Yellen, Lagarde, and the death of the global trade system

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.

“We need to modernize the multilateral approach we have used to build trade integration. Our objective should be to achieve free but secure trade.” [1]

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.” [2]

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.” [3]

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

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

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.

1. https://www.atlanticcouncil.org/news/transcripts/transcript-us-treasury-secretary-janet-yellen-on-the-next-steps-for-russia-sanctions-and-friend-shoring-supply-chains/
2. https://www.atlanticcouncil.org/news/transcripts/transcript-us-treasury-secretary-janet-yellen-on-the-next-steps-for-russia-sanctions-and-friend-shoring-supply-chains/
3. https://www.ecb.europa.eu/press/key/date/2022/html/ecb.sp220422~c43af3db20.en.html

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