Transcription
Good afternoon and welcome. Uh, my name is Raguram Rajan, and this is the 2025 Per Yakobsson lecture. I'd like to invite Deputy Managing Director Nigel Clark to come to the podium and open the proceedings.
Distinguished guests, ladies and gentlemen, good afternoon. It is my pleasure to welcome you to the Per Yakobson lecture, one of the enduring traditions of the annual meetings. Per Jakobson devoted his life to furthering economic and monetary international cooperation, and since its founding, the Per Yakobson Foundation has sought to provide a forum where leaders and thinkers can reflect on the most pressing questions in international monetary and financial affairs. The goal is to spark ideas that guide us towards solutions. And this is why the work of the foundation matters.
This year, it is our great honor and distinct pleasure to host Taran Shanuatnam, President of the Republic of Singapore, as the keynote speaker. His [Applause] speech is titled, "An era of possibility, renewing economic order and shared purpose." Today's lecture will provide a unique space to examine the interplay between domestic strategies and global forces and to consider how we can secure broad-based prosperity. It also invites us to reflect on the global economic order itself. The system that supported decades of stability is being tested by sweeping policy changes and longer-term transformations, such as the advance of artificial intelligence. We must renovate and strengthen the global system to meet the challenges of the new era. The foundation's strength has always been in its ability to bring together diverse voices grounded in rigorous analysis and openness to new ideas. As we begin today's lecture, I hope it will deepen our collective understanding of the forces that are shaping the global outlook and help us imagine how cooperation, even amidst uncertainty, can boost resilience and prosperity. On behalf of the Pere Jacobson Foundation, I thank you for joining us today, and I look forward to the insights that will emerge from this distinguished lecture. Thank you. Thank you very much.
Um, uh, DMD Clark told us about the foundation itself. Let me tell you a little bit about Pury Yakabson. He was an internationalist in every sense of the word. First at the League of Nations, then at the Bank of International Settlements, and finally as managing director of the International Monetary Fund. He saw times like these, when trade shut down during the Great Depression and re-emerged after World War II, and he played a vital role in ensuring that happened, that the rules-based order emerged from chaos. Um, he worked towards this at a time international cooperation and globalization uh was at an ebb, when trust was in short supply. And it is fitting that today uh we have uh President Tarman Shano Ratnam, the president of the Republic of Singapore uh to tell us how we can perhaps follow in the footsteps of Pur Yakabson and continue and rebuild the international order for these times.
The president has held a variety of positions in Singapore other than the current one. He was managing director of the Singapore Monetary Authority. He was education minister, deputy prime minister, and senior minister. Unlike many with a technocratic background, he's actually won elections, including one for the current position. He also has had extensive experience on the world stage, chairing the IMFC and various international committees in areas uh that are widespread and are too numerous to enumerate here. To today's lecture, President Shanmar Atnam brings not just his vast global experience but also the concerns and aspirations of a country that has extensive trade and investment links with the rest of the world and has a strong relationship with both of today's superpowers, the US and China.
Before I invite the president to the podium, let me also tell you about our two very distinguished discussants. Dr. Dr. Leel Brinard is a distinguished fellow at the Saros Center for Financial Markets and Policy at Georgetown University. She has served as a director of the US National Economic Council under President Biden and previously served as vice chair of the Federal Reserve, a member of the Federal Reserve Board of Governors, and also as under secretary at the US Treasury for International Affairs. We also have Dr. Morris Schularic, who is president of the Keel Institute for World for the World Economy and also professor of economics at SOSPO in Paris. His research includes financial markets and asset prices, issues in monetary macroeconomics, and the causes of financial crisis and economic inequality. He's a recipient of the Libnets Prize, Germany's most prestigious research prize.
Let me now ask President Shamaratam to come and speak. He will speak for about 25 minutes, followed by the two discussants. We will then start the panel discussion, which will include questions from the audience. So please join me in welcoming President Shanar Ratnam, who will speak on "An era of possibility, renewing economic order and shared purpose."
An era of possibility. Thank you, Nigel, and thank you, Ragu, especially for um inviting me. And it's wonderful to be here amongst friends, many of whom I see in the audience. Um, it's a real privilege to be here as Ragu put it, to follow in the footsteps of Pyakubson uh and to join many other distinguished speakers over the years. And thank you, Ragu, for uh not disqualifying me for the fact that I'm actually speaking for the second time in the Per Jacobson lecture series, the first being 19 years ago, as some in the front row would remember.
Economic nationalism is resurgent, and from all indications, it will run a long course. So too, multilateralism and the belief in the mutuality of nations is at its weakest in 80 years, at the very stage when it is needed most. All this, despite the historic gains across the world that an open, rules-based order has brought. For sure, the rules were never equal or never fully equitable. Major countries, including the architects of the order, were prone to periodic hypocrisy and selective application, selective adherence to the rules. But the rules were broadly accepted, and they brought prosperity around the world amongst low-income nations, middle-income nations, and the rich nations themselves. And very importantly, they lifted a billion people out of poverty just in the last quarter century.
