Toward a Geoeconomic Order in International Trade and Investment

INTRODUCTION

Recent developments suggest that the international economic order is transitioning away from the post-Cold War Neoliberal Order toward a new Geoeconomic Order.¹ The shift to this new order, which is characterized by a growing ‘securitisation of economic policy and economisation of strategic policy’,² will likely see the rules, norms, and institutions of international trade and investment law undergoing significant change. We expose the differences in the underlying logic of these orders, explore how this shift is being driven by the emerging USA–China tech/trade war, and consider the consequences of this transition for global economic governance.³

I. INTERNATIONAL ECONOMIC AND SECURITY ORDERS

An ‘order’ can be conceptualized as a relatively predictable set of behaviours, interactions, and outcomes within a particular social system.⁴ A given order in an area of world politics tends to be defined by certain regulations (rules, norms, institutions) and patterns of behaviour (actions, reactions, outcomes) that reflect how actors understand and apply those regulations. Within international trade and investment, we are currently witnessing the emergence of new regulations and patterns of behaviour that portend a shift of orders.

There have been two main international economic and security orders since the end of the Second World War, though their time periods do not exactly overlap.⁵ The first economic order, from the 1940s to the 1970s, was centred around the principles of embedded liberalism and underpinned by the Bretton Woods Institutions.⁶ The second, which emerged following the economic turmoil of the 1970s and 1980s, was centred on a set of ideas typically described as neoliberalism or the Washington Consensus.⁷ This regime placed a greater emphasis on market forces—encouraging further deregulation, liberalization, and privatization—and reducing the role of the state in the market.

In terms of security orders, the period was divided between the Cold War (from the late 1940s to the early 1990s) and the post-Cold War period (from 1991 onwards). In the post-Cold War period, the neoliberal economic order became increasingly internationalized and legalized.⁸ This highly globalized post-Cold War economic order, which we call the Neoliberal Order, has been under increasing strain since the 2008 financial crisis, paving the way for the emergence of a new Geoeconomic Order. When contrasting the emerging Geoeconomic Order to the previous one, we are primarily contrasting recent and emerging practices to the post-Cold War Neoliberal Order.

Commentators use the term ‘geoeconomic’ in different ways. Some use it to describe micro level actions, such as Robert Blackwill and Jennifer Harris who define geoeconomics as the ‘use of economic instruments to promote and defend national interests, and to produce beneficial geopolitical results’.⁹ Others use it to describe macro level changes, such as Edward Luttwak who, following the end of the Cold War, argued that competition and rivalry among states would principally play out in the economic rather than military realm:

[T] he methods of commerce are displacing military methods–with disposable capital in lieu of firepower, civilian innovation in lieu of military-technical advancement, and market penetration in lieu of garrisons and bases. [This has led to] the emergence of ‘Geoeconomics’ … the best term I can think of to describe the admixture of the logic of conflict with the methods of commerce.¹⁰

We use the phrase Geoeconomic Order to describe a macro level change in the relationship between economics and security in the regime governing international trade and investment law. Geopolitical power has changed, resulting in different patterns of behaviour among key states, including most notably China and the USA. The new order is marked by a greater focus on relative—rather than absolute—economic gains in view of their implications for security, heightened concern over the security risks posed by economic interdependence and digital connectivity, strong competition over technological development, and increased invocations of security exceptions in ways that make it difficult to disaggregate motivations of protection and protectionism.

In sketching this shift to a Geoeconomic Order, we are not suggesting that one order has completely replaced the other, that security was entirely absent from the old order, that all of the developments we see today are a result of or portrayed as resulting from increased security concerns, or that security concerns always trumps economic interests in the new order. Instead, we are identifying in broad brushstrokes and ideal types how the balance and relationship between economics and security are shifting. In particular, while an ‘economic’ mindset previously dominated the routine operation of international trade and investment law, ‘security’ considerations now play a more prominent role in the regime’s core.

A. The logic of the Neoliberal Order

Security did not dominate the core of the post-Cold War Neoliberal Order. Although it was not absent from the regime, security tended to operate as a justification for and exception to the Neoliberal Order, rather than affecting its day-to-day operations.

Security served to justify the old order because, in line with US policy ideas and preferences discussed below, entering into trade and investment agreements was understood to increase economic interdependence, which in turn would promote peace and cooperation by raising the costs of conflict between states.¹¹ This idea was summed up in the slogan ‘World Peace through World Trade’.

Security also represented an (unused for the most part) exception in the Neoliberal Order. Most trade and investment agreements concluded after World War II included broadly phrased national security exception clauses.¹² States, however, exercised restraint in invoking these clauses for fear of opening a Pandora’s Box: they realized that a national security exception would be difficult to regulate and that broadly invoking the clauses would ultimately undermine the trade and investment rules.¹³

But security concerns tended not to be invoked in the routine operation of the regime. Instead, the ordinary substantive rules that underpinned trade and investment treaties reflected an ‘economic’ mindset rather than a ‘security’ mindset. The economic mindset was primarily concerned with maximizing economic gains for states engaged in international trade and investment by increasing efficiency within and across their economies. The potential security concerns caused by deepening economic interdependence across a broad range of sectors received comparatively little attention.

