A new world order seeks to prioritize security and climate change


AAfter After the Cold War, the US and Europe established an economic order based on open markets, global trade and limited state intervention in the economy. Climate change was a distant threat. Allowing countries such as China or Russia into the global economy was widely seen as beneficial to both them and their Western trading partners. As both the countries develop they will certainly adopt market economics and eventually democracy. Other things mattered. But economic considerations took priority.

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not anymore. Policy makers on both sides of the Atlantic have come to the conclusion that national security and climate change must now come first. The talk in Brussels is of “economic security” and “strategic autonomy” – policymakers want the bloc to be able to chart its own course. European Commission President Ursula von der Leyen recently said that she wants to “cut off” relations with China. Officials in Washington have similar ambitions. They believe that the old world order allowed America’s industrial base to wither, created economic dependencies that could be exploited for geopolitical gain, did not address the climate crisis, and increased inequality in a way that undermined democracy. weakened. Yet pursuing greater security, tackling climate change and trying to counter the threat of China all involve trade-offs. Even though economic thought may no longer dominate, there is still much to do in the discipline of economics.

For example, to judiciously use an economic weapon such as sanctions, national-security types must accurately assess their costs. Russia’s invasion of Ukraine last year provided a test case. At that time, there was a debate European Union About the ban on the import of Russian gas. The fear, loudly expressed by businesses and industrial unions, was that an embargo would deal a brutal economic blow, not to Russia, but to Europe. When a group of economists, including Ben Moll at the London School of Economics and Moritz Schulrich at the University of Bonn, analyzed the potential impact From such measures at the time, they predict a harder, if less severe, hit, as they expected the economy to adjust rapidly to the shock. And this European Union Recession avoided, even though gas consumption in the 12 months to February was down 15% from a year earlier. In a new paper, three economists from the group who provided the initial forecast argue that Europe could face an immediate gas embargo in April 2022, rather than a cut-off later in the summer. A forthcoming paper by Lionel Fontaine of the Paris School of Economics and others, which studies energy-price shocks in France over the past few decades, comes to a similar conclusion: Companies adapt quickly, and only employment and production By cutting

What about an economic conflict between the West and a larger, more powerful rival like China? Using a model similar to the group above – and looking only at intermediate inputs such as semiconductors or engine parts rather than at finished products – the European Central Bank researchers divide the world into two blocs: “East” and “West”. If the bloc were to return to limited trade in the mid-1990s, the analysis suggests the short-term hit would be large, at around 5% of global before the world economy adjusts. Gross Domestic Product, But over time the loss will drop to about 1%. The impact on the US and China will be relatively minor compared to more globally integrated economies such as the Euro Zone. Small open economies like South Korea will have to bear the brunt of this.

An intriguing aspect of the East–West confrontation is technological diffusion, an important component in economic development. Less trade means fewer opportunities to learn, especially for poor countries. Carlos Goes of the University of California, San Diego and Eddy Bakers of the world trade organization Look at the effect of a breakup on such a spread. They find that the consequences for the US economy as the technology leader are again manageable. The impact on China or India is substantial, as both countries will miss out on opportunities to grow.

The trade-offs can be more painful when it comes to climate change. President Joe Biden has set aside more than $1 trillion over the next decade for green incentives and manufacturing. There have already been high-profile investments by large firms. But these may be very good plans that have been put forward to secure subsidies. Meanwhile, the evidence on interventions to boost industrial employment is decidedly mixed. Chiara Criscuolo oecd and others have analyzed European Unionprevious attempts. They find that Block’s plans support employment, but only in small firms. Large firms tend to take payments without adding jobs.

Other countries are responding with green subsidies of their own, and more are likely to be added – which may be unwise. The world needs every bit of economic efficiency to maintain a stable climate, because resources are limited and Government budget increasingly strained, In a new working paper, Kathleen Schubert of the Paris School of Economics and others look at different combinations of carbon taxes and green subsidies. They find, in line with earlier research, that relying on subsidies to green an economy has a larger cost than a carbon price.

danger of unanimity

Dani Roderick of Harvard University, a critic of the old “Washington” consensus, very much welcomes the new era. But in a recent essay on industrial policy, he describes how difficult it is to get such interventions right, and warns that multiple goals (e.g., tackling climate change, boosting industry) can be achieved with a single lever. and to increase security) increases the chance. Of failure What’s more, any paradigm that becomes conventional wisdom is in danger of promoting one-size-fits-all solutions, writes Mr. Roderick. In the eyes of its critics, Washington’s old consensus has fallen short when it comes to fairness and development. It is now easier for economists of all stripes to see the dangers of the new consensus. Policy makers would be wise to listen.

Read more on free exchange, our column on economics:
How Japanese policymakers fell into a very deep hole (May 4)
Economists and investors should pay less attention to consumers (April 27)
Is China better at monetary policy than the US? (20 April)

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