Yet the mood has shifted, not least in the advanced economies. The enthusiasm for openness, the enthusiasm for international cooperation has dimmed. We all know that. What went wrong? Part of the problem has been the spread of zero-sum attitudes within society. There are many studies now that have been unearthing this significant overall gains in real incomes in the advanced economies, including for the majority of ordinary working people, were accompanied by losses amongst communities and regions displaced by new technologies or competition. And while the gains in jobs and incomes vastly exceeded the losses, the pain of job loss has been more deeply felt. And the fact that job losses have been concentrated in communities has magnified the sense of injustice. And as studies show, these concentrated losses, compounded by fading hopes of upward mobility, have encouraged zero-sum beliefs. The sense that one group's gain can only be because another group has lost and has paid the cost.
Winners and losers were always inherent in international trade. But whereas trade in the first few decades after the Second World War and after the formation of GATT was largely between richer nations, it grew most sharply between the global North and the global South over the last three decades, driven by much larger differences in wages and other factor costs. The gains and losses from trade were therefore magnified. The shift from North-North trade to North-South trade. But critical here has been the failure of domestic policies, the failure to respond adequately to workers and communities who were losing out. And in some cases, we even had support being reduced at the very time that trade was being liberalized, such as what happened in the United States with the Trade Adjustment Assistance Act. Public policy has to be far more robust to support those who are displaced, even where they are minorities, even where the majority of working people and citizens are making gains.
The signal shift now is the steady retreat of the United States from its role as the defender of open markets and more recently from international cooperation on climate change, global health, and support for a world where the global commons are now our largest challenges wherever we are. To be sure, the new economic nationalism is not so much a reassertion of national interests, but a shift to new beliefs on how national interests are to be secured. The US-led post-war order was not driven by charity. Its genius was to shape a cooperative order that promoted global prosperity while serving America's interests. The US, as the dominant power, paid large dues to underwrite the system, but it obtained much larger dividends in return, in economic in its economy and financial markets, and through the unparalleled soft power that it gained.
There is little prospect of a return to that world of a far dominant power acting with an expansive and enlightened sense of self-interest. It is commonplace to observe that we are past the unipolar world, at least in economic affairs. But the transition to a multipolar world will not happen quickly or smoothly. And in itself, multipolarity gives no assurance of mutual prosperity between nations and economic security. The transition gives greater reason for the renewal of multilateralism and the development of new forms of international cooperation. We otherwise risk a long and messy interregnum in global leadership, and the risk of a self-reinforcing decline into global disorder. We risk a repeat of the Kindleberger trap, so, so named after Charles Gindelberger's observations of the risks that befell the world with the period of absence of global leadership after the First World War.
And it's not difficult to see how a slide to disorder into disorder could occur through the persistent sidestepping of the principle that disputes should be resolved by rules and norms rather than by power. The Balkanization of technology, supply chains, and payment systems. The inadequacy of climate action that leads to the world crossing dangerous thresholds, such as the collapse of the Amazon's rainforest or the die-off of coral reefs, both of which now already foreseeable. The crossing of the tipping points that take us into irreversible shifts in the planet's ecology and likely harder to control global warming. The failure to avert the very real prospect of future pandemics and the accelerating spread of drug-resistant bacterial infections. And a continuing doom loop between domestic anxieties, fraying social fabrics that feeds into distrust of both institutions and in global cooperation, in turn weakening national economies. That doom loop is entirely possible.
We can and must avert this slide into global disorder. We must reset the rules and norms and develop a renewed multilateralism suited to this new era. Not merely for its appeal to common humanity, although we should never lose sight of that deeper reality, but because without international cooperation and collective action, it will be impossible for any country, large or small, to secure their own interests and to ensure the economic security that their people desire.
The rest of my remarks will reflect on three key challenges that we have to address in order to renew and sustain this cooperative international order. First, we have to do better in creating good jobs and in supporting workers displaced by technology and competition. Second, the US and China will have to manage their relationship differently, and that will be central to how we avoid a multipolar world becoming a more polarized and dangerous world. Third, we have to breathe new life into multilateralism itself so that it can help solve the world's largest problems. This includes reforming the WTO, and it includes at the same time exercising agency amongst coalitions of nations so as to provide the scaffolding for the broader rebuilding of a new multilateralism.
So let me turn first to the issue of good jobs. We cannot leave the creation of good jobs to the market. This is a lesson we learn from everywhere. Indeed, there is no efficient market for the creation of human capital, the development and continuous replenishment of skills, and the matching of skills with the changing needs of employers. Good jobs and the matching of skills to new demands must be elevated to the center of public policy. It is both good economics and an important key to social mobility.
A vast wave of Gen Z youth in both the advanced economies and developing now confronts a generational challenge of securing jobs and being on that same ladder of improvement through their lives that the previous generation has experienced. In the developing world, it is a crisis of it is a challenge of unprecedented magnitude. 1.2 billion young people are entering working age over the next decade, and on current projections, we will fall short of providing jobs for 800 million of them. It is a crisis on the scale we've never seen. The largest gaps are in Sub-Saharan Africa, but even in Asia, where employment has been stronger, young workers now find themselves being shunted into low-skilled service sector jobs or the informal labor market. And given their glut in numbers, they risk being stuck in low-wage, low-productivity work and with little prospect of moving up into the middle class.
