What's 'bi-globalization' and could this be the near future for geo-economics and global trade?

The global economy is being reshaped according to geopolitical fault lines. The post-Cold War economic globalization, driven by the logic of economic liberalization and free trade, has been replaced by geo-economic biglobalization, underpinned by the logic of geopolitical competition.

This shift reflects structural changes in international power. Just like the USA-dominated geopolitical unipolarity shaped the process of economic globalization in the past, the new US-China geopolitical bipolarity is defining the landscape of geo-economic biglobalization.

Geo-economic competition will escalate; the weaponization of trade will intensify. The geo-economic strategies of great powers will redraw the world map of international trade, foster bloc allegiances, and transform the global trading order.

The world economy does not operate in a vacuum. The patterns of international trade and investment depend fundamentally on the global balance of geopolitical power. The international system has evolved from the geopolitical unipolarity of the 1990s to a distinct bipolar power structure today.

The post-Cold War unipolarity provided the perfect geopolitical environment for economic globalization. The USA enjoyed a rare moment of absolute primacy. The US geopolitical power shaped the global economy and paved the way for global economic integration. Geopolitical unipolarity offered stability and safeguarded the security of sea-lanes, vital for international trade flows. In concert with allies, institutions of global governance were universalized, guaranteeing the rules-based framework of the international trading order.

The World Trade Organization (WTO), established in 1995, was the product of that time of policies promoting multilateral trade liberalization and reforms among market economies.

Today’s geo-economic bi-globalization takes place in the shadow of geopolitical bipolarity. The USA-China bipolarity is restructuring the world economy. Geo-economics – geopolitical competition in the economic domain – will define the years to come. In a bipolar rivalry, great powers will view economic interdependency as geopolitical vulnerability. Instead of the universal promotion of market opening and international trade, two competing geo-economic strategies coexist in the process of geo-economic bi-globalization.

Decoupling and defending versus decoupling and diversifying

The USA geo-economic strategy is the a mixture of decoupling economic ties with China via tariffs, trade barriers, and investment restrictions in strategic sectors and of defending the economy at home via industrial policies and subsidies.

China’s geo-economic strategy is the combination of decoupling via import substitution in technology manufacturing and other sectors and of diversifying its export and investment markets across different regions of the world. Both strategies employ industrial and trade policies. But they are geo-economic in nature. Their goal is to achieve a position of strategic advantage.

By the logic of those strategies, two spheres of geo-economic influence are forming. One such geo-economic sphere, centered in the USA, is taking shape around the consensus on economic security and encompasses the EU and other G7 members and allies.

This position on economic security seeks to rescue strategic independence from the economic interdependence of globalization. It strives to rebuild national competitiveness in key sectors of industry and technology and to reduce external risks and vulnerabilities.

Also, reconstructing the industrial base has become a matter of national security, with the potential loss of critical competitive advantages, especially in dual-use technologies, tackled by export controls, industrial policies, embargoes on technologies, investment restrictions, FDI screening, and trade defense instruments.

In addition, the expansion of trade partnerships and economic arrangements are aligned with the emerging geopolitical competition fault lines. Vulnerabilities from supply concentration and the risks of disruption of critical components and raw materials will be mitigated by both domestic production and by arrangements among aligned countries.

By contrast, China’s geo-economic strategy focuses on import substitution, seeking self-sufficiency in technology manufacturing and other sectors, and export substitution, diversifying from the US and other advanced markets.

It seeks both to build national economic resilience and to connect China to the rest of the world, particularly Eurasia and the Global South, including Africa and Latin America, through trade and investment arrangements, such as the Belt and Road Initiative and the Global Development Initiative. These are the seeds of another geo-economic sphere of influence.

The interplay of these competing geo-economic strategies has systemic effects. Their dynamics have set in motion the process of bi-globalization, predicated on evolving geo-economic spheres of influence. These geo-economic spheres may evolve into fully-fledged geo-economic blocs.

According to a recent IMF study, trade and investment between two hypothetical blocs — one centred on the US and the other on China — is decreasing in relation to trade and investment flows within blocs.

Apart from the initial signs of geo-economic fragmentation, the IMF also shows the role of “non-aligned connector”, countries offering indirect links between blocs. It highlights the agency of other countries in trade policy decisions.

However the situation of “non-alignment” can only happen in loose bipolar systems. In the geopolitics of a tight bipolar system, the space and flexibility for connecting countries or swing states simply disappears. Not surprisingly, many multinational companies are anticipating the trend and already adopting bipolar structures, decoupling their global operations.

Irrespective of the evolution of the bipolar system, which is still contested, there seem to be some signs of impact on the international trading order – the institutions, rules, and principles regulating global trade. All signs indicate that the process of geo-economic bi-globalization will proceed without the stabilizing effects of multilateral institutions and binding rules.

Under the pressure of the emerging configuration of bipolar power and new instruments of geo-economic competition, the liberal international order could be seen to be coming apart. The institutional framework and rules that still offer predictability to international trade relations are looking very fragile.

The 1947 GATT system (General Agreement on Tariffs and Trade) ordered international trade as part of a peace project. It was a response to the disastrous effects of geopolitics during the interwar period 1919-1939, when geopolitical rivalry led the global trading system to splint into competing trade blocs. It is estimated that protectionism and trade restrictions affected up to 70% of world trade. The international trading system fragmented and eventually collapsed.

But the GATT system was a partial order. Its rules and principles encompassed one of the blocs in the old Cold War. In a unipolar world, the GATT system was universalized as a multilateral institution in the post-Cold War world with the creation of the WTO and the integration of China and Russia to the organization.

Now, the post-Cold War international trading order has vanished. Great powers establish orders. The basic multilateral framework of rules and principles regulating global trade and overseen by the WTO is at risk. There is no longer a shared view on the common objectives accepted by major players. The most likely scenario is a period of bipolar reordering. The foundations of the international trading order can no longer support the weight of great-power geopolitical rivalry and geo-economic fragmentation.

The historical precedent shows that international trade is not a guarantee of peace. After all, economic globalization and trade interdependence did not prevent the outbreak of World War I. However, fragmentation, less trade, and blocs did not provide more economic security. In fact, falling trade interdependence and protectionism preceded World War II.

A new world trading order has yet to be imagined and eventually established. It will be the product of leadership and statecraft, as well as a new equilibrium of powers and a common vision of the future.

Simply adapting to circumstances using the tenets of the previous order won’t fix the larger transformations reshaping the world. The challenge now is to buy some time. It is to help manage coexistence in a situation of geo-economic competition - and this is a significant diplomatic challenge by nature.

Just like the UN functioned during the Cold War, the WTO as an institution can provide a framework to facilitate cooperation, foster dialogue, and bridge differences. But this is not a substitute for order. Geo-economic competition may well intensify in the years to come. The response must be to avoid the chaos while waiting for the conditions of a new order to emerge.

Braz Baracuhy, a career diplomat based in Helsinki, has served as the acting ambassador of Brazil to the WTO (2022-23) and deputy-director for policy planning at the Brazilian foreign minister’s office. (Opinions expressed are personal; they do not necessarily reflect those of the Brazilian Foreign Ministry).