According to classical economic theory, free trade is beneficial because it allows states to play to their comparative advantage by concentrating on producing what they do best and trading for the rest.¹⁴ Free trade was presented as a win–win situation: the size of the pie, and thus the slices of pie that can be claimed by each state, could be grown through cooperation. States may bargain fiercely over how to divide the pie, but the underlying assumption is that both parties can ‘win’ in absolute economic terms or else they would not engage in the trade.¹⁵

To effect the goal of increased economic efficiency, trade and investment treaties aimed at overcoming economic nationalism and mercantilism by, for instance, reducing protectionism and instilling the principle of non-discrimination. To the same end, corporations restructured their supply chains to maximize efficiency and economic gain, creating deep interdependencies across states, both friends and potential foes. These goals were facilitated by the movement toward highly legalized dispute resolution through the creation of the World Trade Organization (WTO) and the widespread adoption of investor-state arbitration.

The prevailing narrative of the time posited that the WTO legal and dispute resolution framework spurred economic efficiency by, among other things, limiting government interference with markets and enhancing predictability in the event of disputes.¹⁶ The rule-orientation of the trade and investment regimes led to the enlargement of the epistemic community of (chiefly legal) experts, encouraging rule by lawyers rather than by politicians or diplomats.¹⁷ Although politics was not absent from the institutional design and operation of the WTO,¹⁸ the regime’s legalization somewhat shielded its day-to-day operation from the broader topics of world politics,¹⁹ which sidelined security and strategic concerns.

B. The logic of the emerging Geoeconomic Order

Key to the emerging Geoeconomic Order is a shift in focus from absolute gains (based on the assumption of a positive-sum game) to relative gains (based on the concern that one party has gained disproportionately or that one party’s gain amounts to another party’s loss, i.e. a zero-sum game).²⁰ The language being used about the system by some major actors has shifted from an emphasis on cooperation to one of competition and conflict. The changing relationship between economics and security undermines some traditional rational choice explanations for trade policy.²¹

Another feature of the new order is a different approach to the relationship between trade and peace, reflecting a consideration that perhaps long periods of peace (typically associated with times of hegemonic stability) enable the conditions that lead to increased economic interdependence, not the other way around.²² The hegemon typically supports free trade when it does not fear the economic growth of its strategic rivals. In such periods of relative peace, the hegemon can afford to focus primarily on its own absolute economic gains while largely ignoring changes in relative economic power.²³

But when the relative size of the economies of the hegemon and its strategic rival converge to a sufficient degree, the hegemon’s calls for free trade will weaken in favour of the adoption of greater protectionism. This change occurs because economic power ultimately undergirds other forms of power, including military power, which are often understood by great powers in relative or zero-sum terms.²⁴ As economic power converges—and particularly when it leads to bipolarity²⁵—the hegemon’s sense of security diminishes, and its focus shifts from absolute economic gains to relative strategic power.²⁶

With this shift has come another realization that underpins the patterns of behaviour in the emerging order: interdependence may increase economic efficiency, but it can also generate strategic vulnerabilities, such as dependencies on foreign states for the supply of critical technologies necessary to the economic advancement and military capacity of great powers.²⁷ The relative shift from more of an ‘economic’ to more of a ‘security’ mindset in the Geoeconomic Order involves a transition from appeals to economic efficiency to calls for greater resilience, including through increased self-reliance.

An important attribute of the Geoeconomic Order is a reconsideration of the pros and cons associated with interdependence and, in relative terms, a greater tendency of states to both ‘weaponise interdependence’ and to seek to reduce exposure to such weaponization.²⁸ States can create economic interdependencies with the aim or awareness that these may translate into strategic advantages, as China is doing through its Belt and Road Initiative.²⁹ Key asymmetries can also be exploited or weaponized as strategic leverage by the less vulnerable party in an interdependent relationship.

Weaponizing interdependence thus has a ‘use-it-and-lose-it’ quality. If states perceive that other states or actors are using economic interdependence to gain strategic advantages, their incentive to become independent is strengthened, especially when the actor seen as abusing the interdependence is a central or dominant node in the system. Examples include the establishment by other states of alternative payment regimes to avoid US controls over SWIFT, which it has leveraged to enforce its sanctions.³⁰ China’s decision to try to become more self-reliant with respect to technology can also be understood as a response to the USA cutting off supply lines to essential technology with respect to ZTE and Huawei.

