15 July 2019

Geopolitics and World Trade

Geopolitics and global commerce, otherwise referred to simply as “flag and trade” – these are what shape the world. The flag is in fact the sovereign state, the political power and military force that is mustered behind it, and which it embodies; this is why the term flag refers both to the markings on a warship and to the means by which a sovereign power furthers its own interests. This is roughly what geopolitics means. The other element is commerce, and the economy in the broader sense. The word “trade” essentially means both commerce and all other economic activity in the broader sense. These two are the main factors shaping what we call the world order, which is the subject of much discussion nowadays.

Many say that the world order is changing, and that this transformation is speeding up. Many believe that the world order is collapsing, or that it is about to collapse. There is also an ongoing debate about what will take its place. Here I will limit what I have to say to geopolitics and world trade, while recognising that these are not the most important aspects. There is a third factor, which is the most important. This could symbolically be referred to as the “Bible”. By this we mean the holy scriptures in general, such as the Vedas or perhaps the Quran; but in a broader sense, it refers to the ideas that people and humankind have formed about themselves. The nature of that certain world spirit, the Weltgeist – as defined by Hegel –, the intellectual sphere, concepts, culture, art, science and of course ideology. Culture in the broadest sense. This is what really controls the world, but it does so predominantly through geopolitics and the global economy. Two brief examples: firstly, the thing that is presently determining the development of the world order – and will continue to do so – is technology. Biotechnology, artificial intelligence, the integration of the two, and everything that follows on from this. The winner of this increasingly fast-paced and fierce competition will be one who secures first place in this technological race. And the technology is in our heads: science, creativity and innovation are essentially dependent on consciousness factors. There is another channel through which this world spirit, the Weltgeist, shapes history. This is the ethical fabric of the whole system: morals. This issue is set to become especially critical as biotechnology or artificial intelligence confronts us with increasingly weighty ethical problems. We are talking about known examples here. In just a few days, the European Commission is preparing to issue its guidance on the ethical implications of artificial intelligence. In my youth I was intrigued by science fiction. We read Ray Bradbury or the Hungarian Péter Kuczka, who, interestingly enough, were both also excellent poets. They predicted a lot of things, and then what they wrote about never happened. We still do not know what will happen, but now we can sense that what we had thought of for so long as the distant future is now 50 years. The next 50 years will see changes that are unforeseeable, will speed up development by an unbelievable rate, and will present new, extremely grave, unprecedented threats and challenges. Stephen Hawking, who recently passed away, said in his last, posthumously published work that the real great challenge for humankind is artificial intelligence. And it is no fantasy that robots could seize power. They might seize power, or they might not; but whatever happens people will be faced with a situation that they have never faced before.

The two objective factors defining the world order, therefore, are geopolitics and global trade. In the words of Karl Schmitt: Jede Grundordnung ist eine Raumordnung1 – every fundamental order is a spatial order. We refer to geopolitics as geopolitics because, in many respects, it has also a spatial structure.

I will articulate eight theses, all of which are disputable. Indeed, they would not be theses if they could not be challenged. In fact, they all have only the force of probability. All eight theses, therefore, are disputable and challengeable; counterarguments can be raised against each of them.

