The weaponisation of trade by the major powers, the return of geopolitics and a much more uncertain international environment has brought economic security policies into fashion, mostly in advanced economies.

High trade shares are now seen as a source of vulnerability and many countries are trying to diversify away from their fundamental comparative advantage and economies of scale in international markets in the name of economic security.

In the pursuit of economic security, countries and companies are self-insuring by diversifying, stockpiling, friendshoring, onshoring, hedging and introducing a raft of other costly measures. These are third-best policy responses in a second-best world that reduce our chances of reaching the first-best solution.

Economic security policies make countries poorer, but it’s not clear they make countries safer or more secure. Some governments are focused on economic resilience while they continue to implement export controls, restrict investment and retreat from global markets.

The global economy seems to be on a trajectory towards a 1930s-style epic fail equilibrium — a generalised prisoner’s dilemma where everyone is made worse off by narrowly self-interested national decisions even if better outcomes are possible from cooperative international decisions — driven by US-China strategic competition and beggar-thy-neighbour policies brought on by uncertainty-induced policy short-sightedness in major economies.

It is a world on that trajectory because of decisions in Washington, Beijing and other capitals that of their nature are not all-embracing, and purposeful actors in the global community can alter that trajectory by deliberate policy........

© Eurasia Review