In the advanced countries, young job entrants too, including college graduates, are now seeing much a much softer demand for them in the job market. In part, this may be due to cutbacks in hiring following a boom in hiring following the pandemic. But data also shows a declining a decline in hiring for entry-level jobs as a result of AI. Entry-level jobs in the most AI-exposed occupations are now in less demand. And if AI accelerates this erosion, we face the risk of a generation already scarred by COVID during their schooling years, now being doubly scarred by missed opportunities for a ladder of progress in their working lives.
We have to respond, and we have to respond all across the chain of human capital development. First, better prepare young people during their years in education. One of the interesting things about the Gen Z upheavals we are seeing from Africa to Asia to Latin America has been a demand not just for jobs and not just a demand for an end to corruption, but a demand for a new education system. There is it is a self-conscious generation, and they they they know they haven't had a good deal. They know they've been through an education that now leaves them unprepared for the future. We have to we know what needs to be done. We have to invest much more boldly in technical and vocational education and correct for the over-academization of post-school education. It's a challenge everywhere in the world, in the advanced world and in the developing world. We have to ensure that people are prepared with the skills that employers need, which is a range of skills that are not just soft skills, but very often a mix of soft skills and technical skills, and the technical and vocational route in education has been greatly neglected.
Second, we need intelligent systems to guide workers on the skills they need. Give them opportunities for training courses, including modular courses to pick up the skills and acquire micro-credentials and match them to employers, if possible, real-time, but at the very least as current as possible. No country has quite got this right. Singapore's making good progress in developing such a system. There are other examples. In South Africa, for instance, the Harami Youth Employment Accelerator is developing a system for youth of vocational training, skills assessments, job matching to employers that has already helped 1.22 million young people.
Third, we need a more proactive and muscular approach to helping those displaced by technology and competition. Again, we know what needs to be done, and some smaller countries have been much more active in putting this at the center of public policy. Sweden and Singapore, for instance, have job transition programs, including skills training to give every displaced worker a realistic chance of restarting their careers. Industrial policies may be back in vogue, but I'll have to say that success in job creation requires social policy on an industrial scale. It requires us to develop every human talent, deepen and upgrade skills continually, and advance social mobility in the process. It cannot be left to the market. It requires new forms of collaboration between the public sector, enterprises, unions, and community organizations, and with individuals themselves being empowered to make choices. It is a large-scale and complex endeavor and too often neglected in the rush to implement industrial policies in their narrower economic form.
Next, I move on to US and China and the challenge of finding a new equilibrium. It is the most worrying fault line in international affairs, and especially with the perceived widening of the intersection between national security and economies. The US remains well ahead of China in overall productivity and median incomes. It is also the home to the most innovative companies in the world. It has the deepest capital markets, and the dollar's dominance in payments and finance is still intact. It has a significant overall lead in technology over any other nation. But the US has never before faced a competitor of such scale and emerging capabilities as China. And that has changed the political zeitgeist within the US. China is already the world's largest manufacturer, already leads in several key technologies, especially those involved in the green transition, in robotics and advanced machine tools, and in digital infrastructure. It will likely soon take the lead in biotechnology as well. And while it is still behind the US in AI model development, China is moving faster to actually embed AI across industries. And not to forget, it also has the very significant future advantage of energy supplies. Having expanded massively its solar energy capacity, the US may be able to delay China's catchup in key technologies and possibly even preserve leadership in some areas for several years to come. But it is already evident that it'll be difficult for the US to prevent China from advancing to very high levels. China is investing significant resources at every stage of the chips value chain, for instance, with difficulty, with hindrances, but it is making progress in overcoming US controls, and it will keep making better chips.
The real question therefore is not whether China catches up, but whether China advances while maintaining interdependence with the US, Europe, and other major technology players, or whether it advances through a strategy of self-reliance. Both options are still plausible. Both involve risks, and one can never be naive about them. Interdependence will have to be actively managed by both sides to prevent the weaponization of key technologies or materials. But it will surely be a more profoundly dangerous world if we end up with bifurcation. If we end up with a decoupled world in technology, supply chains, financial flows, payment systems, and data. And with each of these two powers developing whole AI ecosystems of their own.
There is an alternative perspective that we can borrow from the world of ecology on how the US and China might interact. One that accepts that they will compete vigorously, yet interact dynamically in ways that can be hugely beneficial for both nations and the world. In ecology, the most dynamic places are not deep within one ecosystem or another, not deep in the forest or out in the plains, but at the edge where they meet, where the forest merges into grassland or the riverbank gives way to dry land. The ecologists call this edge the ecotone. It is a zone of overlap where species from both ecosystems interact and adapt, where hybrids flourish and new life forms emerge. The edge is often the most dynamic part of the landscape.
Now consider that in the United States and China, we have two different economic systems. One, a system historically rooted in markets, unparalleled in the world for its inventive culture, an ability to bring new ideas to fruition through entrepreneurial initiative, VCs, and an openness to the best talents in the world. The other, a system with state guidance and the ability to plan long-term, blended with more intense market competition and deep emerging capabilities, such as the whole ecosystem that has enabled the largest scale-up in green technologies that the world has seen. Like the edge in nature, the interface between the US and China has been and can yet be greatly productive. Through trade and investments, joint ventures, two-way technological transfers between companies, and through networks of research labs and academic exchanges, we can see the world's most important and urgent breakthroughs yet. And I must say, there is a yearning amongst academics and scientists in both the US and China for these exchanges to resume. Breakthroughs in health, in AI itself, in climate, for example, will enable the world to take big ideas and use them to solve our largest problems and drive down the cost so that every nation benefits. And with smaller nations too, having a place in the edge as intermediaries between the US and China and partners at the frontier.
