Global Business and Trade

Shifting balances of economic power


Free trade agreements and economic globalization have gone out of fashion: Sanctions, protectionism, and fears cloud the outlook for a prosperous development of international trade relations.

[Translate to English:] Keyvisual April

Since the beginning of the 2020s, many things in the global economy are no longer as they used to be. Coping with the COVID-19 pandemic required an enormous financial effort, not only for entire countries but also for their citizens. Then there was Russia’s attack on Ukraine, which, in addition to all the suffering it brought about, caused many economic goods to become more expensive and made energy costs skyrocket. The age of free trade agreements, whose original idea was to curb political conflicts through trade integration, seems to be over. After the end of the Cold War, there was a general desire that as many countries as possible should adopt the liberal, Western economic system. “Western democracies, European countries more so than the USA, promoted trade agreements as part of policies intended to reduce barriers to bilateral and multilateral trade,” explains Harald Oberhofer, professor at the WU Department of Economics. He believes that global economic integration will become less important in the foreseeable future. As Oberhofer points out, “Efforts will be made to avoid becoming too dependent on autocratic regimes, for example with regard to critical raw materials or sensitive products.”

Democracies under pressure

The Bertelsmann Transformation Index, published in March, concludes that democracies are under pressure around the world: Among the developing and emerging countries, the number of democratic states has hit a 20-year low. There are 63 democracies in this category, compared to a majority of 74 autocratic regimes. “The proportion of democracies among our trading partners is declining,” says Gabriel Felbermayr, professor at WU’s Department of Economics and director of the Austrian Institute of Economic Research (WIFO). “Geostrategic rivalries are back, and international economic policy is today seen as power politics, which is damaging mutual trust on a massive scale.” We are seeing a profound recalibration of the overall political approach: Growing emphasis is being placed on near-shoring, i.e. increased trade with nearby states, or friend-shoring, i.e. trade with friendly states.

The problem-fraught relationship with China

How should trade relations with China be assessed in this context? China has long since ceased to isolate itself through its policies. Quite on the contrary, China wants to strengthen its global influence, but it wants to do so based on its own rules. According to the Chinese way of thinking, this is the best way to maximize its power and prosperity. On the other hand, the USA seeks to increasingly decouple itself from China. “The goal of the US is to be two generations ahead of China in high technology, for example in the development of microchips, and to stem the rise of China through measures such as export bans,” Oberhofer explains.

Reducing dependencies

Europe is pursuing a policy of de-risking to reduce the risk of dependency for certain products. This is why Europe is promoting raw material partnerships with other countries, for example for rare earths. “Alternative supply partnerships are intended to reduce Europe’s dependency on China for certain products,” explains Professor Oberhofer. For example, up to 90 percent of the individual components needed for photovoltaic systems currently come from China. The hope is that with alternative suppliers available, the European economy will be hit less hard in the event of a geopolitical conflict. “It’s clear that Western protectionism is hurting the Chinese growth model,” says Felbermayr. “The central problem is that international trade goes hand in hand with specialization, and specialization cannot be achieved without dependencies. If we want less dependency, we have to reduce the degree of specialization, but this results in a loss of prosperity.”

Austria is lagging behind

To varying degrees, the EU member states were also dependent on natural gas imports from Russia. However, since the start of the Ukraine war, direct trade between the EU and Russia has collapsed, not only regarding sanctioned goods but also in other areas. As other economies have shown, it is possible to phase out Russian gas. Only Austria is lagging behind. “The argument that we can’t simply terminate the existing contract is relatively weak,” says Oberhofer. “After all, Russia hasn’t adhered to the terms of the contract either, because since Russia’s attack on Ukraine, the gas bills must be paid in rubles instead of euros.” As Felbermayr adds, “It’s true that Russia’s share in Austria’s total gas imports is still very high, even though overall the imports have gone down. This will soon change, however, particularly because Ukraine is bound to stop the transit of Russian gas.”

Worried glances across the Atlantic

With justified concern, the world is also looking at the USA, where the next presidential election will take place in November and Donald Trump’s chances of reelection are very much alive. “Much is still unclear. But one thing is certain: If Trump wins, the political tone is bound to become more aggressive again and the mood would deteriorate,” Felbermayr believes, “but in any case, today we know much better what to expect than we did eight years ago.” Some of Trump’s announcements have raised eyebrows: There is talk of additional tariffs of 60 percent on imports from China; the US could also put in place a basic tariff of 10 percent on all imports. This would also affect goods imported from the EU, which in turn would force the EU to respond in a similar way. Professor Oberhofer does not expect US-EU trade relations to improve anytime soon. “A free trade agreement is a long way off, even if Joe Biden remains president,” he says.

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Harald Oberhofer

© Alexander Müller

Harald Oberhofer is professor of empirical economics at WU Vienna’s Department of Economics and an economist at the Austrian Institute of Economic Research (WIFO). He also heads the FIW (Research Centre International Economics), a collaboration between four Austrian universities and two research institutes focusing on applied economics. His research interests include questions related to the economics of international trade and trade policy. He regularly shares his expertise in commentaries published by Austrian media outlets.

[Translate to English:] Gabriel Felbermayr

© Alexander Müller

Gabriel Felbermayr is a full professor at WU Vienna and was also appointed director of the Austrian Institute of Economic Research (WIFO) on October 1, 2021. His research and consulting activities focus on questions related to international trade theory and policy, job market research, European economic integration, and current issues in economic policy. He has published a large number of articles in international academic journals and newspapers, and he has won various awards for his research achievements.

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