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BRUSSEL S FORU M PAPER SER IE S

Guardians of the
Global System
What the transatlantic economic
partnership should give the world—
and why it might not deliver

Richard Salt
Transatlantic Fellow
The German Marshall Fund of the United States
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Guardians of the Global System
What the transatlantic economic partnership should give
the world—and why it might not deliver

Brussels Forum Paper Series

March 2008

Richard Salt
Transatlantic Fellow
The German Marshall Fund of the United States

Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Foundations for a Strong Global Economy . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
The Need for Economic Governance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
A Transatlantic Responsibility . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Why the Transatlantic Economic Relationship Requires a Strategic Purpose . . . . . . . . 14
Prospects for a Cooperative Partnership . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
Adopting a Mission . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
1 Introduction

Why should we care about intensifying The challenge doesn’t stop there. If we are to fulfill
transatlantic economic cooperation? After all, the this mission, it requires concerted, long-term
European Union and the United States remain cooperation based on a shared understanding of the
the world’s dominant economic powers, and it challenge. In practical terms, the European Union
is now widely acknowledged that transatlantic and the United States must, at the heart of their
trade and investment ties dwarf those seen dialogue, acknowledge that they are guardians of
between any two continents in history. After a the global system, and give sufficient weight to this
period in which these ties survived the political fact when calculating their self-interest. They will The European
fallout of transatlantic disagreement over Iraq need to build domestic political support for this Union and the
more or less unscathed, demonstrating the objective, which will require them to offer a vision United States
robustness of commercial links, can we relax? of the partnership that does more than trade market
must acknowledge
access in different sectors of the economy. Long-
The answer is no. Today’s global economy that they are
term cooperation must be based on more than
brings unprecedented opportunities for trade, guardians of the
the potential economic benefits from closer trade
investment, travel, and interaction. It also faces and investment ties. The ability to cooperate fully global system.
significant challenges, in part caused by the depends on building a coalition of support, both
same globalization—to resolve the tensions across the Atlantic and domestically from people
that differences in national policies can create increasingly worried about what globalization, in
internationally, and to overcome the growing all its forms, means to them. As Ellen Frost argued:
political, economic, and environmental
challenges that require transnational solutions. “What is primarily at risk is not the transatlantic
Spreading prosperity, addressing climate change, relationship as such, but rather the opportunity
stopping terrorist financing, preventing the to inject shared foreign policy leadership
spread of disease—these are all foreign policy and forward momentum into the post-Cold
challenges as much as they are economic, War global political-economic order. This
and all require international cooperation. is a strategic issue if ever there was one.”1

Yet the international cooperation we need is more This paper is an effort to illustrate a number of
difficult than is often assumed; globalization factors shaping the global political economy, in
itself makes our ability to work together even the hope of generating a long-term foundation
more fraught with problems. The conditions for transatlantic cooperation.2 The first part
that led to much of today’s economic governance
and its institutions no longer exist and, unlike 1 
Frost, E. (1997) p. 3.
the immediate post-war period, there is no one 2 
This paper was prompted by a series of discussions I have been
either a party to, or privy to over recent years—each discussing
state able or willing to address these challenges strategic arguments for closer transatlantic economic cooperation.
on its own. In its place, the global economy In particular, I had the privilege of attending, with then-British
requires leadership from its strongest, most Chancellor of the Exchequer Gordon Brown, a Council on
Foreign Relations working group led by Henry Kissinger and
powerful members. Sitting at the core of the global Larry Summers—an exercise that helped crystallize thinking that
economy, this confers a particular responsibility developed further with Robin Niblett, then director of the Europe
Program at the Center for Strategic and International Studies. Dr.
on the United States and the European Union. Niblett deserves my utmost appreciation for his ideas and input,
and no responsibility for any errors I have made with it.

Guardians of the Global System 3


describes the scale of the challenge in two ways— transatlantic cooperation is likely to be essential,
by reminding us why globalization generates and that the European Union and the United
particular challenges that require international States have a particular responsibility conferred on
solutions and by illustrating why it is so difficult them by their size and power—but that significant
to secure the necessary international cooperation. political obstacles seem, at present, likely to
Drawing on this, the second part will argue that block progress.