The first three theses are related to the structure of the world order. The first thesis is that there is no hierarchy in the structure. Of course, day-to-day wisdom tells us that there is; but in reality, there is no hierarchy. The structure is not hierarchical, but heterarchical. Heterarchy is also a system, an order, which does not form into a vertical, rigid geometric structure. Brain researchers discovered this a good 70–80 years ago. They found that there is no hierarchy in the human brain, but there is heterarchy; in other words, there is order – variable ranking, as the phrase goes. This concept has also emerged in information technology. We also used to think that the relationships between legal standards constituted a clean, solid hierarchical system. Today, the situation is far more intricate and complicated; there are various points, and if we try to position them in space it turns out that there is no hierarchical system. So, the first thesis is that there is no hierarchy, but there is a system. This means that the system is variable, with different hierarchical structures in different areas, each with different participants. In the world today, different powers lead the way in different areas. But none of them come first in every area. To take the most obvious example, gross domestic product (GDP), there is clearly a bipartisan structure here. One of the protagonists is the United States, and the other is China. And there is even scope for variation within this, too, because in terms of purchasing power parity China comes out on top; but on a nominal basis, which is the most important in world trade, the United States is first. After these come the other, very important areas. For example, if we look at the demographic data, which are another key factor, then it is clear that there are two frontrunners – China and India – with all the other countries following far behind them. If we take nuclear warheads, almost half of all the world’s nuclear warheads are in Russia, with almost half again in the United States. There are seven other nuclear powers, and they also have a few hundred. North Korea only has twenty, but that could still hurt us. The important thing is that, from the perspective of military force, the structure is different. So, this is the heterarchical structure in which there is military force, there is a demographic factor, there is naturally GDP, and there is trade. The world’s top trading power is neither China nor the United States, nor even India, or Japan, but the European Union. In terms of both exports and imports, the European Union is number one in the world today.

The second thesis follows from the fact that there is no hegemony. Not only is there no hegemony now, but there never was and never will be. Significant attempts have been made throughout history to secure full, global hegemony. The potential for global hegemony is also limited by the fact that relationships are always restricted to a specific region of the planet. China, for example, was not in competition with the Roman Empire. Later there were attempts, either at sea or on dry land. These were not successful. It is true that there has been a bipolar world system, and after that came something that was referred to as a unipolar system between 1991 and 1993. This was a misnomer, of course. There has never been a unipolar global system, but this expression nevertheless gained ground in daily discourse. Today we do not talk about this. Today we think in terms of a multipolar world, although it is not easy to define the poles. There is no hegemony, therefore, and there never will be, because the existence of a system defined by a single centre of power appears to be ruled out, even from a philosophical perspective. I do not understand particle physics, or cosmology, but my feeling based on the overall picture is that there is not, and never will be a system controlled from a unified centre. If artificial intelligence takes power, then various power centres will also come into existence around the artificial intelligence, competing with each other in terms of who will be the quickest, whose algorithms will be even more innovative, who will be able to gain an advantage over the others. There will not be a unipolar world, therefore, either officially or unofficially. There is no single, secret centre of power. Several power centres exist. Some of them are secret, but there is not just one, but many, and they are in competition with one another.

The third thesis is a refutation of the claim that two systems are emerging in the world. The view that the world can be divided into two, opposing political economic and ideological systems is gaining traction.2 This is not true. There are not two systems in the world; there are multiple systems. Today, most of the talk is about the conflict between China and the United States, a strategic confrontation that has various territories and tools, including our main topic, world trade. This confrontation is without doubt very important, perhaps the most important at the present; but it cannot be considered a conflict between two world orders. It would be interesting to compare the Cold War with the present so-called “cold war” between China and America, because some people do think that this is a cold war. Although the face-off between the two powers undoubtedly bears some hallmarks of the original Cold War, this confrontation is different to the one that took place between the Western world and the Soviet Union, or between “socialism” and capitalism as it was referred to. Back then, both parties had an ideology. (This is the aforementioned third factor!) China has no coherent ideology. There is Wang Dao, but not even they can articulate precisely what is meant by reverence, the acceptance of superiors. Besides Confucius there is Mao too, and behind him Marx, Lenin… Indeed, recently it seems the powers-that-be are also including Buddha in this line-up. And there is pragmatism too, the essence of which is that you need to be productive and make lots of money.