The basic point is this: the interaction and competition between the two superpowers is not a threat to be eliminated, but an opportunity to be managed. The prospect may appear distant in today's geopolitical climate, but take the long view. The stakes are high. If we manage this well, the US-China edge will be a source of prosperity for both nations and the world's greatest engine of innovation. If we fail and progressively decouple the systems, there will be no winners.
I move now to my third theme, my final theme, which is the renewal of multilateralism itself. Multilateralism as we know it must be reformed. But we also need new forms of cooperation that have to be crafted around today's multilateralism. There is no option other than coordinated collective action if we are to tackle the largest issues of the global commons. And we also have it in our common interests to prevent a rollback of economic development in the lower-income world, the consequences of which will surely spill across borders.
I will focus, in the interest of time, on just two issues: how we re-energize the WTO and open the rules required for an open trading system, and how we establish a framework to govern AI, which is probably the most complex public policy challenge we have. On the WTO, it has taken body blows, but it is up before they count, as they say in boxing. The reason is simple: the vast majority of its members want the WTO to succeed. WTO members should now use the present crisis to move forward on issues that bedevil the system. Most urgent, we have to reform the WTO's consensus decision-making process. It is a treasured principle, but it has in effect been a recipe for paralysis. Several proposals have been put forward for reform. I won't go through them in detail. Singapore has made a proposal for responsible consensus, which seeks to give room for members to pursue their national interests while supporting the systemic interests of the membership at large. China has proposed a very interesting partial consensus proposal, where members exercise restraint in blocking consensus where a decision enjoys a substantial majority of support without making any member worse off. Partial consensus. There are other proposals, such as for a shift to qualified majorities or double majorities. They should all be considered seriously because we cannot leave decision-making at the WTO paralyzed.
Second, we have to reform access to the system of special and differentiated treatment. It's a critical component of the WTO for developing country members to participate meaningfully in global trade, but it should be needs-based, with criteria that are objective for how countries qualify, objective and flexible. All WTO members should make commitments commensurate with their economic capabilities.
Third, we need to make headway on export subsidies. The system is no longer fit for the system of rules is no longer fit for purpose. We've seen a proliferation of export subsidies, export restrictions on grounds of national security. States do need a margin of maneuver on national security issues as a matter of sovereignty, but claiming exemption from WTO rules cannot be exercised lightly. It cannot be done by the wave of a flag. We need a new discipline and a new collective commitment to contain export restrictions within the WTO's framework of rules. And it requires, in the first instance, greater transparency. Transparency when claims are made for exemption to Article 11, Article 11 of GATT, so that the WTO can understand a country's justification and assess the impact of its proposed export restrictions.
Fourth, we need reforms to avoid a global subsidy race. Industrial policy is likely to remain a mainstay of economic strategy, including in the advanced economies. Some of it for good reasons, such as to accelerate investments in clean energy. But we need sensible guardrails to prevent an arms race in subsidies that can fragment markets and destroy trade. There are precedents at the WTO, such as the caps on subsidies on agriculture, the WTO agreement on agriculture, which can be evaluated for their conceptual relevance to these new domains, such as on semiconductors and clean energies.
Fifth and finally on trade reform, we have to build a pathfinder multilateralism through plurilateral agreements and regional agreements. These are agreements that involve coalitions of countries that can create momentum for fair and open trade before they are eventually multilateralized. Crucially, they must reinforce and not diminish trade liberalization in line with WTO precepts. In other words, they must be WTO compliant. There are many examples already, such as on digital commerce. And when you think of what's happening now in the world of regional agreements, this is one of the blessings of the US tariffs. Regional agreements are now being taken more seriously, both amongst themselves, but also they're now attempting to create bridges between different agreements. And the largest initiative of these is the initiative for the CPTP to start talking to the European Union. Both major bodies covering the vast majority of world trade, and they will now begin conversations to see if they can get an equivalence of standards and on other forms of cooperation.
I now turn to my final topic on global governance, which is AI safety, and I'll be very brief. Experts predict a very wide range of possible outcomes for unfettered AI development. It is not possible to preempt all risks, but we do need guardrails for the worst risks that could befall humankind. The worst risk to human well-being and peace. AI-powered scams and hacks on a much larger scale than we've seen so far. Runaway misinformation that could undermine democracy in fundamental ways, and autonomous warfare. States on their own, including the larger states, will not be able to manage these outcomes, these risks on their own. We have to set up coalitions guided by science for the responsible development and use of AI. We need, in the first instance, the equivalent of the IPCC on climate change. We need independent groups of scientists coming together to keep track of this rapidly changing field of innovation and to advise governments on what the opportunities are and what the risks are. The United Nations recently agreed to set up an independent scientific panel on AI to provide that evidence-based assessment of AI's capabilities and risks. It hasn't yet been constituted, but when it does, it'll have 40 members, 40 scientists in their personal capacity performing this role.
