The international economic governance architecture established after the Second World War has come under pressure. The reason this has happened is more complex of course, but an important contributing factor is that over the last couple of decades, many emerging economies with a variety of political and economic systems representing over 3 billion people have been added to the world economy. At the same time, although nothing in economic theory has changed to justify why market economies should no longer pursue profit maximization and efficiency through international economic openness, globalization as the principal paradigm of international economic governance is also being questioned. It raises fundamental questions about economic leadership and multilateralism, and it heralds a return of unilateralism and isolationism.

The difficulties in which the international economic governance system finds itself today have had an impact on multilateralism as a tool to address economic governance issues. It has resulted in an uptick in unilateralism as recent examples in the technology sector have shown, including measures by the US to restrict China’s access to semiconductors. Unilateralism should not be condemned per se, and every entity subject to international public law should be entitled to pursue its own development model. However, a multilateral consensus is more likely to prevent geoeconomic tensions from becoming geopolitical flashpoints. Compromising over hard-fought national sovereign rights is not easy, though, and there are also different views on multilateralism among major contenders, which complicate efforts toward effective multilateralism. By nature of its institutions, the EU’s experience in multilateralism is unique and Belgium’s historical contributions to it hold important lessons.

International Economic Governance Today

The challenges that international economic governance wanted to address have not fundamentally changed since 1944, when the bulk of the present multilateral framework currently used for this purpose was devised. There is nothing in economic theory that has changed to justify why market economies should no longer focus on improving efficiency and profit maximization supported by economic openness. What has changed though is the addition of about 3 billion people and a growing number of emerging markets in the international economy. This has changed the process of how international economic policy is made, mainly due to the increase in participants and a wider diversity in Bretton Woods Institutions, such as the IMF and World Bank, as well as newly-created forums such as BRICS.

Over the same period, international economic governance has tried to become more rule oriented. A good example of this evolution is the WTO (World Trade Organization) which expanded its membership in recent decades, developing out of GATT in 1995, which had been founded in 1948, into a full-fledged organization including a two-step Dispute Settlement Body. However, a firm foundation of rules is only useful if they are flexible enough and can adjust to changing circumstances. This explains why new modern forms of international cooperation have sprouted as can be seen in international finance, including banking, insurance, and capital markets, as well as in areas of health and safety, such as environmental protection. With each transition, as has been happening in response to climate change, as well as intermittent crises, such as the 2008 global financial crisis, it is important for economic governance to adapt.

Whereas in certain areas, such as in international finance, more multilateral cooperation has been observed in recent times, the multilateral process has stalled in others. This is presently the case with WTO reform, where multilateralism and international cooperation has failed to make progress. This often adds to the difficulties and tensions that the world is witnessing. This lack of reform will undermine the fitness to govern the economic challenges for which the organ was set up. It does not always have to be a subject of international law, such as an organization with categorized as a legal person. Sometimes, an ad hoc political forum, such as the G20 can be equally effective.

These days, many observers agree that the world is moving away from a consensus about globalization to a new era of great power competition with a renewed focus on industrial policy. The notion that economic interdependence because of globalization is much less likely to spark major conflicts has been nonetheless the dominant paradigm since the end of the Second World War. It has been commonly believed that cross-border trade will make countries more dependent, increasing thereby the costs of any conflict between them. With geopolitical tension rising and with calls for decoupling economies from each other, this paradigm has started to shift. Nowadays, more countries are focusing on their own security, power, and influence again to strive for greater autonomy. The recurrence of unilateral actions in these areas may further undermine global economic governance. There is even talk of the “weaponization of trade”.

Today, there are countries and certain groups in societies that believe a free and open world has not benefited them. They hold the view that globalization equals economic turbulence and that migration and international enterprise presents threats rather than opportunities. They want to protect themselves from injustice and insecurity. These tendencies are not restricted to the developing world, they are also present in countries of great wealth. Of course, globalization has not created a borderless egalitarian world as some would dream of. Nonetheless, many East Asian nations can testify that the internationalization of trade and the globalization of the economy have the potential to lift people out of poverty and to create prosperity. A successful development model allows for economic openness.