Returning to structure, there are still other major players that cannot be left out of the game. First of all, there is Russia. Many say that if there are two systems, then Russia is part of the Chinese system. This is by no means certain. Incidentally, the relationship between China and Russia is essentially a pseudo-alliance, which from time to time appears to be a real alliance. There was a time when it was, up to the middle of the 1950s. The older generations still remember the Ussuri incident and the events that followed it. There is an incredibly long border, which is not usually a good thing; and then there are the somewhat restrained economic relations, both in terms of trade and reciprocal investments. Without a doubt, there are ideological ties, which are not too strong, and there is an exceptional degree of mistrust. We should not forget that when it comes to population, China’s is ten times larger than Russia’s. In terms of GDP – depending on whether we calculate it based on PPP or nominally – China’s GDP is six or respectively eight times higher then Russia’s. So, what we have here is a serious lack of symmetry.

Japan and the European Union warrant their own discussion. It is very important to remember that in this structure, where we deny the existence of two world orders, there are various groups and alliances. These alliances are very often related to specific issues, or are geopolitical in nature or related to trade, or perhaps originate from some consciousness, ideas or ideologies. The fundamentals may be different. A big question, for example, is that of what holds the North Atlantic Treaty Organisation (NATO) together. The Bible? Yes, this continues to be the most important factor. So, without a doubt there is a shared set of values that connects us, and which can be given various names – the expression “liberal world order” is very much in vogue nowadays. The terms with which a recently published study3 describes the substantive features of the liberal world order – values-oriented, built on norms, rules based – could also be used to describe a conservative world order. Nevertheless, there is a community of fundamental values within NATO, but there is also a shared geopolitical interest. Both the United States and Europe are more secure if they maintain, safeguard and strengthen the cohesion of the North Atlantic Alliance. Perhaps, we also have shared economic interests. Of course, it is hard to explain why the United States cites national security exceptions when introducing trade restrictions against the European Union – its closest allies – to say nothing of others, such as Canada. The question arises of whether it is “trade”, the economic aspect, or the shared geopolitical interest that is definitive; joint security, because in essence geopolitics is condensed into a security issue, and this is an existential issue, or the shared values.

The fourth thesis is that the individual policy areas, and their tools, are converging with one another; indeed, in some cases they are merging into one another. For a long time, there were foreign policy-makers, geopoliticians, and there were trade policy-makers, each with their own area of expertise. The two naturally came into contact with each other, which is by no means unusual as there have always been commercial, economic interests that always spilled over into politics, and vice versa. But these were still two systems, distinct from each other. Now it seems that things have been swapped around, and the different policy areas are using one another’s tools. The best example of this is still when it occurred to Robert Lighthizer that, as the legal basis for customs tariff hikes, instead of Article XIX of GATT (which permits protective measures in the event of economic difficulties, against which the other party may institute counter-measures), the United States should instead cite Article XXI. In the case of steel and aluminium products, customs tariffs need to be imposed on even the closest allies, because this serves the interests of national security. National security interests are a strange thing. The system has been in place for a good 70 years, and until now there was an unwritten rule that we should refrain from citing them wherever possible. This is a kind of taboo, which occurs but only very rarely. There were two rules, one is that we do not cite them; the other is that if someone does cite them, we do not launch a dispute settlement procedure because the dispute cannot be settled anyway. How could a few law professors or trade experts decide what is or is not in the country’s national security interest? Well, that system has now been upset. It was overturned by the largest actor, the one that defined the system. The others are thinking about what to do. Does the biggest player want to maintain the system at all? All the signs suggest that it does not want this very much, or it would allow the dispute settlement system to operate within the framework of the WTO. But it does not permit this because it is blocking appointments to the appellate body; and if appointments cannot be made to the appellate body, then after a time it will no longer be possible to settle disputes. There will be no dispute settlement process, and without dispute settlement it makes no difference if there are norms and laws; there is no enforcement. This begs the question of whether the entire system itself is at risk, or just certain parts of it. The United States imposed the trade restrictions citing GATT Article XXI as the grounds for doing so; in other words, it wants to deal with a commercial, economic problem by citing national security. (Whether or not this is managing the economic problem well is a disputed economic question.) There is another, very small country that decided it, too, could do this. It imposed a 100 per cent additional tariff, first on products from Serbia and later on those from Bosnia and Herzegovina. The country is not even recognised by everyone; its name is Kosovo. And what is it citing as grounds for this action? National security. To the question of what a 100 per cent tariff has to do with national security, they reply that Serbia continues to block Kosovo’s recognition by international organisations. This is an existential issue for them, which directly impacts on national security. If the biggest player can do this, then the smallest can try too. The 100 per cent tariff is still in effect today. The whole system is dissolving further; the spatial structure, the geometry continues to loosen.