But the US and China again are key. They both have a common, it may seem it may seem a little distant from today's news and preoccupations, but they both have a common interest in AI safety. They have a common interest, for instance, when AI is embedded in health systems or transport, in ensuring an equivalence of standards, interoperability of standards. They have a common interest in ensuring that autonomous warfare does not get out of hand. And they would both have an interest in the recommendations recently made by the Global Commission on Responsible AI in the Military Domains, commissioned by the Netherlands. It recommended, first, legally binding restrictions on AI control of nuclear weapons. And I believe that's something which both the US and China will agree to, as well as the UK and France and other nations. But it's also advanced a very important concept, the concept of responsibility by design. In other words, not responsibility as you go along or responsibility after the act, but responsibility at point of design of AI systems in the military. It's a very important principle to build in safety from the outset, and that is a recommendation that will have to be taken very seriously. And again, I say it requires both the US and China at the table.
Other nations will have to play their role in providing every forum available for the US, China, and all the major countries to be part of this dialogue and this formulation of sensible guardrails for AI safety. A recent conference in Singapore, the International Conference on Learning Representations, held for the first time in Asia, saw 2,000 participants each from the US and China, 2,000 from China, 2,000 from the US, to discuss precisely these issues. We also organized a Singapore conference on AI among scientists, 100 leading AI scientists, again including a significant number of American and Chinese scientists, to start thinking through their research priorities jointly. So this is what we need. It's an emerging field. We don't yet have multilateral agreements, but coalitions have to get going because we cannot wait until we find out which part of the spectrum of risks is going to materialize, which part of that spectrum that experts warn us of is going to materialize. If we wait to find out, it will be too late.
History has shown us that at times of crisis and transition, perilous as it may seem, we can forge breakthroughs and we can achieve new forms of cooperation and progress together. That's how Bretton Woods came about after the Second World War. The challenge today, however, is not of a sudden major collapse of the system, not of a global war, not yet, but of a steady erosion of global order and the steady causing of morality. There are reasons to be daunted by the task ahead, and there are not many grounds for optimism. Not many grounds for optimism in a future grounded in rationality and morality. But it is our responsibility to make it possible. Responsibility to make possible a future of dignity, sovereignty, and a livable planet for our children and generations after. This is no time for timidity. Thank you very much. Over.
[Applause]
Well, it is an honor uh to discuss President Shamukad Rottman's uh Pere Yakobson lecture. It's nice to be here with all of you, and let me just start by paying tribute uh to President Thurman's important contributions to strengthening global cooperation. During my time uh overseeing international cooperation at the US Treasury, President Thurman was chair of the IMFC and played a vital role at a moment of profound global economic challenges. With his leadership, we secured important reforms to the governance of the IMF, supported the Euro area as it successfully navigated turbulence and emerged stronger, and put in place important financial system guardrails. Those buffers were vital when the pandemic struck, and we navigated the massive dash for cash at the time when I was at the Fed. Through his leadership at home and abroad and his important lecture today, President Thurman has consistently highlighted the goal of a strong and stable international economy that delivers opportunity and prosperity that is shared broadly within and across countries.
I want to highlight the important points he made in his speech regarding the need for new forms of cooperation to continue making progress on the vital challenges that confront all our countries. I strongly support the approach he lays out. I do have a different view on the US and China, but I approach it from the perspective of an American who's committed to working in partnership with other countries to advance shared prosperity and address climate change and new challenges and opportunities like emerging technologies associated with generative AI.
President Thurman spoke eloquently of the need to create good jobs for the next generation and the imperative to advance cooperation across borders to continue making progress on global challenges like climate change, migration, poverty, and harnessing new transformative technologies. We need to invest in R&D and new tools and technologies to ensure a clean energy transition. We need to mobilize capital and innovation to create new opportunities in regions of the world with large young populations to complement the traditional flows of development finance. Mobilizing private investment is especially important at a time when fiscal space in countries that traditionally account for concessional finance is squeezed by exigencies at home and for some by security responsibilities around the world.
As President Tharman noted, ultimately, strong international agreements and cooperation to resolve pressing challenges rest on the bedrock of strong domestic institutions that deliver. In many countries, it is vital to rebuild domestic support for these international agreements by ensuring they demonstrably yield benefits. President Thurman laid out a compelling vision in which coalitions of countries that have an alignment of interests and the requisite domestic capacity pioneer new arrangements to strengthen cross-border cooperation. It makes sense at this juncture, when multilateral institutions such as the WTO face challenges, to use variable geometry and coalitions of the willing to continue adapting arrangements to make progress. President Thurman also noted that medium-sized and smaller countries may need to take the lead, and I agree.
I do have a different view on the US and China, but I believe no less strongly that we benefit tremendously from engagement in international agreements and institutions. I believe that the fundamental rupture in the bipartisan consensus in favor of trade in my country would not have happened without the distortion to the rules-based international system that is associated with China's export-driven and non-market growth model. The speed with which China surged to dominance in global manufacturing value added, rising from a share of 120th in the late 90s to one quarter by 2010 to nearly one-third today, wasn't a reflection of simple market forces, but rather of significant non-market distortions. And while the WTO's core rules-based architecture of MFN tariff rates works well between countries where prices are set by market mechanisms, the presence of significant state allocation of resources and discriminatory behind-the-border rules undercut the mutuality of gains. The WTO was not able to effectively regulate these kinds of distortions. But the IFIs, including the IMF, were also unable to rein in the accompanying global imbalances. As China's current account surplus swelled from less than 2% to over 10% on the eve of the Great Financial Crisis, America disproportionately absorbed that massive shock. It is notable that today, as China moves its exports away from the US to other markets, countries are voicing concerns about exports flooding their markets. I think that speaks volumes to the fact that China's overcapacity is a global problem, and it was masked for too long by America's absorption of the excesses.