To recalibrate the relationship between economics and security, states are increasingly relying on claims of national security in order to avoid the application of international trade and investment obligations and to limit or oust judicial review. This appears in the spread of foreign investment review processes, with numerous states enacting or contemplating stricter rules on investment screening in recent years. It can also be seen in the growing number of investigations under long-standing screening processes like CFIUS in the USA (see Figure 1). It further appears in the broad use of national security to justify limiting exports (such as the US Huawei ban), imposing tariffs in the trade sphere (such as US tariffs on steel and aluminium), and localizing data (such as in China’s cybersecurity laws).

II. USA AND CHINA RIVALRY: CAUSES AND CONSEQUENCES

Although many states have long had to balance and integrate their economic and security interests, the relative divergence and convergence of these spheres in US policy have given essential impetus to the shifts in orders identified above. Indeed, although the USA played a key role in establishing the international economic order following World War II, it has equally been one of the driving forces behind the movement toward a new Geoeconomic Order. A significant factor contributing to this shift has been the emergence of China as both an economic and a strategic rival, which has also given rise to an emerging tech/trade war.³¹

A. Convergence of economic and security competition

The relative divergence between the economic and security realms in the post-World War II economic orders occurred partly because the USA did not view itself as having an economic and strategic competitor. During the Cold War, the USA had economic and strategic competitors, but they were not one and the same. The USA and the Soviet Union were strategic competitors, but over time, it became clear that the Soviet Union was no match for the USA economically. Japan emerged as an economic competitor to the USA in the 1970s and 1980s, but it was a US ‘client state’ and security ally rather than a strategic competitor.³²

After the Cold War, the USA achieved both economic and strategic predominance, so it lacked peer competitors in both areas. In the newly unipolar world, the communist threat fell away, leaving capitalism as the ruling economic ideology of the day. The neoliberal economic model spread rapidly with the support of various international organizations, including the World Bank and the International Monetary Fund. The USA welcomed former Soviet states and China into the world economy on the assumption that this would increase both peace and prosperity, with economic gain and security being seen as reinforcing rather than in tension.

Meanwhile, the USA perceived its main security threat during this period as coming from ‘rogue’ states like Iraq and Iran and—after 9/11—from non-state terrorist actors like al-Qaeda, the Taliban, and the Islamic State.³³ The US strategic focus was strongly trained on the Middle East and a succession of battlefield operations from Iraq to Afghanistan to Libya. The USA did employ some economic tools in waging these wars, such as the use of economic sanctions to target terrorism financing and nuclear proliferation.³⁴ But the targeted states were generally economically marginal and the measures of weaponized interdependence remained quarantined outside the highly legalized fields of trade and investment.

A central driver of the reconfiguration of economics and security in the Geoeconomic Order is the growing geopolitical rivalry created by the emergence of China as both an economic and security competitor of the USA. In absolute economic terms, the USA and China both gained tremendously under the Neoliberal Order, but in relative terms, China had begun to close the gap. This shift became stark in the late 2000s when the US economy precipitated the global financial crisis, causing a crisis of faith in the Washington Consensus model, while China’s economy emerged as the world’s second largest.³⁵ An ever more economically competitive China came to be seen as a threat in Washington, which contributed to the US ‘pivot to Asia’ in 2011 and its embrace of the Trans-Pacific Partnership (TPP) Agreement.

At the same time as inequality was declining between China and the USA, it was also rising within the USA. Since the 1970s, inequality within the USA has increased owing to a variety of factors ranging from trade and technology trends to a lack of effective redistributive policies, culminated in a populist backlash against international trade and investment.³⁶ The resulting populist and protectionist political climate led all of the major candidates vying in the 2016 US presidential race to disavow the TPP. Some US commentators and politicians believe the problem is the need for more equality between rich and poor domestically through measures such as improved redistribution. Others have turned their attention outwards, such as Donald Trump who claimed that China was ‘raping’ the US economy and ‘stealing’ its jobs and thus promised to ‘bring our jobs back home’ and get tough on economic competitors that were ‘cheating’.³⁷

Differences in the economic and political systems of China and the USA both contribute to rivalry and are used by the two states to justify that rivalry.³⁸ Economically, the USA has traditionally championed a free market neoliberal ideology, whereas China has adopted more of a state-led capitalist model, which means that they have different strengths and seek to craft and play by different rules. This has led to accusations by the USA that Chinese companies are not playing on a level playing field because of state subsidies and that the existing rules were insufficient to discipline China. It has led to complaints by China that the USA is seeking to impose its economic model on other states when international law does not require a one-size-fits-all approach.