For international economic openness to work properly, variations of legal and economic systems must be interfaced through harmonization and standardization. Within a continued diversity of states and political systems, a certain degree of order is needed. Therefore, a broad consensus on market economic policies and some minimum requirements on a country’s legal system are necessary preconditions to actively participate in the current complex international economy. Some practices are good, and others should absolutely be avoided. The Organization of Economic and Cooperation Development (OECD), of which the EU Member States and the US are members, and of which China is a strategic partner, has been able to develop especially useful guidelines and good standards, which in many cases have become globally recognized best practices.

The issue of international economic governance, however, should not focus on the divide between political systems in the West and in the East. The real issue is how to create prosperity and fairly distribute wealth. Macroeconomic gains of globalization are often diffuse, whereas the losses are often very tangible on the microeconomic level. The question of the matter is therefore how to solve the divide between the haves and the have-nots, or alternatively between the developed and the developing world. The need to ensure sufficient growth and share it with the entire world, is a compelling reason why the world needs economic governance.

Change Unseen in a Century

If governments and their stakeholders no longer wish to believe that international economic governance should focus on the creation of inclusive growth, or that economic interdependence or globalization can prevent major conflicts, then the world will enter a whole new chapter. The world will become more selfish and inward looking. This will also affect the way in which the world is already transitioning in the fields of climate, energy, and technology for instance.

For the first time in a long time, the world is witnessing more states that want to claw back control. The sovereignty of states is the bedrock of international law and it is assumed that in international and multilateral contexts, national governments always exert effective control. However, national governments do not always have sovereign control over the economic interdependencies and the effects of globalization. Factors of production, such as capital and labor, are now increasingly globalized and multinational enterprises have also freed themselves from sovereign control. Furthermore, where central bank independence exists, it does not give governments control over their own interest rate. In an international and globalized economy, much escapes the sovereign control of a nation state. This loss of control frustrates governments, which can cause them to pursue policies of unilateralism and protectionism to please particular stakeholders within their territory. For the EU and the US, this return to economic nationalism has been something recent, while China has for decades consistently controlled the commanding heights of its economy.

The industrial policies that China has pursued for decades are today being amplified by the US and the EU in a whirlwind of subsidies and trade defense measures. Where China has been accused of giving cheap energy handouts, subsidizing land-use rights, and implementing local content requirements in manufacturing, the US Inflation Reduction Act (IRA) as well as the CHIPS Act put in place similar policies to favor Made-in-America nationalism. Likewise, the EU has taken unprecedented measures to support its economy by accelerating the transition into digital and green growth. While the COVID-19 pandemic and the energy crisis in Europe have been the main drivers for the EU, the spur in the US mainly comes from its strategic competition with China. If this reawakening of industrial policy is true, what does it mean for international governance? It raises fundamental questions about economic leadership and multilateralism, and it heralds a return of unilateralism and isolationism.

Unilateralism in Full Swing

In putting up a licensing regime for high-end semiconductors and US technology in October 2022, the US cut China off from supplies of the most advanced chips, the tools to make them and the US human resources to use these tools. It chose not to use a multilateral agreement, such as the Wassenaar Agreement on restrictions on the transfer of so-called dual use technologies. Instead, the US used a unilateral instrument under its own national legislation. The main justification for the measures was that China’s civil-military fusion strategy makes it possible for commercial companies in China to enhance military capabilities. Since advanced semiconductors are key building blocks for the world’s most sophisticated weapons, the US invokes the national security exception to take these measures. Whether this exception could be held up before a WTO Arbitration Panel as a legal justification is of course debatable but not the purpose of this essay. The point of this example is that unilateral economic actions are a tool of deliberate choice, whereas a globalized economy would prefer a multilateral approach.