Support for trade in the US is still actually pretty strong, just not when it comes to China. Fewer than half of Americans believe America benefits as much as China from trade between the two countries. But more than 70% of Americans believe that trade between the US and Mexico and Canada benefits Americans as much or more than their trade partners, even though the combined imports from those two countries is twice those of China. More broadly, tariffs are extremely unpopular with Americans. The political challenge in the US was, of course, exacerbated by China's emergence as a rising strategic competitor, and there is a foreign policy dimension that, of course, is important. The last administration sought to rectify these harms in a targeted and measured way and coupled this with the kind of domestic support that President Thurman talked about for jobs, training, and healthcare. It shows a handful of sectors where China has a disproportionate share of global manufacturing, above 70%, and where we saw from the pandemic that supply chain diversification is important. Those sectors were important either for national security or the clean energy transition, where the societal value generally exceeds what is reflected in the market value in those priority sectors. It coupled high tariffs, but very targeted on China, with domestic support to offset state support in China. In doing so, it made working with allies and friends a centerpiece of supply chain resilience, building up resilience through partnerships, as in critical minerals. And it brought down select tariffs on friends and partners.
Unfortunately, I believe America's current approach is profoundly misguided and will not be effective. I believe we should continue to deepen America's partnerships with allies and friends to build resilient, diversified supply chains in key sectors. Instead, the administration is raising tariffs to levels not seen for a hundred years on all trade partners, including allies, friends, and small, vulnerable countries. Instead of a laser focus on countering unfair trade in a few sectors, current US policy aims to make tariffs a major source of revenue. That hasn't been the case for over 70 years, when tariffs have accounted for less than 1.5% of total federal revenue. The administration wants to go from less than $80 billion in tariff revenues to $300 to $400 billion a year against the backdrop of revenue losses from a tax law that was passed this summer. Instead of working with friends and allies to diversify supply chains, the US is imposing high tariffs on close allies and partners. Some of our trade partners that share our interests actually faced tariffs in the US that were higher than those on China before the last week of escalation. Far from providing American manufacturers a level playing field, high tariffs on inputs are hurting America's manufacturers and exporters. Far from strengthening the fairness of the global trading system, which is of course the ultimate goal, today's policy appears to be a rejection of that system. We've also seen a rejection of policies to support the clean energy transition, despite the reality that AI compute needs put a greater premium than ever on developing new sources of energy. We've cut vital US support for global health programs and other foreign assistance that has been shown time and time again to be a smart investment that pays off for America and for the world.
It's worth noting that these international disruptions are actually mirrored by even greater disruptions to our domestic institutions, challenging the rule of law, challenging our research infrastructure, undercutting America's ability to attract world-class talent, and taking an expansive view of executive authority that risks undermining the independence of our central bank and weakening the global role of the dollar. So for the United States, the first priority has to be to strengthen the rule of law, the independence of the Fed, checks and balances from the legislature. We have to develop political support for a fiscally sustainable model that funds training and health to support the kinds of transitions that President Thurman was talking about, as well as clean energy infrastructure to ensure all communities can thrive. Even with recent disruptions, our capital markets remain among the most open in the world. And foreign investors and companies are participating, as our private sector leads the way on transformative technologies that are propelling a massive wave of investment in related industry and hold great promise at home and abroad if properly risk-managed in the ways that President Thurman was discussing.
I want to leave you with two thoughts. First, when a robust democratic country, who's been a long-standing supporter of the multilateral system, notes that sustaining domestic political support is becoming increasingly difficult unless the system sustains important reforms, I would take that seriously. Second, I agree with President Thurman that in this moment, it is important to keep moving forward, and the momentum must come from groups of countries who have the capacity and the vision working together as coalitions of the willing to make advances on the common challenges that he laid out. The important reforms that I noted earlier during President Thurman's leadership of the IMFC all came together by building on agreements among informal smaller groups. The seeds for the Euro area's eventual success were planted, among other moments, on a rainy night at an informal meeting called at the last minute on the margins of the G20 summit, where everyone overcame their own misgivings and tears of frustration and decided to keep Greece in the Euro area. The seeds of the critical financial reforms that were ultimately adopted in the FSB came together in the margins around the Toronto and London summits, and the basic deal that gave key emerging markets greater voting share at the IMF started to form in side meetings in Pittsburgh. In each case, mid-sized and smaller countries punched above their weight and made important contributions. I know it's a trying time for America's friends and allies. I appreciate very much the vision that President Thurman is laying out to make renewed progress, and I deeply believe America must participate, although it may take some time. Thank you.