The fifth thesis is that there is no system of closed bilateral relationships. There is no pure bilateralism; never was, never will be. First of all, trade is multilateral by nature. This is not something that was made up by politicians or lawyers; trade was already multilateral in the time of Adam Smith because the English fabric that was bought by the Portuguese was then made into clothes and sold to a third country. In the world of supply chains, it is blindingly obvious that wherever any kind of intervention takes place – whenever a restriction is imposed or a special discount granted, or a bilateral free trade agreement is signed – at that moment, the effect spills over to all the actors. Global trade is the best example of the butterfly effect. This was why GATT was created back then, and this continued in the World Trade Organisation, because it was clear that at the level of legal standards this system can only be defined in a multilateral framework. This was what the principle of best treatment for all members was based on. This is why the best treatment principle, which for a long time had been valid in bilateral frameworks, had to be multilateralised, turning it into a multilateral concept. And this was why the special rules, the erga omnes principle had to be introduced, under which any measure taken against one party must, with a few rare exceptions, be taken against everybody else. Even if a measure is instituted exclusively against A, it will also have an effect on B, C and D. The legal regulation, therefore, only encapsulated this obvious reality. The restrictions introduced by the United States against China to date affect imports totalling USD 302 billion. According to a UNCTAD study, of this USD 302 billion in imports, some USD 250 billion in trade is being diverted to other countries. Therefore, the restriction does not protect the industry that it was originally intended to protect because someone else will import the same products. The European Union – European agriculture, the European automotive industry – benefits from these restrictions to the tune of USD 70 billion, but others – Canada, Mexico and others – are also capturing some of the diverted trade.

So whatever restrictions anyone introduces, their impact runs right through the whole system. This is what the multilateral system of rules, which is now creaking and groaning, was attempting to cope with. The question is whether it will manage to retain at least its essence.

The sixth thesis, which is also related to the previous one, is that globalisation is slowing down. Not accelerating, slowing down. This can be clearly demonstrated in the global trade data. For a long time, we saw the growth in global trade outstripping the “global outcome”; that is, the pace of global GDP growth. In the past, this was how it has always been, it was what we grew up with; but in the past five or six years this has not been the case. The main cause of this is technological advancement; we no longer have to send everything physically, it is enough to just send the data and the product can be manufactured on-site, for example using 3D technology. The structure of global trade is undergoing a major transformation. At first, we predominantly traded in goods, then we traded increasingly in services, and now we are increasingly trading in data. The legal regulations also have to encapsulate this data traffic, which is no easy task. Especially when the whole world will consist of data, and perhaps it will not even be us managing that data. Things change, and in this case the technology does not advance globalisation in the conventional sense, but much rather it tends to localise production, and takes the work back to the place from where it previously went away. There are other causes too, such as sustainability. Another exciting debate relates to how global trade is connected to sustainability. The WTO’s director general Azevêdo said he had not heard that the two had anything to do with each other. But they have. As we move goods, pollute the sea and the air, our footprint grows ever bigger on this unfortunate planet. And this is to say nothing of the fact that free trade can help us to take certain forms of production, which it is no longer acceptable to perform at home for environmental reasons, to places where they are still allowed. So there is a relationship. Whether this can be resolved with the regulation of trade, and not its restriction, is another question. Sustainability is coming into focus, therefore, and this is also holding back any further acceleration in globalisation. Globalisation is gradually slowing down, at least in certain segments, and giving over to regionalisation. The slowing of globalisation does not mean that growth has to slow, and welfare has to decrease. Regionalisation is getting stronger. Distance matters. “Just In Time delivery” within the supply chain means that a car part has to arrive in a given hour and no later, which means that production centres in close geographical proximity to each other have to be connected. There is also a geopolitical aspect to regionalisation. Underlying every single regional trade agreement (RTA), there is also a geopolitical consideration. In some cases, there is also an economic philosophy, intellectual or ideological dimension as well. These factors all point towards regionalisation. The British will be able to tell us a lot about this in five or ten years time, when they realise how they were taken in by the illusion of “Global Britain” and the idea that their trade with Australia, Canada and New Zealand will make up for the loss of their neighbours. We, the European Union, have trade agreements with these countries, and it will not be easy for the British to join them. But Australia will not substitute for France anyway. You just need to look at the map, and of course history and culture too. Regionalisation means that there may not be any closed bilateral relationships, but the regional systems of relationships function more powerfully.

