Responsive and responsible leadership to forge a new world order

By Christopher Bovis | chinadaily.com.cn | Updated: 2017-01-19 11:31

A Davos logo is seen before the annual meeting of the World Economic Forum (WEF) in Davos, Switzerland January 15, 2017. [Photo/Agencies]

Global political and economic leadership is at a crossroad. Globalization has been based on the assumption that free trade is beneficial for national and regional systems. An integration agenda has been sought by international institutions and governments across the world with the objective of trade liberalization and the elimination of protections and preferences by governments to national industries.

However, globalization and the full-fledged neo-liberal approach to market integration in international trade, has revealed significant side effects which were not previously accessed. The emerging assumption is that free trade does not always serve national interests.

Recent political developments in the European Union, particularly in Great Britain, and in the US have verified that assumption and have opened up the fundamental debate related to globalization and the ensuing principle of market access and its implications on international trade.

Pivotal to this debate is the introduction of a regulatory system which could strike a meaningful and workable balance between free trade and national concerns. The EU and the WTO are two systems which both purport the regulation of international trade based on the market access principle.

The WTO has been the vehicle for the emergence of China as one of the most prolific markets in the world. The EU system represents one of the most mature, accessible and interoperable systems of liberalizing trade. It is aligned with the World Trade Organization, although the latter is an international trade policy framework of less liberalizing trade intensity as it is based on the principles of national treatment and the most favored nation (MFN).

Under both systems, international trade regulation has been preoccupied with the demolition of tariff and non-tariff protection. This has led to a significant reduction in tariffs, on the premise that world trade cannot function without tariffs. Tariffs in trade represent a means of revenue for the state and ultimately a means of protection of domestic markets and industries. Nevertheless, emphasis in the regulatory action has been directed upon eliminating non-tariff barriers (NTBs), in the sense that they represent the most prolific set of obstacles to the liberalization of international trade under both the EU and WTO as international trade regulatory systems.

Global political and economic leadership has not been responsive to the side effects of globalization and the vacuum which was created by the shift of resource allocation as a result of free trade. Production factors migrate to markets where conditions are optimized but leave behind a gap which has not been addressed satisfactorily.

Wealth is accordingly generated in regions where productivity and competitive advantages attract production processes, but present gaps which reflect on sustainability of national industries, employment issues, competitive advantages, labor mobility and migration.

On the other hand, a responsible global political and economic leadership necessitates a balance of facilitating free trade whilst protecting national interests, although such a balance is difficult to strike, because its inherent features run against the grain of international normative and political dogma over the last century.

A responsive and responsible political and economic leadership will have a number of features which focus on diluting globalization. Although the fundamental principle of free trade is paramount to the world's political and economic systems, priorities of national or even regional systems will attempt to balance the positive effects of free trade with any adverse effects arising out of uninhibited market access to trade. How would they do so?

First, trade and free trade is only one dimension of globalization. Free trade allocates resources where there is most beneficial to the owners of production factors. On the other hand, free trade opens numerous possibilities for economic growth based on diversification, mobility (which represents the ability to mobilize production factors in different markets) and policy intervention. The latter epitomizes the need to instigate contemporary industrial policies.

This approach aims at creating framework conditions under which improvement of national or regional competitiveness would compensate where necessary for market failure. Free trade and the aftermath of globalization generates positive externalities on the economy as a whole, increasing the growth potential and the vibrancy of the economic fabric, fostering innovation and training as a result of increased demand for skills. In this perspective, industrial policy plays a key role by concentrating on strategies, the creation of a favorable environment and clear support to key investments that can generate growth.

Secondly, a responsive and responsible political and economic leadership will have the hallmarks of a contemporary and fit-for-purpose industrial policies across the world which harnesses the benefits of free trade whilst balances the negativities of the ensuing industrial reorganization. Such industrial policies across the world should be interoperable and aim at the following tasks.

(I) To set out the boundaries within which industry and enterprise can flourish. Failure to set this framework correctly can lead to risks for the public, or to the waste of industrial resources and the frustration of entrepreneurial initiative.

(II) To ensure that the conditions are present for industry to develop and to realize its competitive potential. The availability of technology, skills, an educated workforce, a positive attitude to risk-takers, finance and the other conditions which form a truly competitive and innovative business environment have to be the active concern of a responsive and responsible global leadership.

(III) To ensure that the frameworks, institutions and instruments that are necessary for the business environment and for industry are able and capable to accommodate contemporary societal needs and requirements.

Globalization and free trade serve national interest partially. They enhance the global economic performance but leave behind a socio-economic vacuum in need of redress.

The response of global leaders to the adversities of globalization should not reflect nor lead to protectionism. Instead, a model of responsive and responsible leadership must embrace the positive dynamics of industrial policies and offer the solutions to the challenge of the new world order.

The author is a professor of EU and international business law at the University of Hull Business School.