International cooperation under pressure: Economic conflicts – a challenge for multilateralism

Multilateralism is coming under increasing pressure. The fostering of international cooperation has brought many benefits to humanity, first and foremost, securing peace and increasing both material and intangible prosperity. The increase in economic conflicts – both between countries and within individual countries – are a significant reason multilateralism is feeling the pressure.

International division of labor from 1950 to 2000

The period after the Second World War was marked by an increase in the international division of labor, which followed a relatively straightforward pattern: Industrialized countries specialized in producing capital- and technology-intensive products, while populous emerging countries, such as China and India, specialized in labor-intensive products.

This international division of labor has been beneficial for all countries involved. Gross domestic product (GDP), employment, and real wages rose in the industrialized countries, thus improving living conditions in general. Competition with low-wage countries did not cause any noticeable disadvantages for workers in industrialized countries: even if individual sectors lost competitiveness and jobs were cut, the people affected by this usually found new jobs in export-oriented sectors.

The emerging countries also benefited from economic globalization: For them, globalization has been a way out of the poverty trap.

The rise of emerging economies since 2000 increased conflicts of interest between countries

However, the economic effects of the international division of labor have changed in recent years, in some cases, dramatically. Since China joined the World Trade Organization (WTO) in 2001, the Chinese share of global exports of goods has risen rapidly. Increasing Chinese exports have led to more pressure on employment and wages in rich Western industrialized nations.

The competitiveness of Asia’s emerging markets, which can be mainly ascribed to low labor costs, has meant that some of these countries have been able to generate high export surpluses for many years. As a result, these economies have capital with which to acquire shares in companies in industrialized countries. In the process, investors from emerging countries have acquired shares in high-tech companies in industrialized nations, which the latter view as a threat.

The international division of labor is also changing as emerging countries catch up in capital- and technology-intensive sectors. They are now becoming serious competitors for industrialized countries in an area previously dominated by the industrialized countries. One example is the sharp rise in patent applications from China and South Korea.

It is crucial to note here that it is not only the quantity but also the quality of patents that is of great importance. Bertelsmann Stiftung published a study that examines so-called world-class patents in cutting-edge technologies to explore this phenomenon. The numbers show that East Asia – above all China, but also South Korea – have done an outstanding job in developing crucial innovations over the past 20 years.

The rise of emerging economies will continue

The predicted increase in the world’s population from around 7.8 billion people in 2020 to 9.7 billion by 2050 is expected to occur almost exclusively in Africa and Asia. Europe is the only global region whose population will be smaller than in 2020.

Global demographic developments, combined with the strong technological gains made by emerging countries, are leading to a massive shift in the percentage of global GDP generated by industrialized and emerging countries. Looking at the economic output of individual countries and regions expressed in US-dollar purchasing power parity, Asia’s share grows considerably between 1980 and 2024 (the latter is the last year available in the forecasts used.

As a result of the developments described above, industrialized economies’ share of the global economic output is declining. This means that the political influence of these countries is also dwindling. If, for example, G7 countries want to strengthen their negotiating position, they can only succeed if they are united.

My fear, however, is that this joint action will become even more difficult in the future than it already is since the growing economic conflicts within individual industrialized countries are leading to the “renationalization” of politics.

Growing conflicts of interest within developed economies

The traditional distribution conflict within an economy is between two factors of production: labor and capital. I believe this conflict will increase in the future because, in the long term, digitalization will replace labor with capital, data, and technology, putting pressure on wages.

In the future, conflicts between consumers and producers will also become more significant. Here is just one example: Part of the ongoing process of digitalization is that private individuals are now offering services on digital platforms that compete with those of commercial providers giving rise to conflicts. Understandably, taxi drivers are protesting Uber’s attempts to enter their market. Consumers, on the other hand, want more of these services, which results in more choices at lower prices.

Up to now, these economic conflicts have mainly been resolved with the help of government transfer payments. However, this strategy will become increasingly difficult for most industrialized countries in the future. Reasons for this include: aging populations (since government revenues will increasingly be needed to cover pensions, nursing, and health care, and will no longer be available for transfer payments), growing international tax competition, which will put additional pressure on government revenues, and growing debts from stimulus packages to tackle the economic hardships of the coronavirus crisis.

Increasing conflicts have a negative impact on countries’ ability to compromise

When economic conflicts increase in an industrialized country, it limits the number of available policy solutions. For example, in an era of globalization, the state’s income redistribution measures must consider that owners of capital might send their money abroad if taxes become too high. A certain level of redistribution, as desired by society at large, may not be financeable at all.

This can lead to social tensions and political polarization, limiting further the state’s ability to act. If,  a country’s policy options shrink, then its ability to compromise during international negotiations decreases – making multilateral solutions less likely.

Such a development has far-reaching consequences: As they become less willing to compromise, industrialized nations face challenging geopolitical developments such as the rise of emerging economies. As history shows: When established countries are threatened with a loss of supremacy, international cooperation is replaced by a renationalization of politics (see Vöpel 2018, p. 7). A vacuum then looms for global rules, institutions, and cooperation. Finding multilateral solutions for global challenges becomes increasingly difficult.

Literature

EFI (Expertenkommission Forschung und Innovation) (2020). Gutachten zu Forschung, Innovation und technologischer Leistungsfähigkeit Deutschlands 2020. Berlin.

Vöpel, H. (2018): “The Rocky Road Towards a New Multipolar Order”, ChinaContact Hamburg – Summit Special 11.2018, Berlin, S. 6–7.

Recommendation for further reading:

The content of this blog post is taken from my article “United We Stand, Divided We Fall – New Economic Conflicts as a Challenge for European Diplomacy”, published in the Background Paper “Rethinking Relations – Innovative Diplomacy in an Uncertain World” for the Trilogue Salzburg 2020.