Politically, the two great powers also differ significantly. The USA depicts China as an authoritarian regime that is aggressive abroad and repressive at home and has become more so under the leadership of President Xi Jinping,³⁹ whereas China tars the USA as hegemonic and hypocritical,⁴⁰ pointing to its track record of interfering in the domestic affairs of other states and accusing it of seeking to hold back China’s development.⁴¹ Some US commentators advocate ‘othering’ China to help overcome domestic divisions and reinforce social cohesion, regardless of the fact that doing so would ‘at times constrain commercial relationships’.⁴² Others warn that doing so would amount to dangerous scapegoating to distract attention from domestic problems.⁴³

The growing economic and strategic rivalry of the USA and China in the Geoeconomic Order is playing out in a world of deep economic integration and growing digital connectivity, which is changing perceptions about the strategic opportunities and risks associated with interdependence. During the Cold War, by contrast, there was little economic interaction between the strategic rivals of the USA and the Soviet Union.⁴⁴ In the post-Cold War period, China and the USA became deeply economically integrated with each other (see Figure 2). Whereas deep integration was celebrated in the Neoliberal Order as increasing both peace and prosperity, the current rise of strategic rivalry between China and the USA is leading to a reconsideration of the risks posed by interdependence.

Concerns about interdependence are likely to be amplified when an economic competitor is also understood to be a strategic competitor. Instead of prioritizing the economic gains of interdependence, strategic competitors may seek to create what Tom Wright calls ‘spheres of independence’, decoupling their integration in at least some areas⁴⁵ to limit vulnerabilities.⁴⁶ One area in which concerns about interdependence are becoming paramount is in information communications technology (ICT). For instance, the USA is concerned about Chinese companies building critical infrastructure like 5G networks and having access to sensitive data. China is concerned about the USA cutting off supplies to crucial ICT components, like semiconductors.

This growing USA–China strategic rivalry is occurring as the world moves into the Fourth Industrial Revolution in which developments like artificial intelligence (AI) have the potential to create unknown but outsized economic gains and security risks. Even though the USA enjoys technological supremacy in many areas, surges in Chinese research and development funding and recent breakthroughs in areas like AI have stirred US concerns. The movement to 5G and the Internet of Things will also give rise to unparalleled accumulation of data that can be used to power economic innovation and military advances, which is upping the stakes of the current competition.

These developments have resulted in a noticeable shift in US policy, particularly since 2017–18. Upon taking office, President Trump withdrew the USA from the TPP but doubled down on treating China as a threat. The 2017 US National Security Strategy deemed China a ‘revisionist power’ and a ‘strategic competitor’ that uses ‘predatory economics’ to intimidate its neighbours.⁴⁷ It also declared that ‘economic security is national security’.⁴⁸ Endorsing this formulation, the US Department of Defense concluded that America’s ‘manufacturing and defense industrial base must be secure, robust, resilient, and ready’,⁴⁹ paving the way for securing supply chains and protecting domestic industries.

The US concept of ‘economic security’ bridges—and potentially collapses—the rule against economic nationalism and the exception for national security, creating an exception that has the potential to swallow the rule.⁵⁰ Economic security is clearly important for national security: a state will not be able to defend itself if it lacks economic prosperity or if it must rely on foreign states, including potential adversaries, for key defence supplies. But if national security requires a state to be economically prosperous, globally competitive and capable of military self-sufficiency, including at surge capacity—as some US policy statements suggest⁵¹—it can be used to justify protection on everything from steel and aluminium to tents.⁵²

If economic security is national security, how can one draw the line between protection and protectionism? Measures justified under economic security have a Rorschach-test-like quality to them: what looks like protection from one perspective (a security mindset) looks like protectionism from another (an economic mindset) (Figure 3). International economic law scholars have been critical of the US steel tariffs on this basis.⁵³ However, expanding invocations of national security to sectors that previously were not considered to be strategic, often for mixed economic and security reasons, makes it hard to draw a clear line between protection and protectionism, particularly under the less stringent approach of good faith judicial review.⁵⁴

Treating economic security as national security may also create a permanent state of exception justifying broad protection/protectionist measures across time and space. By mixing notions of competition, conflict, and rivalry across economic, political, and security realms, it is hard to know when a threat might be understood as starting or finishing.

B. The USA–China tech/trade war

One area in which these dynamics are unfolding is USA–China technological competition. The USA is a world leader in technological innovation, which it has used to fuel both its economic advantage and its military predominance. As a rising great power, China faces an ‘innovation imperative’: it needs to acquire and develop new technologies so as to enjoy long-term growth, continue its ascent up the global value chain, and arm itself against a dominant strategic competitor with more advanced military capabilities.⁵⁵ It has sought to close this technological gap through a combination of what Andrew Kennedy and Darren Lim describe as making, transacting, and taking:

• Making consists of supporting domestic firms in developing indigenous innovative and manufacturing capacity so that China can be more self-reliant when it comes to creating and producing new technologies. For example, the Made in China 2025 industrial policy seeks to spur Chinese innovation and technological advancement in key emerging technology sectors.

• Transacting involves concluding commercial transactions with foreign entities that result in the transfer of key technology. This goal can be achieved by Chinese companies buying or investing in foreign technology companies or requiring foreign companies that want to invest in China to work with domestic firms or transfer some of their intellectual property in return for market access.

