The End of the Win-Win World

I have spent my working life writing about international politics from the vantage points of the Economist and now the Financial Times. Surrounded by people who tracked markets and business, it has always felt natural for me to see international economics and international politics as deeply intertwined.

In my book Zero-Sum Future, written in 2009, I attempted to predict how the global economic crisis would change international politics. As the rather bleak title implied, I argued that relations between the major powers were likely to become increasingly tense and conflict-ridden. In a worsening economic climate, it would be harder for the big economies to see their relationships as mutually beneficial — as a win-win. Instead, they would increasingly judge their relationships in zero-sum terms. What was good for China would be seen as bad for America. What was good for Germany would be bad for Italy, Spain, and Greece.

Now, as the paperback edition of my book comes out, the prediction is being borne out — which is gratifying as an author, although slightly worrying as a member of the human race. The rise of zero-sum logic is the common thread, tying together seemingly disparate strands in international politics: the crisis inside the European Union, deteriorating U.S.-Chinese relations, and the deadlock in global governance.

This new, more troubled mood is reflected at this year’s World Economic Forum. In the 20 years before the financial crisis, Davos was almost a festival of globalization — as political leaders from all over the world bought into the same ideas about the mutual benefits of trade and investment and wooed the same investment bankers and multinational executives. At Davos, this year, the mood is more questioning — with numerous sessions on rethinking capitalism and on the crisis in the eurozone. The European Union is an organization built around a win-win economic logic. Europe’s founding fathers believed that the nations of Europe could put centuries of conflict behind them by concentrating on mutually beneficial economic cooperation. By building a common market and tearing down barriers to trade and investment, they would all become richer — and, eventually, would get used to working together. Good economics would make good politics. The nations of Europe would grow together.

For decades, this logic worked beautifully. But, faced with a grave economic crisis, this positive win-win logic has gone into reverse. Rather than building each other up, European nations fear that they are dragging each other down. The countries of southern Europe — Greece, Portugal, Italy, and Spain — increasingly feel that they are locked into a currency union with Germany that has made their economies disastrously uncompetitive. For them, European unity is no longer associated with rising prosperity. Instead, it has become a route to crippling debt and mass unemployment. As for the countries of northern Europe — Germany, Finland, and the Netherlands — they are increasingly resentful of having to lend billions of euros to bail out their struggling southern neighbors. They fear that they will never get the money back, and their own prosperous economies will be dragged down. Now that France has lost its AAA credit-rating, Germany is left as the only large AAA-rated country in the eurozone. Many Germans feel that they have worked hard and played by the rules — and are now being asked to save countries where people routinely cheat on their taxes and retire in their fifties.

From the beginning of the crisis, Europe’s politicians have argued that the solution to a severe crisis within the EU was "more Europe" — deeper integration. Unfortunately, their interpretation of what this means is rather different and dictated by the singular nature of their national debates. For the southern Europeans, "more Europe" means Eurobonds — common debt issuance by the whole European Union that would lower their interest rates and make it easier to fund their governments.. But the Germans regard this as a dangerous pledge simply to underwrite their neighbors’ debts, long into the future. For them, "more Europe" means stricter enforcement of budgetary austerity from the center — German rules for everybody.

Over the next year, this inherent contradiction is likely to cause increasing discord and rivalry within the EU as the political argument plays out against a deteriorating economic climate. Britain’s refusal to go along with a new European treaty at the December 2011 Brussels summit led to screaming headlines about a continental divorce. But it is likely to be just a foretaste of things to come. The development to watch for in European politics will be the rise of political parties that are more nationalist in tone and that take a much more skeptical attitude to the European Union — not to mention the single currency. Marine Le Pen and the National Front will do well in the upcoming French presidential election. Other rising Euroskeptic parties include the Freedom Parties in the Netherlands and Austria, the Northern League in Italy, the True Finns in Finland, and a motley collection of far-right and far-left parties in Greece.

Ironically, this intensifying crisis in Europe comes just at the time that the United States has decided to readjust its foreign policy to concentrate much more on Asia and Pacific. Although the "pivot to Asia" is being presented as a far-sighted reaction to long-term economic trends, it also represents an adjustment to a shift in the global balance-of-power in the aftermath of the global economic crisis.

