europe by withholding gas exports would inflict far more serious economic damage, but would also do long-term damage to Russia’s reputation as an energy source. It is unlikely to regain its pre-war status as one of the most important energy trading partners. Indeed, energy trade results in ‘on-shoring’ and ‘friend-shoring’, but this is the result of the normal operation of market forces and not a new paradigm of international economic interaction.
This week’s main article, Adam Triggs and Sam Hardwick, look closely at the rhetoric of “friend-shoring” and find it lacking. They argue that it “encourages security, a nationalist policy that wastes resources and undermines the strategic gains of openness”. It’s a big problem in these times. The latter is a point worth repeating. Since the end of World War II, Asia has successfully built prosperity along with peace. A return to the bad days of securitized trading threatens both.
“Friend Shore”, “Reliable Trade”: These are essentially euphemisms for ideas that are a revival of the old imperial trade bloc of the interwar period, and the benefits of free trade, if they come with It’s based on the idea that it’s only worth having. Free geopolitical insurance too. But as Triggs and Hardwick point out, managing risk does not mean not taking risks at all. It means building flexible and resilient economies that are prepared for unexpected challenges. There are some relatively simple policy settings required, both nationally and internationally. Reducing trade costs through agreements, customs reforms, infrastructure investment, etc. will ease the pain of adjustment by making it cheaper to find new markets. “
The world is an even more uncertain and dangerous place than it was a year ago. The response is to assume that risk can be managed by concentrating it on a small, unwieldy network of “friends” selected based on geopolitics rather than economics. We need a calm, comprehensive approach to risk, not approach. .
The EAF Editorial Board is located at the Crawford School of Public Policy at the Australian National University Asia Pacific College.