• Taking means acquiring existing technology from foreign states and companies without paying for it. This objective can be realized through legal means, such as collecting open-source material like published scientific papers or sending Chinese students to study abroad, or illegal means, such as stealing intellectual property from foreign governments and competitors.

By contrast, we argue that, as the technological incumbent, the USA faces an imperative to maintain its ‘technological supremacy’. It accordingly has an interest in defending its existing technological dominance, hobbling the technological ambitions of its upcoming rival and doubling down on its own technological advancement to ensure it retains its innovative edge.

Views differ over whether openness in trading, investment, and research and development with an economic and strategic competitor represents a security risk (because of the possibility of knowledge and material transfers) or a security gain (because it bolsters thriving technology industries that are then best placed to retain their innovative edge).⁵⁶ Depending on the views prevailing at the time on the best balance to strike between being open and closed, the incumbent technological power may thus seek to protect its lead through some combination of shielding, stifling, and spurring—impulses that can be seen in recent US actions and debates.

• Shielding consists of protecting domestic technological knowledge from taking and transacting by a competitor. In current US practice, shielding includes prosecuting Chinese nationals and companies for industrial espionage; resisting ‘forced technology transfers’; and expanding the activities of the Committee on Foreign Investment in the United States (CFIUS) to permit the review and blocking of, inter alia, all non-passive foreign investments in any company that deals with ‘critical technology’ (including ‘emerging and foundational technologies’), ‘critical infrastructure’, or ‘sensitive personal data of United States citizens that may be exploited in a manner that threatens national security’.⁵⁷

• Stifling involves taking actions to inhibit the strategic competitor’s capacity for making.⁵⁸ US practice in this regard includes imposing unilateral tariffs with a view, among other things, to pressuring China to moderate industrial policies that support high-technology industries;⁵⁹ adopting new export controls on ‘emerging and foundational technologies’ to prevent the transfer of next-generation technologies, such as quantum computing, robotics, and AI;⁶⁰ banning the sale of components like semiconductors to Chinese companies like ZTE and Huawei;⁶¹ and seeking to prevent the purchase or adoption of Chinese technology like Huawei and 5G domestically⁶² and abroad.⁶³

• Spurring means seeking to stimulate technological innovation by, for instance, increasing government research and development funding, adopting a more extensive industrial policy, attracting the best talent from around the world, and seeking to ensure for domestic companies a competitive advantage in foreign markets. The USA has worked hard to open foreign markets for its companies, and it has a strong history in attracting and retaining foreign talent, but its support for research funding and the strength and coherence of its industrial policy have waned over the years, leading to current debates over whether such measures should be reinvigorated.⁶⁴ Political scientists have identified ‘creative insecurity’ as a key factor in spurring technological innovation, which occurs when a state’s perception of external security threats outweighs the drag of internal distributional fights between domestic stakeholders.⁶⁵

Some argue that such measures are necessary so that the two economies can be ‘decoupled’ to counteract China’s ‘technonationalism’.⁶⁶ In response, President Xi has increasingly invoked the importance of zìlìgēngshēng, which means ‘self-reliance and sufficiency’.⁶⁷ According to Xi: ‘Only by mastering crucial core technologies with our own hands can we … fundamentally safeguard our national economic security, national security, and security in other areas’.⁶⁸ Thus, offensive and defensive actions by the incumbent might spur further offensive and defensive moves by the challenger, and both may increase levels of independence.

The economic and technological rivalry is likely to increase as data becomes a central battleground because of its unknown and potentially outsized economic benefits and security risks, particularly given its role in driving AI.⁶⁹ For instance, CFIUS recently requested that Chinese firms divest from Grindr (a gay dating app) and PatientsLikeMe (a personal health app) over concerns about access to sensitive data.⁷⁰ China has declared big data to be a ‘fundamental strategic resource’ and has sought to protect this strategic asset by requiring the localization of data within the country,⁷¹ which fits within China’s broader policy of protecting its ‘cyberspace sovereignty’.⁷²

These developments signal that the USA and China are taking active steps to decrease the interdependence of their economies by moving towards greater spheres of independence in certain strategic areas, most notably in information communication technology. The question is not one of interdependence versus independence; rather, it is one of what degree of interdependence and independence is desirable and possible, in which areas, and subject to which precautions. It is a future of competitive and cooperative ‘managed interdependence’.⁷³

III. CONSEQUENCES FOR GLOBAL ECONOMIC GOVERNANCE

What consequences are likely to flow from the recalibration of economics and security in the emerging Geoeconomic Order and the growing tech/trade rivalry between China and the USA? To answer this question, it is helpful to visualize the USA and China as similar to two top football teams coming together to play. Both are world class, but they have different strengths and are playing different versions of the game.⁷⁴

The US team is like the World Cup champions; the game of football that it plays is soccer. Fast and nimble, the US players move fluidly and feature a range of individual styles and tactics. The players are not especially centrally coordinated. They wear shin pads but are not heavily protected. The team is quick and innovative; individual members can move the ball in many directions at great speed and with daunting skill.