Put bluntly, the United States is taking the rise of China much more seriously. American preeminence, long into the future, can no longer be taken for granted. Nor can it be assumed that a stronger, richer China is good news for America — as successive U.S. presidents argued all the way back to 1978. On the contrary, both as individuals and as a nation, Americans are getting the queasy feeling that a richer, more powerful China might just mean a relatively poorer, relatively weaker America. In other words, the rise of China is not a win-win for both nations. It is a zero-sum game. That belief is now feeding through into the presidential election — and is reflected both in the protectionist rhetoric of Mitt Romney and in the soft containment of China of the Obama administration.

Romney has promised to designate China a "currency manipulator" and to slap tariffs on Chinese goods. These kinds of arguments have surfaced before, particularly during presidential elections — but they are not normally made by pro-business Republicans. However, with America beset by worries about high unemployment and a spiraling national debt, old nostrums about free trade are easier to jettison. Missed in all the excitement of a presidential election is the extent to which protectionism is being intellectually rehabilitated in the United States. Respected economists like Paul Krugman and Fred Bergsten have argued that imposing tariffs would be a legitimate U.S. response to Chinese currency policies.

A similar shift is underway in America’s military and strategic thinking. The Obama administration’s much-ballyhooed Asian turn is essentially a response to the rise of China. According to the Economist, China is likely to be the world’s largest economy (in real terms) by 2018. And Washington sees Beijing as already flexing its muscles, with increases in military spending and a harder-line in border disputes with a range of neighbors, including India, Japan, and Vietnam. As a result, the United States is seeking to make common cause with China’s nervous neighbors — bolstering alliances with its traditional Asian allies, while committing to strengthen its own military presence in the region. This move is all the more significant since it comes in the context of a plan to make deep cuts in overall U.S. military spending.

The Chinese are not wrong to see this policy as essentially one of "soft containment." They are unlikely to respond passively. A new Chinese leadership — under pressure from a nationalist public — might push back hard.

American-Chinese relations have long contained elements of rivalry and co-operation. But, increasingly, the rival elements are coming to the fore. This is not yet a new cold war. However, the state of relations between the United States and China — the sole superpower and its only plausible rival — are likely to set the tone for international politics in the coming decade.

In fact, the increasing rivalry between Washington and Beijing is an important contributor to the third major manifestation of the spread of zero-sum logic through the international system — the increasing deadlock in multilateral diplomacy, from the World Trade Organization (WTO) to climate-change negotiations to the G-20’s stalled efforts at global financial regulation.

In the heyday of globalization over the past three decades, big trade agreements were both a symbol and a driver of the strengthening of common interests between the world’s major powers. The creation of a European single market in 1992 and of a North American free-trade area in 1994, the setting-up of the WTO in 1995, and the admission of China to the WTO in 2001, were all landmarks in the creation of a truly globalized economy. But the days of heroic new trade accords are over. World leaders have stopped even calling for a completion of the Doha round of trade talks; the repeated empty exhortations have become embarrassing. There have been, however, some small victories: At the end of 2011, Congress finally passed a free-trade deal between the United States and South Korea, and Russia was admitted to the WTO around the same time. But the WTO is now largely playing defense, trying to prevent a major new outbreak of protectionism. Officials there dread the prospect of being asked to adjudicate a U.S.-Chinese dispute over currency — fearing that any such case would be so politically charged that it could blow apart the world trading system.

It is a similar picture in other areas where there were once high hopes for multilateral cooperation. The world climate talks were saved from complete disaster in Durban, South Africa, at the end of 2011 — but few believe that the vague and vestigial agreement reached there will have any real impact on the global problem. The G-20’s efforts to push forward with new forms of global financial regulation have also disappointed. The crisis within the European Union — which has so long seen itself as the champion of global governance — has damaged the whole cause of multilateralism.

A few months ago, I found myself sitting next to a senior EU official who turned out to have read my book. "My job is to prove your zero-sum thesis wrong," he told me. I replied that, as an author I hoped to be proved right — but as a European and a human being I was hoping to be proved wrong. My lunch companion laughed and said, "That is too dialectical for me."

It is one of the nice things about the best EU officials that they are happy to talk to their critics, and comfortable using words like "dialectical." However, I fear that cultured technocrats will not do terribly well in the new era. A zero-sum world may summon up rather darker forces.