Unilateral actions could amount to bilateral sanctions as opposed to multilateral ones such as those under the UN. Examples of sanctions include trade sanctions, financial sanctions, travel restrictions, arms embargoes, military assistance sanctions, and there are more examples to think of like the suspension of dialogue or any other form of cooperation. Apart from the US, the EU and China also frequently utilize bilateral sanctions. A justification for the EU to use bilateral sanctions is that it lacks the ability to influence the behavior of others through military force and therefore has no other choice than the sanctions weapon. The EU also holds the view that these kinds of legal weapons are superior to the threat of military force. Recently, the EU has expanded its sanctions toolbox and increased reciprocity in public procurement, proposed an anti-coercion instrument, and devised other active tools to increase its leverage.

China too has used economic coercive measures to achieve political and strategic goals. Its sanction tools are traditionally less embedded in the rule of law and take a more informal nature. Recent cases include trade restrictions against Australia after it called for an independent panel investigation into the origins of COVID-19. Another example is South Korea’s installation of the THAAD anti-missile defense system in light of North Korea’s increased missile testing, which sparked unilateral action. Export restrictions of rare earth to Japan and targeted actions against Lithuania, and by extension to the EU Internal Market, in the aftermath of the opening of a “Taiwan” Representative Office instead of a Taipei Office can also be mentioned. After September 2020, China has adopted several regulations to respond to foreign sanctions, including Provisions for an Unreliable Entity List, Rules on Counteracting Unjustified Extra-Territorial Application of Foreign Legislation and Other Measures, and the Anti-Foreign Sanctions Law. So far, these legal instruments have not yet been put into practice.

Diversification Versus Decoupling

Political realists will point out that the economic success of one country will spur envy just as well as economic failure in another can equally lead to rivalry. In Adam Smith’s time, it was already known that prosperity leads to power, and power leads in turn to others becoming fearful. Even if the economic growth of one country ultimately benefits others, politics tend to focus on inequalities in the short term and the fear that a shifting economic balance may render another state vulnerable to aggression. Nonetheless, economic weaknesses that result in increased political weakness do not have to be the result of misguided economic policies. Natural disasters as a result of climate change could also economically threaten the subsistence of a country, prompting it to take unilateral actions to protect its security.

Furthermore, it can be argued that economic openness is often accompanied by military expansion to control vital trade routes. It should, therefore, not come as a surprise that with China’s economic rise, it has also made claims in the Taiwan Straits and other parts of the South China Sea. In fact, the entire Belt & Road Initiative (BRI) has already been interpreted by some governments as Chinese power projection. In a similar fashion, merchants and business groups around the world lobby actively to protect critical economic infrastructure, including human resources. The resulting efforts to maximize security can be seen as a projection of power with a view to changing the status quo. It is therefore important to avoid miscalculations.

It is against this background that China, the US, and the EU will need to find new ways to juggle conflicting economic policy goals. It is important that this is not only done through trade policy, but also through meaningful political and macroeconomic discussions. In the case of the EU, the Sino-European trade imbalance has become unsustainable. The EU is becoming increasingly dependent on China both as an export market and for key imports. China, meanwhile, is emancipating itself from European inputs because it is domestically producing many of the goods it once used to import from the EU. Both the pandemic and the war in Ukraine have brought to light some of the EU’s critical dependencies. These examples have shown that the geopoliticization and weaponization of interdependencies can turn a promising market into a much less reliant trade partner in an instant. China has already anticipated and developed the concept of Dual Circulation as part of the 14th Five-Year Plan. It has already started to wane off from certain imports and to become more autonomous. The EU has probably no choice but to follow China’s example in proportionally tackling its critical dependencies.