Counter-intuitively, the Chinese team is like the Super Bowl champions; they play American football or what we will call gridiron. Their plays are more centrally coordinated. The players wear full body protection, including helmets and chest pads. The game is not as quick or flexible. But the team has been highly successful in cooperating internally to move the ball down the field in particular directions and overcome competitors along the way.

Of course, this metaphor overdraws the distinction. Many connections between the state and the market can be found in the US ‘free market’ approach, as evidenced by the role of defence funding in innovations like the internet.⁷⁵ For its part, China has strayed far from a purely centrally controlled ‘state capitalist’ model, as evidenced by the role of its local governments in incubating different approaches⁷⁶ and its highly competitive privately owned companies across many areas, including its innovative ICT companies.⁷⁷

Commentators are spiritedly debating whether the differences between US and Chinese capitalism represent differences in degree or kind.⁷⁸ The answer given depends on the level of abstraction used: at one level, soccer and gridiron are different games (as Mark Wu describes the problem of dealing with the sui generis nature of China, Inc. in the international trading regime); at another, they are both variations of football (as Andrew Lang describes the problem of integrating different varieties of capitalism into the international trading system).⁷⁹

When both teams play football on the global economic field, we envisage four consequences: (i) it will be harder to reach agreement over the rules that do or should govern the game (‘selective multilateralism’ and ‘multilateralism-minus-one’); (ii) movement will occur toward politicization and away from entrusting an impartial umpire to settle disputes (de-legalization); (iii) each team will engage in efforts to sponsor separate games of soccer and gridiron with like-minded or dependent states in certain sectors (sectors of influence); and (iv) the teams will adapt their preferred method of play to compete more effectively when they have to meet on the same field (convergence in play).

A. Selective multilateralism and multilateralism-minus-one

The difference in games played by China and the USA is going to make it harder to reach an agreement on the application of existing multilateral rules and the development of new ones. What we call ‘selective multilateralism’ and use of the ‘multilateralism-minus-one’ and plurilateral techniques are likely to result.

The USA claims that China is cheating. Having underwritten the creation of almost all major international institutions since the end of the Second World War, the USA is used to (disproportionately) setting the rules of international games. It is used to the adoption of its rules as the neutral international rules. The USA will say that it permitted China to join the game on the understanding that China would conform, over time, to the free market rules and spirit of the game that it helped establish and that China would become more liberal and democratic in the process.⁸⁰ This is precisely the view the USA is expressing at the WTO when it claims that ‘China has not been moving toward a fuller embrace of market-based policies and practices since it joined the WTO in 2001’. ⁸¹

China will object that it is not cheating, that the rules are sufficiently flexible to permit its style of play. China has significantly changed its practices since joining the WTO, embracing many free market principles by, for instance, liberalizing its services market, removing restrictions on foreign investment, and reducing the role of state-empowered companies in its economy. It will say that the existing rules do not require a single approach to playing football or running the economy and that many of its practices do not violate the rules and have been crucial to its economic development.⁸² In fact, China’s views on a number of trade rules such as subsidies, investment screening, and data flows clearly contradict the positions long held by actors such as the USA and the European Union. ⁸³

Part of the problem faced by the USA and the European Union is that the existing rules on issues like industrial subsidies do not clearly prohibit China’s conduct.⁸⁴ To be sure, the international trading system has in the past been able to find solutions that enabled welcoming countries with particular economic models under its rules, ranging from Japan to the former soviet republics. ⁸⁵ Crafting new rules, however, is hindered by changing economic and geopolitical power; gone are the days when the rules could be made by the West and exported to the Rest, in particular to a country with the clout and scale now enjoyed by China. In an increasingly multipolar world, if new rules need to be developed, they must involve input from—and reflect the interests of—all major players.

As power becomes more divided between unlikeminded great powers, the room for reaching agreements multilaterally or for one power to force a multilateral agreement over the objection of another great power on core interests will narrow.⁸⁶ Multilateralism will become more selective, often reduced to areas that do not intrude upon core interests of the great powers or zones of competition between them.

When one side is strong enough, it may also seek to create multilateralism-minus-one approaches. This movement involves developing quasi-multilateral rules by joining with a relatively broad and representative group of third states to put more pressure on the other great power. For this approach, third powers like the European Union may operate like swing votes. For instance, in WTO reform, the European Union is currently working with China and India to encourage procedural reforms (to counter the USA) and with the USA and Japan to encourage substantive reforms (to counter China).

