A 'new normal' has emerged in the Indo-Pacific and the world economy due to shifts in geopolitical risk and declining levels of economic cooperation, argued Professor Petri, based on a paper jointly written with Professor Michael Plummer. Economies globally have been impacted by recent exogenous shocks such as COVID-19, the Russia-Ukraine war and the application of severe sanctions, rising inflation, and the rapid increase in the price of natural resources (the "new normal"). There are also trends towards deglobalization characterized by re-shoring, near-shoring, and friend-shoring, all of which involve retreating from cooperative trade practices and instead bringing production back home, engaging only with countries nearby, or trading solely with strategic allies.

The Petri-Plummer paper posits that deglobalization inherently poses a threat to the vision of economic cooperation he hopes will define trade in the future. This vision by and large guides policymakers in the Asia-Pacific region, which has promoted economic integration through comprehensive cooperative trade agreements, most notably the Regional Comprehensive Economic Partnership (RCEP) and the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP). These agreements, and their likely expansion to include more interested countries, offer a promising approach to deepening global trade and investment through concerted economic cooperation.

Professors Plummer and Petri employ a Computable General Equilibrium (CGE) model to analyze the impact of the new normal; geopolitical restructuring; and emerging economic cooperation agreements, including RCEP, two enlargements of the CPTPP, and a "global reach" scenario in which the US, China, Europe and Taiwan also join. Their simulations suggest that within the context of the new normal the rise in the prices of natural resources has the greatest negative effect on short-term economic growth; geopolitical restructuring leads to a larger contraction in global incomes overall and for virtually all countries individually and a massive decrease in trade; but economic cooperation stimulates income, trade and employment, particularly in the global reach scenario. They conclude that inward-looking policies such as re-shoring constitute an important threat to international trade, but that proactive economic cooperation can in part compensate for these effects.

Exogenous shocks are also discussed by Professor Pomfret with regards to their impact on global supply chains and railways. He argues the growth and success of the Eurasian Landbridge — connecting East Asia to the European Union (EU) through regular freight services since 2011— highlights the importance of connectivity for international supply chains, even in the aftermath of exogenous shocks. The volume of traffic on the Landbridge continued to increase despite poor relations between the EU and Russia since 2014 and with China more recently and reached record highs during the pandemic as alternative modes of transport were disrupted. In 2022, however, the Landbridge was ruptured when sanctions were imposed on Russia, which deterred use of trains crossing in Russian territory. The innovativeness of freight forwarders in finding alternative routes amidst this major disruption reinforced the importance of demand for Landbridge services in facilitating efficient trade along global supply chains.

Professor Carbonara concludes that the resilience of markets impacted by geopolitical risk and exogenous shocks can be reinforced through solutions that prioritize cooperative trade policy and by enlarging free-trade areas. These solutions should be coupled with efforts towards developing policy instruments that activate automatically when exogenous shocks occur. Moreover, future policy instruments should consider also environmental and financial sustainability, adding new performance indicators to the analysis. This could possibly counter the limitations of current economic models, such as CGE, in accounting for exogenous shocks and their effects. Thus, Carbonara echoes the sentiments of Petri, Plummer, and Pomfret, and looks forward to a future defined by greater cooperation and open trade amidst a backdrop of global risk.



Full Audio:

International Economics Series

hosted by Professor Michael G. Plummer


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EMANUELA CARBONARA

Emanuela Carbonara is Professor of Economic Policy at the Department of Sociology and Business Law, University of Bologna and Adjunct Professor of International Economics, SAIS Europe. She is an Editor of the International Review of Law and Economics. She has been a Visiting Professor at the University of Haifa and George Mason University; was previously a Visiting Fellow at the Amsterdam Center of Law & Economics of the University of Amsterdam and a Research Fellow at the University of East Anglia. Currently, she is member of the Advisory Board of the European Association of Law and Economics and founding member of the Italian Society of Law and Economics. From 2015 to 2021 she was the Director of the Master (2nd Cycle Degree) in Law and Economics, and Law and Economics of Insurance and Finance at the University of Bologna. She holds a DPhil in economics from the University of Oxford and a PhD in economics from Bocconi University. Her current research interests are law and economics, behavioral economics and regulatory economics. She has published several articles in prestigious journals and book chapters.

PETER A. PETRI

Peter A. Petri is the Carl J. Shapiro Professor of International Finance at the Brandeis International Business School. From 1994 to 2006 he served as the founding Dean, and from 2016 to 2018 as the Interim Dean of the School. He is also a Non-Resident Senior Fellow at the Brookings Institution and its John L. Thornton China Center (Washington, DC), and a Visiting Fellow at the Peterson Institute for International Economics (Washington, DC). Petri has held appointments as Visiting Scholar or Professor at the OECD (Paris), Keio University (Tokyo), Fudan University (Shanghai) and Peking University (Beijing), and as a Fulbright Research Scholar and Brookings Policy Fellow. He has consulted for APEC, the Asian Development Bank, the Asian Development Bank Institute, the World Bank, the OECD, the United Nations and the governments of the United States and other countries. He is or has been a member of the editorial boards of the ASEAN Economic Bulletin, Journal of Asian Economics, Journal of East Asian Economic Integration and the Singapore Economic Review. Petri is active in U.S.-Asia affairs and is a member of the Board of the U.S. Asia Pacific Council and a former Chair of the U.S. APEC Study Centers Consortium. Petri's research focuses on international trade, finance, investment and technological competition with a focus on the Asia-Pacific region. His work has been supported by the U.S. Departments of State, Education, and Health and Human Services, and by the World Bank, the United Nations and major foundations.

RICHARD POMFRET

Richard Pomfret is Senior Adjunct Professor of International Economics at SAIS Europe and, since 1992, Professor of Economics, University of Adelaide, where he held the Jean Monnet Chair on the Economics of European Integration, from 2018-2020. His prior appoinments include: Professor of Economics at SAIS in Bologna, Washington D.C. and Nanjing (1980-1991); Assistant Professor of Economics at Concordia University, Montréal; Research Fellow at the Institut für Weltwirtschaft in Kiel. Pomfret was seconded to the United Nations (1992-4) and was also consultant to the UN Development Programme, the Organization for Economic Cooperation and Development, the World Bank, and the Asian Development Bank. Pomfret is the author of numerous books and articles on international economics, economic development, and other subjects.