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Analysis
Consequences of 2008

Consequences of 2008

How fault lines became clear

by Meghnad Desai in Goa

Wed 15 Aug 2018

When the 2008 financial crisis came, few thought the ensuing recession would have such long-lasting consequences. But 10 years later, the fault lines previously hidden in the economic structure have become clear. Every trading regime has gainers and losers. To maximise social welfare, those who gain from the benefits of free trade are expected to compensate those who suffer losses. Of course, no one is actually compensated; the losers simply adjust to their losing positions.

The crisis made this adjustment difficult, especially in the US. Detroit's fortunes illustrate the shift. The hollowing out of the manufacturing sector had altered the geography of US prosperity, which moved to the coasts while leaving behind the middle of the country that had thrived in 1945-75. The same happened in the UK, with the decline of England's industrial north east, Scotland's shipyards and Wales' coal mines.

Different countries have felt the political effects at differing paces. The collapse of Italy's established parties occurred 15 years before the same fate befell French politics in the 2017 presidential elections. In Germany, the success of Alternative for Germany in 2017 marked the first time since the 1950s that a radical right-wing party achieved a mainstream parliamentary presence. The UK faced the rising popularity of the UK Independence Party, a contributing factor to the 2016 referendum on leaving the European Union.

Donald Trump is the first right-wing political leader to propose a complete review of the modern liberal order, focusing on trade. The World Trade Organisation promotes the idea of the world trading system as forging a common interest for trading nations on an equal and symmetrical basis. Any rules-based system in which members are unequal in strength and size will not live up to the ideals behind it. This has been the case for the WTO. We see the consequences in Trump's desire to reshape the multilateral trading system into a series of bilateral relationship with nations that run a trade surplus with the US; Russia does not appear on this list.

Likewise, in disassembling the North Atlantic Treaty Organisation, Trump wishes to negotiate bilateral relationships with the powers he believes matter most to US security – Europe does not matter in this set.

In Trump's US-centric view of the world trading system, measuring countries' importance by the size of the US trade deficit, China tops the list. Next is the EU, then the partners in the North American Free Trade Agreement. Instead of a universal set of rules applicable to all, Trump wants individual bilateral agreements with each large trading partner. He rejects multi-country, multi-product regional accords such as the Trans-Pacific Partnership.

The world Trump wants trades bilaterally, with dozens if not hundreds of bilateral treaties regulating trade relations between pairs of nations.

This is not entirely fanciful. Rather, it represents the world as it was before 1945, when there were no agreed rules on international trade. Each imperial country had its own rules for trade within its empire. Trade between Europe's imperial powers was not always friction-free. Independent nations like the US developed informal regional trading blocs. It was a miscellaneous arrangement. The system Trump wants to build may retain elements of the modern liberal order, particularly in the form of blocs like the Association of Southeast Asian Nations, but the big players will behave like the pre-1945 imperial countries.

Trump's vision for geopolitical relations is similarly bilateral. He notes that the cold war ended with US victory, with Europe prospering in the decades since, in his view, at Washington's expense. His main concern in Israel and the Middle East. This is why he has focused on Iran as the enemy and Saudi Arabia as an ally. Becoming more involved in the Korean peninsula is a way for Trump to put pressure on China. He is not interested in Nato and other multilateral forums like the G7 and G20, and the United Nations is a low priority.

Many countries may not like what they see in Trump's world view. But the precursors have been rather evident for many years. Adjusting to the new state of affairs may not be as difficult as many believe.

Lord (Meghnad) Desai is Emeritus Professor of Economics at the London School of Economics and Political Science, and Chair of the OMFIF Advisers Council.

This is the second in a series of three articles on the multipolar world and the impact of President Donald Trump on the modern liberal order of free trade and international relations. Click here to read the first article and click here to read the final installment.

Desai was among the relatively few international political commentators taking Trump seriously before the November 2016 presidential election. Download Desai's July 2016 report on Trump's political economy, as well as his April 2017 OMFIF book on the president's first 100 days in office.

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