Tigers, tariffs, and the tripolar delusion

By GENN

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“You cannot argue with a tiger when your head is in its mouth” (attributed to Winston Churchill in the film, The Darkest Hour (2011)).

There are many who suggest that we now have a tripolar world:  the three poles being the US, EU and China. These poles are all equivalent – or so the thinking goes – equivalent morally and in terms of economic impact and importance.

But that is not how the world actually works. 

Instead, a better way of looking at the world is through the lens of the approach of different countries to market competition as a defining or organising economic principle. Here there is a spectrum of countries with at one end, full market competition with a minimum of anti-competitive market distortions.

On the other end we have countries like China which embrace a state-led economic model with a high level of market distortions.  It is possible for the same country to manifest at either end of the spectrum depending on the sector (see the US on technology versus farm policy).  Countries or sectors characterised by market competition models are more likely to seek to work with each other on the basis of mutual recognition, adequacy and equivalence. 

Countries, however, that adopt a more state-led approach have a tendency to wish to co-operate on the basis of regulatory harmonisation or regulatory coercion. Often they use the size of their markets to force regulatory adoption by others of their standards. Because they are less inclined towards competition, they are also less inclined towards regulatory competition (or more accurately see no benefit to it).

Given the importance of ensuring that the regulatory system rests on the most consumer welfare-enhancing equilibrium point: it is the competition between systems that is most likely to deliver that result, and therefore the most likely to lead to wealth creation and poverty alleviation.

Impact of common law approaches and cabining of real economic forces

Our recent GENNsight on the rise of Singapore hinted at a major governance advantage: English common law.  Some of the most successful countries in the world have adopted English common law and our recent GENNsight piece highlights its importance. From the US, to Singapore, Hong Kong, the UAE, and right across the Commonwealth, the principle of stare decisis (following legal precedent) has enabled a system to emerge that holds in balance the competing economic forces of market participants in a way that maximises consumer economic and thus delivers economic growth and wealth creation.  This system has propelled the global economy forward, lifting billions out of poverty in the process.

How we handle China will define us

One of the most significant questions of our time relates to what we do when confronted by a major economic power that adopts a very different approach to market competition than the previously successful economies of the post-war world  The so-called China question is a variant of the first section of this blog.  If we get the answer wrong, we risk losing the global economic battle between competitive markets based capitalism and state-led capitalism, and therefore in the long term condemning people to both poverty and conflict.  There are three crucial pathways to a successful result for the world economy, and its people.

  1. Establish demonstration models of what economic success looks like. As we note in both our Singapore GENNsight as well as our recent GENN report, nothing succeeds like success.
  2. Use platform agreements like CPTPP to bring together aligned countries that are committed to competitive markets, property rights protection and trade liberalisation. This will challenge China and others that seek regulatory harmonisation or coercion. These platform agreements can also challenge the static and collapsing international economic order, and the multilateral institutions that carried it, such as the WTO, IMF and World Bank.
  3. Incentivise the reformers in those state-led economies to embrace market reforms by real carrots and sticks. Real sticks would include measures to use tariffs to eliminate the market distortions that their economies create. As the (alleged) Churchill remark reminds us, nobody should live in a fantasy world where we can by persuasive argument convince an aggressive Chinese Communist Party to adopt a competitive market approach. However we can present China with a choice: that if it seeks access to the biggest and most lucrative markets in the world, that access will be limited by its own internal anti-competitive market distortions. Merely presenting that choice will give oxygen to reform-minded people in China.

In future GENN reports and GENNsights, we will examine these issues in greater detail, and provide recommendations that governments can and should follow.

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