Dear Mr. President, ladies and gentlemen, "An era of possibility." This was the title of this uh truly great and inspiring lecture that we just heard, and it's a great honor to be here and add some points. And I want to first of all thank uh President Thman Shamur Gratnam on this overall positive and constructive approach. I deeply enjoyed it because it contrasts with the day-to-day business that me and my colleagues at the Keel Institute for the World Economies are busy with these days. We have to do with economic security, with tariff wars, with export restrictions, defense spending, and so forth. So thank you for a positive vision. Uh, it's it's really needed.
Um, I want to make three points today um that underline some of the issues that uh were raised in the important lecture we just heard. They will heavily draw on our work at the institute and on geoeconomics and on rethinking the playbook of global economic integration uh when economic relations become entangled in in great power politics. And I will speak as an academic and I would speak as a European. And let me also say, see if as a European and European efficiency can make up a few minutes and leave us time for discussion.
Um, so I want to start by quoting a famous other European, namely Montesquieu. Um, the author of the famous *Spirit of Laws*, uh, the author, the intellectual godfather of the separation of powers. This also an issue that's very much in play these days. For Montesquieu was not only the intellectual father of the separation of powers, he was also the father of the idea that economic integration is not only a means and international trade is not only an economic tool, but also a force for peace and stability in the world. So let me quote this famous passage on the the idea of *doux commerce* in in Montesquieu: "Commerce is a cure for the most destructive prejudices. For it is almost a general rule that wherever we find gentle manners, there commerce flourishes, and that wherever there's commerce, there we meet with gentle manners."
So this is the famous *doux commerce* idea, the pacifying and stabilizing force of trade. And it became the intellectual bedrock, if you will, of globalization. Namely, the idea that international economic integration, globalization, is not just a force for efficiency and welfare, but it also serves a political purpose of stabilizing and pacifying. It has a political dimension. By tying together different countries, they become intertwined and interdependent, which in economic language increases the opportunity cost of conflict. So we end up in a safer and more peaceful world.
As the president noted, the economic promise of globalization, of efficiency, of welfare, has worked out in the aggregate. But many today are looking at the world and are diagnosing that the world has not necessarily become more peaceful and more stable, and that many countries are divided and polarized after 20 or 30 years of globalization. Now, it's clear that globalization is not the only game in town, and we're talking about many other factors, but it was an important part of the policy cocktail of the past 30 years. So, so what went wrong? Where did Montesquieu's logic fail, where externally and internally, that externally and internally, globalization, trade integration would bring not only efficiency but also peace?
First, as President Thurman said, globalization clearly had distributional effects that gave rise to dissatisfaction and the rise of economic populism and nationalism. And these, in turn, can lead to volatile politics and international tensions. More on this later. Second, economic integration creates new dynamics in the international economy, something that Montesquieu arguably had not anticipated. Some countries thrive on the possibilities offered by openness, and the growth impulse coming from trade then translates into domestic growth, technological upgrading, and growing financial and military resources. As a result, the balance of power slowly changes, and with this process, to use a memorable phrase from our moderator, new fault lines emerge in the international arena. It is probably fair to say that China thrived in the global economic order that the US and Europe provided, and it allowed China's export-focused development strategy to flourish. Yet, over time, the resulting shift in power can be at the origin of new fault lines.
Third, economic integration results in interdependence, and along the lines of motive, this should, all else equal, raise the opportunity cost of conflict and make the world safer. Yet, when interdependence meets the existing asymmetries of the global economy, where there are large countries and small countries, differences in size and technological capabilities, or in access to raw materials, interdependence, two-sided, can turn into dependence, one-sided. And dependence then means power. Dependence can be weaponized or threatened to be weaponized. And if the underlying economic relations are asymmetric, then the uh the trade in the economic integration, trade integration, uh becomes trade dependencies become the strategic asset that can increase rather than decrease the risk of conflict.
This brings me to the second point that President Thman discussed, and namely, and it connects directly to the possibilities of our time. I mean, the issue of keeping multilateralism alive, multilateralism alive, to even think ahead into the next, into the next decade. Many of us have intellectually grown up with Charles Kindleberger's idea of hegemonic stability. Namely, the idea that you need a hegemon that provides the public good of an open trading system, of an open financial system, possibly, and someone who enforces the rules and reduces free riding. And the dominant narrative is clearly that after World War II, the US provided this hegemonic stability in its enlightened self-interest. Yet, the benefits of openness and rule-based trade also accrue to strategic competitors if they participate in that system. And if strategic competitors grow in importance, the hegemon will over time become less and less inclined to provide the public goods to sustain the system. The hegemon might even become more selfish. A declining hegemon might.
Instead, use sticks and carrots to bring countries into its zone of influence and stop providing the insurance. So instead of sustaining public goods, this might lead to the emergence of clubs of smaller countries, of regional agreements, of flexible geometries, and non-alignment on in maneuvering between the hedgemen. So this story does not bode well for the future of multilateralism per se. It really strengthens the message of President Thurman that new forms of cooperation are necessary. And my recommendation for the EU is to remain a champion of openness and rule-based policies and also seize the opportunities. But we clearly need to think about new ways to maintain this open and rule-based system.
