As a former professor at LSE and now a professor at the Lee Kuan Yew School of Public Policy in Singapore, Razeen Sally focuses his research and teaching on global trade policy and Asia in the world economy. Razeen is senior adviser to the finance minister and chairman of the Institute of Policy Studies, the government’s main think tank, in his native Sri Lanka. He sits on the Legatum Institute’s Special Trade Commission, which advises the British government on Brexit trade strategy, and is director of the European Centre for International Political Economy – Europe’s leading trade think tank – in Brussels.
We spoke to Razeen about some of the key issues that the world trade scene faces in an era of global trade uncertainty; from global macroeconomic recovery to his trade predictions for Britain in the wake of Brexit.
What are the major challenges in Geopolitics today, and how is it affecting world trade?
I think the major challenge in geopolitics today is the role of the United States, for the last seventy years we’ve had a U.S-lead global order. The United States has lead in terms of its hard military power, with boots on the ground in several parts of the world, and its navy which has allowed trade to flow freely across the seas. The U.S has had the leading role in setting up international organizations like the IMF, the World Bank, the WTO and bilateral alliances with other countries around the world. The big question is whether this will continue or if we are in the early stages of a US disengagement from its role as the ‘global policeman’ as it were, and if the United States is disengaging will other countries or regions substitute for the kind of leadership that the US has provided. Will it be China in Asia? Will the EU step up to the plate in the wider Europe? Will they be creating institutions without the leading role played by the United States? Those are existential questions because we are talking about global order of peace, security and prosperity. If we have more instability there is a danger of greater conflict, more protectionism and the world economy shrinking and unraveling as opposed to prospering. My own view is that US leadership is still indispensable, they are still the indispensable nation. I am doubtful that China or the EU will provide the kind of leadership that the US has provided for the last 70-odd years.
How do you foresee Protectionism developing? Is it something that will remain confined to Western policy?
So far since the crisis we haven’t seen a big upsurge of protectionism, which is good news. Normally when economies slow down, as they have been since the GFC, there are more protectionist pressures. That was particularly acute during the great depression in the 1930’s. Since 2008 we haven’t seen anything remotely similar to the 1930’s and I think we have globalization to thank for that. Despite this I think there is a good chance that protectionism will increase and spread, and the reason for that is that there is now a pronounced anti-globalization backlash in the West. This backlash is taking various forms, of course we see it in headline news with things such as the ‘Trump phenomenon’, and Trump is the most protectionist president of the US (in his heart and in his guts) since the 20’s. So far his bark has been worse than his bite, we haven’t seen his threats translated into action such as tearing up NAFTA or slapping on massive new tariffs against China or even building a wall against Mexico, that hasn’t happened so far; but some of these threats, I think, will be translated into action perhaps beginning with steel tariffs which are in the pipeline. The main issue is that the US sending these protectionist signals, rhetorical or otherwise , does reverberate around the world because the US is still the number one power, and it still matters what the president of the United States says.
There is a chance, a good chance that we will see more protectionism coming from the US and then others will retaliate ‘tit for tat’. The WTO will be further weakened, it’ll be more difficult to negotiate big, new free trade agreements; so yes there is a good chance of protectionism increasing BUT I don’t think it will escalate out of control to resemble the kind of protectionism we saw in the 1930’s. So I’m not a subscriber to the ‘doomsday’ scenario, I think we are in different conditions now, there are many more linkages in the world economy, and there is interest from many of the powerful economic players to refrain in going down the 1930’s road again.
Finally coming to Britain and the uncertainty faced by British trade in the wake of Brexit, what impact do you foresee for British trade post-Brexit?
Well, I think that depends very much on the shape Brexit will take. We know that Britain most likely will leave the European Union in about 1 year and 9 months’ time, but we don’t know what will happen on the day of and the day after Brexit, this is yet to be negotiated. If Britain ends up with no deal with the EU at the cliff edge of Brexit, then I think the prospects for the British economy and for British trade are grim. The disruption will be huge, there will be big losses for companies as Britain comes out of the single market and as new protectionist barriers are placed between the UK and the EU businesses won’t invest because of the uncertainty of it. Many businesses will relocate, all the way from banks and financial service firms that will go from the City to Frankfurt, Paris, Dublin etc, to multinationals that will go elsewhere because they will want production from which they can serve the single market. That’s the really bad scenario. At the other extreme lies a liberal Brexit in which Britain leaves the EU with a smooth transition period and there’s a final deal with the EU that is not as good as the single market but that secures free trade between the UK and the EU. This would enable Britain to deregulate, to liberalize its own economy and to strike new trade deals with the US, other Anglo-Saxon countries, China, India and more. In that scenario I think there’s a good chance that British trade will be much less disrupted and indeed face new opportunities and could indeed thrive. But going from here to there is going to be politically very challenging, the odds are perhaps against it but I believe that the opportunity is still there. Finally there is a sort of in-between scenario, which I think a lot of businesses are pushing for, that mainly entails as little change as possible. In this scenario Britain would have a fairly long transition period out of the EU, and remain in the customs union and the single market. If this was to be the case there would of course be less disruption to business and the transition arrangements could become semi-permanent. So the positive side to that scenario is there would be less disruption to business, but it does take away the opportunity for Britain to liberalize itself and strike important trade deals that go beyond the EU, which then raises the question, so what is the point of Brexit?
Razeen is available for speaking engagements, events and conferences globally. To book Razeen or to find out more please visit our website.