At present there are 471 regional trade agreements (RTAs) in effect, or to be more precise this is how many were reported by member states to the appropriate committee of the WTO. But there are many more and their number is constantly growing. The European Union naturally has the most agreements of this kind in the world – more than 40 – but these cover more than 100 countries because there are a good few agreements – like the Cotonou Agreement – with a high number of members. The others also have agreements; for example the United States has 19, and China 17. The competition is on, negotiations are in progress, because the actors now see that the multilateral system will not evolve any further, and its future is uncertain. There are attempts at moving towards pluralism, which means “many, but not everybody” (e-commerce, etc.); but there are strong barriers to taking this forward. An argument in favour of strengthening regional frameworks is that the parties to these agreements are put in a more favourable position, while the outsiders are at a disadvantage. The European Union is now negotiating with the United States again. Today, from Europe’s perspective, this is perhaps the most important issue. We have concluded an agreement with Japan, which is a massive result, covering 30 per cent of the “global outcome”. Nothing like this has ever happened in the world; perhaps we did not celebrate it enough. We have also concluded an agreement with Canada. This has given rise to disputes, and the Court of Justice of the European Union will shortly issue its ruling regarding the provisions relating to investor protections. One result of the Canadian agreement has been that lobsters originating from Canada can enter the European Union duty-free. In the United States, the state of Maine is where the best lobsters are served in the restaurants, and there are even lobster bars at the roadside. Maine is a small state, up in the corner, on the border with Canada. Lobster from Maine can only enter Europe at a higher customs tariff, while Canadian lobster comes in duty-free. This is good for the lobsters of Maine, but not for their farmers. This is why the United States is saying let us negotiate, but agriculture and fisheries should also be a part of the agreement. Our position, in contrast to this, is that agriculture and fisheries do not feature in the agreement made between Trump and Juncker. Interestingly, now the American side is referring to the GATT rules, saying that Article XXIV requires trade agreements to cover “substantially all trade”… This means 90-something per cent of the tariff lines, but there is no clear case law. Now it just happens to be the Americans who are saying that there is a multilateral system of rules and that needs to be complied with, and agriculture must be included. We Hungarians said the same to the European Community in 1991, when we argued that under Article XXIV of GATT our association (trade) agreement should also extend to agriculture. The American position is that if we do not include agriculture, this will lead to trouble. In any event, the European Union has just substantially increased its soya bean imports – this is the diversion effect I mentioned earlier – because due to the fact that China is not taking American soya beans, the American soya beans are ending up in Europe, and we are buying them. The European Union is not a state that is directly engaged in commerce like China. Here, the market decides what we buy. But we have passed an EU law to the effect that from today it is permissible to generate bioenergy from soya beans. And if there is such a law, then importers will naturally start buying American soya beans immediately.

So, a free trade agreement competition is under way, which we cannot drop out of. There are perhaps countries for which this is less important. Russia, for example, sells fuels, natural gas and oil. It also sells rocket systems, but customs tariffs are not a pivotal issue where these are concerned either. This, then, is a special situation; but the Russians know that free trade has importance.