My last point then concerns the economics of populism and nationalism that President Thman talked about. I can say something about this as an academic. Um, I'm the co-author, actually, of the paper that appeared a couple of years ago in the in in the American Economic Review, and we studied the economic effects of populism and economic nationalism. So we looked at the history of the past 100 years of populist leadership and the policies and the economic consequences that followed. The first finding is very clear. The policies adopted are different from the ones that the fund and others would typically recommend. Um, they are supposed to be different. This is a feature, not a bug, because populism thrives on anti-establishment, anti-system messages. These policies are also costly. We find that the cost of economic populism is ra is is about 1 percentage point of growth per year, adding up to substantial amounts after over time. The main channels are protectionist trade policies, nothing that you haven't heard of recently, boom and bust macro policies, unsustainable public finances, but most importantly, in the long run, the decay of the institutions supporting an economic level playing field, the rule of law, and fair competition. Again, remember, this is a feature, not a bug. Populism is by definition an anti-system movement, and that explains its success. Why should it leave the system the same?
I want to close with uh an idea and a thought that I find rather discomforting as an international economist, but I want to share with you anyways. If we see rising populism and nationalism as a cost of globalization and something that we need to counter through industrial and place-based policies or even through more redistribution, then economists need to do what they do best, namely think about the cost and benefits. So if we assume that such policies are costly, then weighing the costs and benefits necessarily leads to the question about where's the point where the benefits of pushing globalization further equal the costs we have to pay and the policies we have to implement. This point then would mark something like the optimal level of globalization. Let's call it G star, beyond which we want we might beyond which we might not want to push economic entanglements of nations any further. So our and guess your task in the room might well be in the future to navigate our economies towards Gar, this optimal level of globalization, and with this, I hope we have some time for discussion. Thank you very much. [Applause]
Okay, we have just a little bit of time for questions. Let let me ask the questions because it's going to be hard to go to the audience at this point. Um, all of you talked about coalitions of the willing and trying to see groups that would further globalization, but the president also talked about the US being the underwriter of the old system, the hedgeimon that knocked heads together when things went out of line, that even provided resources to deal with problems when they emerged. Do we need a hgeimon for this coalition of the willing? And who will it be? Anyone?
>> Well, I I think this this the simple answer to that very thoughtful question is uh we do not have the option of a hedgeimon. Um, we are moving to a form of multipolarity that will have to involve some form of collective leadership that will involve a group of major powers and a group of middle powers, and it will be helpful for small like-minded nations to be part of that coalition. It'll be more clumsy, or rather, it'll be sometimes more diffused in its decision-making compared to having a single hedgeimon. But the days of a hgeimon are over, and there's no one who actually wants to see a new hegeimon take the place of the United States. Uh, if you think of the alternative powers, China, Europe, neither of them actually wants to be a hedgeimon. They want to have their place at the table. Uh, they want to be not just taking responsibility, but they want to have their voice heard in the shaping of the rules of the game.
Dr. Brena, you talked about some of the things you disagreed with in the current administration's policy towards the world. Let me ask you a hypothetical. Supposing a future administration comes in which is more open, and you're whispering into the ear of the president, what do you think can be retrieved of the open world order? Should be retrieved, and what is irretrievable? What's what's going to have to to change forever?
>> Well, I think it is hard to know uh unless you know we have a better sense of how long the current uh really radical divergence in America's course continues uh and how embedded some of the changes are. But if this kind of a transition takes place where uh things have not been too deeply disruptive, and by that I mean the US continues to have an independent Federal Reserve and a strong rule of law, and Congress reasserts its traditional role of providing some checks and balances. In that kind of a world, you do have a very uh deep bipartisan tradition in America of engaging internationally and trying in fact to be a catalyst. Um, the US is not any longer going to be the major provider, the sole major provider of resources for every problem. But the US has uh I've certainly participated in a many uh moments where the US provides critical catalytic ideas and engagement and just keeps pushing until problems are solved. And there is that question that I think President Thurman raised about who is going to be that actor that keeps engaging and pulling people to the right rooms together to address some of these particularly crisis moments. So my hope is um that there is a push back. I think uh the American people are very uncomfortable uh with uh some of the changes. There is actually deep support in the US for the kind of foreign assistance in global health and in poverty and for humanitarian relief. Uh, there is not support for high tariffs on our friends and allies. And so my hope is if the transition takes place sooner um that you will see uh a renewed uh political public uh support for some of those things, albeit in an evolved role.
Dr. Schularik, last question, and we don't have a lot of time, but um, what role can Europe play as we keep the flame of global cooperation alive and and how does it overcome the internal forces which are also pushing for isolation etc.?
>> Right? So I I think the EU can potentially play a very big role. It is the ultimate Montescu project. It is the project of peace through trade, peace through economic integration. So it has to teach a lot to the world. I think um it has uh it's also a place where there is a rule of law. The decision-m in Europe is so complicated. Once we've arrived at a decision, it takes it's you know, it stands because you can't undo it. And it's also clearly a place that values stability sometimes too much. I wish we had a little more growth and change. But uh in that sense, it is it is clearly a force, a power that can uphold, be a champion of openness and rule-based trade. It's I think it to do that, it needs to have the so in other dimensions, and geopolitical dimension and security dimensions, the means to act freely, which it currently cannot do. So this is a clear priority for Europe uh in order to assume that role.
Well, with that, I have to recognize we're out of time, and um, it remains for me to thank this wonderful panel, uh the president for that wonderful speech, and also the great discussions, and thank you all for coming to witness this. Thanks. [Applause]