This need for diversification means that countries will still have to continue to source goods and services from both near and far. Therefore, this does not spell the end of globalization or international trade as such, but it may lead to a costlier version of globalization in which regulatory blocks are formed and political risk is factored in the cost of production. Regardless, a more fragmented form of globalization will still require that trade blocks look for increased openness and market access to diversify their sources of critical inputs, while at the same time, countries and economic sectors will need to plan for worst-case geopolitical scenarios. Hence, the EU is right when it speaks of “open strategic autonomy”. Without market access and openness, diversification will not work. It also implies that new trade agreements should pay more attention to security of supply. This diversification is the result of a different approach to increased risks. Unlike decoupling, regaining full sovereign control of the value chain and to undo the effects of globalization are not goals in and of themselves.

Apart from the fact that it needs a renewal of industrial policy for its implementation, diversification does not yet answer the question as to what kind of global economic governance it requires. Should the world continue along a path of increased unilateralism, or should we try to mend existing multilateral instruments to deal with the challenges ahead? Of course, multilateralism and unilateralism are matters of degree from the start and their respective use depends on varying circumstances. They are never absolute. Countries and governments need a mix of unilateral and multilateral approaches in developing foreign policy. If we are seeing more unilateralism in dealing with China, it is because there is widespread resentment in the EU and the US based on the perception that China has enjoyed a strategic opportunity thanks to an open and liberal economy for many decades that was the result of multilateral economic consensus building in the form of institutions such as the IMF, the World Bank, and the WTO. Current frustrations also arise from China’s lack of reciprocating this openness and from the belief that China has been unilaterally maximizing its self-interest to serve its own sovereign policy choices under the goal of Great Rejuvenation. However, since the US and the EU are clearly mesmerized by China’s unilateral industrial policies, is it right that they should also find inspiration in China’s vision on multilateralism?

About Multilateralism and Multipolarity

China has always presented itself as a staunch defender of “true multilateralism”. In fact, this version of multilateralism cannot be understood without reference to China’s concept of multipolarity. This concept has been frequently used since the end of the Cold War and the demise of the USSR. Deng Xiaoping, Jiang Zemin, and Hu Jintao spoke about the multipolar world which emerged from an international balance of forces where, according to their view, US military, economic, and technological power had become too great. However, Deng, Jiang, and Hu still tied the emergence and ambition of China to play a role in a multipolar world to the concept of tao guang yang hui (hide your strength and bide your time). It was only after the 2008 global financial crisis hit that China became confident enough to state that the process toward a multipolar world had become irreversible and that it would have to gradually revise its practice of tao guang yang hui. Thanks to the global financial crisis China’s status and influence improved significantly. In 2014, President Xi remarked that the advancement of multipolarity in the world would not change. Ever since then, he has viewed the multipolar world as making deep changes to the international rules-based order. According President Xi, we are living in a world experiencing “profound changes unseen in a century” and heralding a new era in the international balance of forces.

China’s understanding of multilateralism is tied to the multipolarity of the world that emerged after the end of the Cold War and it intends to rebuild it based on its concept of a Community of Common Destiny, or nowadays more often referred to as a Community of a Shared Future for Mankind. To build this Community, the Xi Government focuses heavily on infrastructure investment, new financial instruments, and new security concepts that borrow from its own holistic national development strategy. This embodies China’s concept of globalization in which its own experience on the path of economic and social development is central.

The Community of a Shared Future for Mankind is the foundation for a loose political and economic block. By providing it with public goods, China aspires to build a “One Belt” and “One Road” and in so doing, provide the world with economic development, peace, and security. The Global Development Initiative (GDI) and the Global Security Initiative (GSI), in conjunction with the aforementioned BRI, are programs that provide these public goods to the world. Arguing that the West, under the leadership of the US, has lost its impetus to promote global governance, China has put itself in a leadership position to create a new world order by stating that it is better qualified to solve the problems and to meet global challenges. It goes as far as to set this direction and rules for others. It uses both consensual and coercive leverage in the UN system and it is actively involved in displacing liberal values that originated in the West. At present, 4 of 15 UN specialized agencies are led by Chinese nationals (UNIDO, ICAO, ITU, and FAO), demonstrating the ever-rising influence of China within the multilateral system. In addition to the UN and other multilateral institutions, such as international development banks, China also uses other forums for the roll out of public goods through action plans with regional groupings such as CACF, CEEC, China-CELAC, and FOCAC.

