Yellen, Lagarde, and the death of the global trade system
Published 04 May 2022
The need for common values and geostrategic compatibility will now increasingly shape trade and investment flows. As Janet Yellen and Christine Lagarde – both committed multilateralists – have recognized recently in their respective remarks, the post-war era of globalization irrespective of any potential security or philosophical divergences is approaching an end.
Occasionally, a prominent official will give a speech that perfectly captures the zeitgeist of the moment. US Treasury Secretary Janet Yellen and European Central Bank President Christine Lagarde have given two such speeches within days of each other.
In remarks to the Atlantic Council and Peterson Institute, respectively, Yellen and Lagarde said what should have been already apparent to anyone paying attention: Rising geostrategic tensions and an increasingly volatile security milieu are rendering the post-World War II global trade system obsolete. New approaches will be required to adequately cope with the world of today rather than the world of 75 years ago. The ideal of a single, deeply integrated global trade system – embodied in the founding of the General Agreement on Trade and Tariffs (GATT) and the World Trade Organization (WTO) – no longer seems realistic.
The old system has been gradually crumbling for the better part of two decades. This has been partially driven by the stresses created by China’s model of state-directed capitalism and a re-examination of the economic and social trade-offs brought by trade. The Ukraine crisis has dealt an additional and potentially debilitating blow to the multilateral trade system, raising complex and divisive questions. How can trade and investment relations be conducted with a nation that is attempting to use military force to reshape international borders?
Calls for a new approach to trade
Surveying this volatile landscape, Yellen told her audience that:
“We need to modernize the multilateral approach we have used to build trade integration. Our objective should be to achieve free but secure trade.” 
In her view, “It will be increasingly difficult to separate economic issues from broader considerations of national interest, including national security.” Trade should be conducted with “countries we know we can count on”.
This strategy was referred to as “friend-shoring”, which she explained as:
“(Having) a group of countries that have strong adherence to a set of norms and values about how to operate in the global economy and about how to run the global economic system. And we need to deepen our ties with those partners and to work together to make sure that we can supply our needs of critical materials.” 
Speaking less than two weeks later, Lagarde highlighted strikingly similar themes, saying:
“Russia’s unprovoked aggression has triggered a fundamental reassessment of economic relations and dependencies in our globalized economy. And in a post-invasion world, it has become increasingly untenable to isolate trade from universal values such as respect for international law and human rights.” 
Lagarde went on to say that:
“The war may prove to be a tipping point for Europe and other regions too, making the alliances to which suppliers’ countries belong more important. International firms will still face strong incentives to organize production where costs are lowest, but geopolitical imperatives might restrict the perimeter in which they can do so.”
The ground is shifting under our feet
These remarks are extraordinary for two reasons. First, consider the sources. Both Yellen and Lagarde are prototypical Washington and Brussels “power players”. During the course of impressive four-decade careers, both have proven themselves to be committed multilateralists and staunch proponents of globalization. Both have embodied the strong pro-globalization, pro-free trade conventional wisdom that has been dominant in Washington, Brussels and many other world capitals since at least the 1980s. The defining feature of this long-standing ethos is a rock-solid commitment to steadily reduced trade restrictions, expanded trade relationships, and ever-deepening global trade integration. Questioning these axioms would have been inconceivable to any of the global elite.
The transition we are witnessing is therefore remarkable. The full-throated pursuit of globalization that the two officials have advocated for decades has now been replaced by a call for trade to be increasingly conducted within a much more narrowly defined basket of “friends” who share common “values”.
Another noteworthy aspect is the extent to which this new vision is already being implemented. The EU is moving aggressively to conclude a trade deal with India in order to lessen India’s dependence on Russia and bring it more tightly into the EU's “circle of friends”. Meanwhile, across the Pacific, Japan’s Prime Minister has created a new cabinet post – Minister for Economic Security – which is an explicit recognition of the increasingly vital linkage between trade and security considerations that both Yellen and Lagarde described. The newly created US-EU Trade and Technology Council is ostensibly intended to facilitate trans-Atlantic cooperation on a range of issues related to supply chain resilience, technological security, and trade. As a practical matter, the unstated but apparent objective seems to be binding the North Atlantic partners together more tightly in order to fortify their combined capacity to counter China and Russia.
We are moving from the unquestioned pursuit of globalization to prioritizing trade with “friends” who share our “values”. The ground is truly shifting under our feet.
Business needs to wake-up
The transition that is underway should serve as a wake-up call for business. When planning their global strategies, multinational corporations have had the luxury of focusing primarily on economic efficiencies and the pursuit of greater profitability. With a pro-globalization and pro-free trade mindset ensconced in many markets, executives could safely detach from many global trade policy debates and national geostrategic calculations.
Those days are over. These considerations will now enter board room discussions with much greater frequency. Decisions about a potential investment or the establishment of a production facility in a particular market can no longer be made on the basis of an excel spreadsheet alone. As Lagarde alluded to, the broader geopolitical context and evolving trade policy stances will now have to be factored into the calculations. The world is getting messier.
A better future?
Yellen closed her remarks to the Atlantic Council by saying “we ought not wait for a new normal. We should begin to shape a better future today.”
That future is already coming into sharper focus. Economic efficiencies will no longer necessarily be the primary driver of trade and investment relationships. The need for common values and geostrategic compatibility will now increasingly shape trade and investment flows. The GATT and the WTO were predicated on the assumption that trade could and should flow freely between countries irrespective of any potential security or philosophical divergences. As Janet Yellen, Christine Lagarde, and many others in similar positions around the world are recognizing, that time is approaching an end.
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