B. De-legalization of international economic law

In addition to disagreeing on rules of the road, great powers in geoeconomic competition are likely to seek to retain or increase their control over the interpretation and enforcement of the applicable rules. They do so especially concerning questions of national security where states often want to redirect decision-making authority vertically (from the international to the domestic level) and horizontally (from the adjudicatory sphere to executive determination). As economic relations become more subject to political influence, and less mediated by agreed-upon international rules subject to compulsory third-party adjudication, the levels of obligation, precision, and delegation associated with the international economic regime will decrease.⁸⁷

The USA has made four key moves in this regard: (i) expanding the scope of ‘national security’ to include ‘economic security’ and the protection of a wide range of ‘strategic’ or ‘critical’ industries and infrastructures without clear limits; (ii) claiming that invocations of national security are completely non-reviewable, in addition to hobbling the WTO Appellate Body in general;⁸⁸ (iii) increasing decision-making by domestic executive actors without judicial review through processes like CFIUS; and (iv) attempting to strike a trade deal with China that is not subject to binding third-party dispute resolution at all.⁸⁹

For its part, China is unlikely to accept new international rules for areas it considers of key concern, such as cyber-sovereignty and the free flow of data, let alone agree to subject these rules to compulsory third-party dispute resolution. China retains a significant level of discretion in the application of its domestic legislation on matters such as data localization, which China considers to be part of its ‘national cybersecurity’.⁹⁰ Under the Belt and Road Initiative, Gregory Shaffer and Henry Gao also note that China is rolling out a ‘soft law’ network of memoranda of understanding and private law contracts, which points to a mode of engagement predominantly based on significant economic ties and private law ordering rather than strong legal obligations under public international law.⁹¹

Whereas the US approach involves relegating international issues to the domestic level, China’s position seeks to prevent domestic issues from rising to the international level. As a result, trade and investment policy is likely to become more politicized and less judicialized, which will affect the predictability of rules as compared with the Neoliberal Order.

C. Efforts to create sectors of influence

In the absence of multilateral agreement on new rules of the game, we should expect China and the USA to develop their own approaches at the national level and to seek to export those approaches to like-minded or dependent states and regions. This modus operandi is as if the USA and China were to leave the common football field in certain sectors to sponsor their own preferred games. We can see these developments most clearly in US attempts to decouple economically and Chinese attempts to do so digitally.

Economically, the USA is seeking to pressure others to choose between it and China. For example, the USA inserted into the US–Mexico–Canada Agreement a ‘poison pill’ that requires each treaty party to notify the others if it wishes to engage in free trade agreement negotiations with a non-market economy (here, read China) and permits the other treaty parties to terminate the agreement unilaterally if a free trade agreement deal with China is reached.⁹² This clause appears to have greater symbolic value than practical effect,⁹³ but the USA wants to replicate it in future deals.⁹⁴

The USA has also invoked national security concerns to limit the reach of certain Chinese companies in the rollout of 5G technology, increasing the chance of bifurcated 5G systems in the future.⁹⁵ US delegations have encouraged allies to ban Huawei from participating in the construction of next-generation computer and phone networks, suggesting inter alia that America might not otherwise be able to share intelligence with these states.⁹⁶ Some allies, such as Australia, have banned Huawei outright, while others, such as the UK, have struck a compromise approach that bars Huawei from the core of their systems.

The USA is trying to export its more stringent approach to investment screening to like-minded states. For example, the US Congress has directed the President ‘to urge and help allies and partners of the United States to establish processes that parallel the [CFIUS] to screen foreign investments for national security risks. …’⁹⁷ Various US allies have already enacted or are contemplating enacting stricter rules on investment screening, including the UK, Australia, Canada, and Germany. So too have America’s strategic competitors, including China and Russia.

Digitally, China leads the charge on decoupling, having strengthened its Great Firewall since the Arab Spring.⁹⁸ After Xi took power, the government reinforced internet controls and censorship, including by cracking down on the use of virtual private networks to access censored sources. The Chinese internet has developed relatively independently, giving rise to internet giants like Alibaba, Tencent, and Baidu, and distinctive apps and super apps like WeChat. Leading internet specialists, like ex-CEO of Google Eric Schmidt, have predicted that within 10–15 years the world will contain two distinct internets: a US-led one and a Chinese-led one.⁹⁹

Like the USA in the economic sphere, China is attempting to promote its influence in the cyber-sphere. China’s efforts to achieve greater connectivity with Belt and Road countries extend to digital infrastructure, in the so-called Digital Silk Road.¹⁰⁰ Behind this initiative lies the interest in seeing that ‘China’s internet media should be at [the] driver’s seat to build a digital Silk Road that facilitates cross-border communication’ along the Belt and Road, according to a high-level Chinese authority.¹⁰¹ China is disseminating its methods of internet governance and cybersecurity to interested partners¹⁰² and actively promoting its approach in world conferences, international organizations, and other forums.¹⁰³

Whereas China shows aversion to joining the interdependent infrastructure and network underpinning the internet—by decoupling measures such as data localization—it feels comfortable promoting its own network of interdependence with states willing to participate. This approach can also involve accessing data from those other states, suggesting that China wants to be able to engage in data localization itself but is unlikely to push this approach on other states, particularly in states where its companies are operating abroad. For instance, it has been reported that a Chinese AI company has been providing Zimbabwe with surveillance mechanisms in a deal that, in exchange, will grant it access to data on ‘millions of black faces’¹⁰⁴ to help training its AI experts on more ethnically diverse data than is available from Chinese sources.