Notwithstanding the noble cause of building a Community of a Shared Future for Mankind, China’s multipolar approach by no means equals multilateralism as viewed and practiced by the EU. The essence of multilateralism is that stronger countries accept to be bound by the exact same rules as weaker countries. China, by contrast, wants a multipolar order with its own loose coalition of support revolving around its own development and modernization concepts. This immediately and naturally limits its attractiveness for developed economies such as the EU Member States.

Moreover, where China used to be more focused on consensual elements of order-building, it is increasingly focused on punitive elements and coercion. There is nothing wrong in adding Chinese wisdom in the belief that it is better equipped to deal with global problems, but on the basis of its multipolarity, China has led outright attacks on universal norms and values, Western culture and governance systems. It should therefore not come as a surprise that this has led to a backlash in both the EU and the US. Wolf warrior diplomacy has further exacerbated these attacks on the West. It has raised legitimate questions in the EU about China’s trust and reliability. It is not that the EU would be unable to accept Chinese leadership, but it questions the type of leader China might be.

Multilateralism is Based on Rules of Consent, Not Coercion

While after the Second World War, the cloak of leadership landed on the shoulders of the US and its allies, including the USSR, China has stepped into the world’s limelight much later and it is no longer hiding from this light. It needs to take on new responsibilities and, therefore, must more actively participate in the formulation of international rules and institutions. The question of leadership is important. Who takes leadership in global governance and who leads within this leadership? Is it only about “might is right” or is it predominantly economic power that should account for this leadership position? Surely, to lead also means that one needs followers, and they must follow voluntarily. A country that asserts itself by coercion should not be accepted as a leader.

Leadership is born out of a collision of wills around which some consensus needs to arise. Leading by coercion by withholding food, energy, or other critical supplies from others may delegitimize the leadership altogether. With legitimacy also comes some moral component of leadership. To complicate matters even more is that governments consent on behalf of their populations and sometimes this can go against the popular will. Unfortunately, there are no clearly good or wrong answers, but sovereign nations that only serve their own naked self-interest do not make good multilateral interlocutors. Communication and persuasion are to be preferred over coercion and dictating rules. Nations should therefore avoid a world order in which consensus is the result of some form of coercion. Therefore, it seems wiser at this moment to stick to the already established rules of consent. It would be good, of course, to have some stronger elements in a group to make it more efficient, but multilateralism needs the power of inclusiveness to build consensus and enable compromise. The US and the EU both have their track records already. It will be important for China to show it also can deliver.

It should not be forgotten that without the support of the international community, China cannot realize its Great Rejuvenation and the two centennial goals. It is not enough to promote the success of its development model and to propose robust infrastructure deals or invest in security if there is the risk that those on the receiving end are possibly being coerced in a direction they do not wish to or should not take. China, for instance, may claim that it is better equipped to deal with extremism, terrorism, and populism. However, if this leads to increased surveillance and censorship, it will not easily be condoned as it will never be part of a consensus.

Likewise, if the BRI, GDI, and GSI radiate China’s preference for others to become dependent on China economically and to divorce them from economic and other alliances with the West, then the Community of a Shared Future of Mankind and the goals it should serve to realize the China Dream will never be espoused by the entire world. The collective developing world may still want an alternative path to development in this conception, but it is less clear why others should join if these new instruments and concepts will only pitch the rest of the world against the West instead of rallying a broad consensus.

China still has much convincing to do and to prove that it will always play by the rules of consent, allow itself to make compromises with others and will not adopt coercive tactics. Until then, the EU is unlikely to rally around China’s version of multilateralism.