When they are approached with requests to conclude a free trade agreement, their answer is that agreements of this nature can be made with the Eurasian Economic Union – the customs union formed by the Russian Federation, the Kyrgyz Republic, Belarus, the Republic of Kazakhstan and the Republic of Armenia. The customs union differs from a free trade agreement in that the members of the customs union cannot independently conclude free trade agreements, because they are bound by the system, customs tariffs and other rules of the customs union. Brexit currently centres on this question. Customs union or no customs union? Prior to the announcement of the referendum, one single question should have been put to the British people. This is the make-or-break exam question in courses on international economic law: what is the difference between a free trade agreement and a customs union? If the examinee gives the right answer, he or she has passed, if not it is a fail. Well, it seems that a substantial proportion of the decision-makers did not know the answer; indeed, a good few of them perhaps still do not understand the difference today. They do not even know that, free trade or no, every imported automotive industry product can be stopped at the border because compliance with the rules on origin has to be checked. Now the agreement that we made with the Japanese, and which took effect on 1 February, will be instantly extended to the United Kingdom. And what about the rules on origin? Currently all that the 28 of us manufacture are European products on a cumulative basis. It is not an issue with the Japanese, because they are alone; they fulfil the rules on origin by themselves. But if the British leave, will they then fulfil the quota requirement by themselves? These are some of the things that were not previously an issue.

The seventh thesis is nothing new: competition is becoming fiercer. What is the competition about? Above all, it is about technology. Who will gain the edge in the field of technology? Who will take the leading role in artificial intelligence, biotechnology, and the combining of these two technologies? This is certainly the central issue of the present competition. It is also a decisive issue from the perspective of security policy and defence, and one that could settle conflicts and break down the more or less well-functioning principle of mutual deterrence. Another very serious challenge arises if a group within society can financially afford to use special devices, and enjoy the advantages stemming from these, giving rise to inequalities that have never existed before. This would represent such a jump in quality, and create such a volatile situation, that it could be beyond humankind’s ability to manage it. The competition, therefore, is also under way for these advantages; and the chasm between the winners and the losers is continuing to deepen. This is why new tools are emerging, and this is why we acquire tools from other, foreign areas. And with all this, we further dissolve the system, which loosens further, dissolves and becomes increasingly fluid and diffuse, and this in itself increases the risk.

This brings us to the eighth thesis, which is essentially that the dangers are growing more serious. Some say that in effect this is simply the global phenomenon of entropy. Maybe, but there is harmony too. The vast majority of the hazards are man-made. The bulk of global risks are caused by people. This also means that we can and must help through human will and action, and through rules made and respected by people. The situation, therefore, is far from being hopeless. We should resort to culture, the third and most important factor of human history, as represented by the missionary.

Translation by Daniel Nashaat

 

Notes:


1 Carl Schmitt, Land und Meer: Eine weltgeschichtliche Betrachtung, Klett-Cotta, Leipzig, 1942, neunte Auflage, 2018, 71.l.

2 Martin Wolf, “The Challenge of One World, Two Systems”, Financial Times, 29 January 2019. In more detail: Robert Kagan, “The Strongmen Strike Back”, The Washington Post, 14 March 2019.

3 Daniel Deudney and G. John Ikenberry, “Liberal World: The Resilient Order”, Foreign Affairs, July/August 2018, Volume 97, Number 4.






HUNGARIAN REVIEW is published by BL Nonprofit Kft.
It is an affiliate of the bi-monthly journal Magyar Szemle, published since 1991
Publisher: Gyula Kodolányi
Editor-in-Chief: Gyula Kodolányi
Editorial Manager: Ildikó Geiger
Editorial office: Budapest, 1067, Eötvös u. 24., HUNGARY
E-mail: hungarianreview[at]hungarianreview[dot]com
Online edition: www.hungarianreview.com

Genereal terms and conditions