Attempts to establish sectors of independence do not mean that the struggle to influence rules at the multilateral level is ignored, as can be seen in the competition currently playing out between China and the USA in the design of industrial standards for the technology industry, for example.¹⁰⁵ But the creation by great powers of spheres of relative independence can set the stage for sectors of influence, which may put third states in the uncomfortable position of having to choose between the two great powers, at least in some areas like trade agreements, supply lines, and digital connectivity. If independence does not or cannot exist, third states may be able to achieve a better deal by playing the USA and China off against each other in areas like infrastructure funding and aid grants.

D. Convergence in styles of play

Although the USA and China may seek to cultivate spheres of independence in crucial areas relevant to their core security interests, such as military supply chains and ICT systems, they will continue to play with and against each other on the same football field in many areas. In response, both sides are likely to adapt their preferred style of play to accommodate the style of the other side. The Chinese gridiron team has already become more decentralized and fast-moving, whereas the US soccer team will likely become more centrally coordinated and padded.

These developments are illustrated by some of the defensive moves adopted by the USA in areas such as investment screening and export controls. They are also seen in calls for increased US government investment in research and development in emerging technologies and a revamped industrial policy.¹⁰⁶ In Europe, the same developments are revealed by calls for changes in European antitrust rules to develop ‘European champions’ capable of successfully competing with Chinese firms.¹⁰⁷ These Western states are effectively saying that if China will not ‘level up’ to meet their standards, they are justified in ‘levelling down’ to play China at its own game.

Divergence between the two styles of play will be exaggerated in discursive terms so that the difference between the two teams seems stark. In practice, however, the style of play will converge to some extent. For example, the USA objects to China’s state-led capitalist approach on the basis that it creates an uneven playing field between Chinese and US firms. But the Trump administration is responding with a version of ‘patriotic capitalism’¹⁰⁸ by, for instance, calling on Google to think beyond revenues and not engage in projects like its censored Dragonfly search application.¹⁰⁹ Similarly, the USA is condemning China’s Made in China 2025 plan and state subsidies, but many US actors also talking more about ratchetting up America’s industrial policy and government R&D funding.

One way to think of this process is to envisage each state as a ‘triple helix’ involving three strands: the state, corporations, and universities. The Chinese triple helix is more integrated and interconnected than the US triple helix, as evidenced by approaches such as civil-military fusion and government censorship.¹¹⁰ Some previous actions by China could be understood as loosening the bonds of its triple helix (though that may have gone into reverse since Xi came to power), whereas some actions by the USA could be viewed as strengthening those connections. For instance, the US government is increasingly scrutinizing issues like US universities receiving funding from and collaborating with Chinese sources.¹¹¹ Regardless of what level of integration a given state thinks is ideal in the abstract, it may shift its approach in response to competition from another state with a different level of integration.

CONCLUSION

In this article, we argued that the international economic order appears to be moving toward what we call a Geoeconomic Order. This shift marks a significant departure from the post-Cold War Neoliberal Order given that it challenges key pillars of the trade and investment regimes, particularly through the increased invocation of security considerations to avoid trade and investment commitments and dispute resolution. As witnessed in the USA–China tech-trade war, the Geoeconomic Order implies greater legal uncertainty for economic operators since the lines between protection and protectionism are increasingly being blurred while the prospects of effective judicialized dispute resolution are decreasing.

The USA and China are the most important actors in the newly emerging Geoeconomic Order; they are not the only relevant ones, however. Whatever balance is ultimately struck between economic and security concerns in this new order will depend not just on internal machinations within these states but also on the responses of third actors, including international organizations like the WTO, third states, and private actors like corporations and universities. The USA–China relationship is embedded in a web of other actors, many of which are likely to seek to temper great-power competition and retard efforts to economically or digitally decouple or allow security concerns to trump economic considerations. Understanding how those third actors will respond and with what effect is the next step in the analysis.

Anthea Roberts is a Professor in the School of Regulation and Global Governance (RegNet), Australian National University, Australia; Henrique Choer Moraes is a Brazilian diplomat currently posted to the Mission of Brazil to the European Union and a PhD Candidate in the Leuven Centre for Global Governance Studies, KU Leuven, Belgium. The views expressed in this article are the sole responsibility of the author and do not necessarily reflect this positions of the government of Brazil; Victor Ferguson is a PhD Candidate in the School of Politics and International Relations, Australian National University, Australia.

Footnotes