International Technological Governance

Coming back to the initial question of governance, technology plays a significant role in diversification and the renewal of industrial policy. Technological progress is equally entwined with the global economy, because Artificial Intelligence, Quantum Computing, Internet of Things, among others, all intersect with international supply chains, financial power, data flows, and so forth. These are all areas where the US, the EU, and China compete to seize leadership. With programs such as Made in China 2025 and the aforementioned concept of Dual Circulation, China seeks to indigenize key technologies and to set market share targets for its domestic market. Subsidies, technology transfers, and market access restrictions are part of the industrial policies to accomplish this. China’s ongoing drive to “catch up to and surpass” is a source of tension for those countries that want to remain their competitive advantage.

International economic governance should focus on the creation of a level playing field and therefore should not support acts of unfair competition. Unfortunately, a leading body or authority in the field of international competition is lacking in setting rules for anti-competitive behavior. The WTO is at present only partly equipped to this end. Technological advancement is of course part of the comparative advantage. Nonetheless, certain rules and practices could benefit from more multilateral oversight. This should become a pressing issue for trading nations around the world. This is an area where the EU, US, and China should do more together as tensions in this field are unsustainable overall.

The strengthening of transatlantic ties within the framework of the EU–US Trade and Technology Council is a step in dealing with this situation. It could make the engagement between the EU and China more complex. However, the US will have to thread carefully because the recent acceleration of US–China decoupling by means of export restrictions of strategic technologies causes unease in the EU. There are already signs that American unilateral actions are alienating partners and allies. Allies will find it difficult to reign in this unilateralism with universal values, if it outgrows certain proportions, because it will raise the question whether one can deny the right to technological progress.

It is important to discuss economic and technological capacities and to keep engaging in a more level playing field between the largest trading nations. There needs to be more room for constructive discussions on these economic and industrial policies. A lack of coordination and the use of unilateral trade sanctions could lead to serious harm and add to the existing geopolitical tensions. The EU should also not be trapped in a binary choice between trading with the US or China; neither should any other country in the world. The EU should prioritize trade and deals with partners that respect agreed norms, principles, rules, and procedures grounded in reciprocity. In addition, the EU should favor trade with partners who have stronger interests in climate change and de-carbonation of energy or in transport.

The focus on geopolitical risk should become an integral part of industrial policy dealing with microchips, batteries, and cloud systems, just to give a few examples. Getting these policies right will require a strong economic governance framework with an aim to strengthen resilience and competitiveness. At the start, it can be limited to like-minded countries or geographical trade blocks, but the aim should be to become as inclusive as possible and not to leave any nation behind. If certain existing critical dependencies are a source of geopolitical tension, it will necessitate more multilateral action to alleviate them.

After the Second World War, both steel and coal, as key supplies of the defense industry, were put under control of a supra-national authority on the European continent. Had it not been for the wisdom of the European Coal and Steel Community (ECSC), which after several stages eventually morphed into the EU, the European continent most probably would not have witnessed its longest ever period of peace. To find a true multilateral solution for the current building blocks of the defense industry like the EU did in the 1950s would be the best contribution to future world peace. Let us hope that the world does not need another devastating conflict before acknowledging again that giving up some hard-fought national sovereign rights could save the world from catastrophe.

The EU has had more experience with effective multilateralism by nature of its own institutions. Besides, the EU has always been open and oriented toward its international partners with an outward look on the world. It has been an actor of peace in Iran (JCPOA), the Sahel and recently in Armenia, to name just a few examples. The EU can speak to the world without arrogance, humbled by the numerous colonial errors of some of its Member States. It should play a role in bridging and offer a platform to find a sustainable multilateral solution to the contentions that unilateral actions by big powers are bringing to the world. The EU is not about projecting power and can lead by persuasion, without coercion. Of course, it has a defensive policy to protect existing universal norms, principles, and rules because it still believes they can work. It is time for moderate forces to invite themselves to the debate again in order to avoid extremes that could lead us to calamity.