4 The German Marshall Fund of the United States


2 Foundations for a Strong
Global Economy

Today’s global economy is more deeply integrated with their own preferences. But not everyone can
than at any point in history,3 bringing together have their own way if policies are to converge.
an increasing share of the world’s countries and
population, with goods, services, capital, and people In foreign policy, globalization increases
crossing borders at a rapidly growing rate. With this the potential for economic policy to help in
integration of markets, and the deeper networks of achieving wider foreign and security policy
people, communications, and finance that support objectives; the value of trade and investment
it, globalization creates both opportunities and flows means that preferential trade agreements
challenges at an unprecedented rate, both for the and economic partnerships, or the lure of World
global economy as a whole, and for individual Trade Organization (WTO) membership, can be
economies and states. No country that wishes to leveraged to secure broader non-economic goals.
secure the potential gains that it offers can afford to Equally, however, the effectiveness of such policies
ignore the interaction between its domestic policies is undermined if other states are not willing or
and those of other states4—integration means that able to coordinate their policy. Sanctions, for
domestic political choices have an increasingly example, can be made less effective if others are
international dimension. Equally, the choices willing to step into the economic void created
made by the larger, more powerful economies (CSIS, 2006). Meanwhile, the arbitrary, unilateral
or the global community, or even the impact of use of some international economic policy is
the markets themselves, can influence domestic necessarily constrained by the parallel objective
policy and its consequences around the world. of maintaining a “rules-based” trading system.

Global integration offers clear economic benefits Integration creates tradeoffs in other spheres.
for the economy as a whole, but also some costs Not only can consumers and businesses seize
that are often concentrated on particular groups opportunities; so, too, can terrorist networks and
of people or industries. In turn, this implies that countries wishing to pursue radically different
each country also faces something of a tradeoff interests. The economic channels and networks
in domestic policy choices, one that widens the that underpin globalization do not, of course,
more the economy is open to globalization. Taking just offer opportunities to the well-intentioned.
a decision based entirely on domestic interests, In a similar way, the growth of faster transport
even if due to entirely legitimate preferences, links that service the global economy and provide
will impose a greater cost (in terms of benefits opportunity for personal travel also facilitate
foregone) when these policy choices differ from the more rapid spread of infectious diseases, as
those of international norms, rules, or those of one’s illustrated by the speed with which the previously
economic partners. Each country has the incentive, unknown SARS virus spread across the world
therefore, to try and influence international from its suspected source in China in 2002–2003.
norms or rules in order to bring them into line In the environmental sphere, the pace of
economic growth across the world and rapid
3 
See Bordo et al. (1999) for a comparison with the “first age of industrialization in a number of major emerging
globalization” in the early 20th century. They conclude that not only
are commercial and financial integration more extensive than in the economies holds the promise of raising millions
earlier period, but that today’s political system gives a louder voice of people out of poverty, but increases demand
to special interests (a theme picked up later in this paper).
on natural resources. Not only does this raise
4 
For different perspectives on this relationship, see Friedman
(1999) and Drezner (2007).
the potential for political and economic tensions

Guardians of the Global System 5


between states seeking to make use of the same and to regulate global markets to facilitate
resources, but growing demand also risks making commerce, while limiting the potential abuse of the
environmental degradation more likely. Once system either by other states or non-state actors.
environmental damage, either actual or potential,
has been identified, globalization makes the task These are all examples of global public goods.
of addressing these problems more difficult. Left entirely to private or voluntary action, many
public goods tend toward under-provision because
Maximizing the Finally, global integration changes the domestic of two key characteristics—economists describe
benefits of a context in which a given state’s international them as non-rival, meaning that the consumption
economic policy develops, particularly when it of the good by one person or state does not
global economy,
comes to economic openness and greater trade diminish the consumption of any other (a standard
and minimizing
and investment liberalization. Rules underpinning textbook example is often the safety and light
its costs, requires the global trading system necessarily limit provided by a lighthouse); and non-excludable,
more and more the scope of governments to buy support for meaning that once the good is provided, it can
international (or acquiescence to) liberalization policies be consumed by people or states that have not
cooperation. by offering targeted protectionist solutions. contributed to the costs of its provision. The
Improvements in communications and media optimal outcome for many individual states is,
appear to have strengthened the hand of special therefore, for everyone else to pay and to “free-
interests; liberalization tends to provide diffused ride” on the goods provided by others. As a
benefits to the economy as a whole, with the consequence of these two characteristics, it is
costs concentrated within increasingly vocal often hard to secure collective action for their
and motivated sub-groups. The increasingly provision without some form of compulsion, and
technical nature of some international economic the good is either not provided, or is not provided
policymaking (such as international regulatory in optimal quantity. Mancur Olson argued:
policy) makes it hard to command broad-based,
informed public support. On the other side of “… unless the number of individuals in a group
the communications equation, of course, is the is quite small, or unless there is coercion or
potential for a more effective global civil society some other special device to make individuals
to develop and advance a globalist policy agenda. act in their common interest, rational, self-
Yet that is still largely a vision, not yet a reality. interested individuals will not act to achieve
their common or group interests.”5
Maximizing the benefits of a global economy, and
minimizing its costs, requires more and more Within states, we know how to address this
international cooperation—to establish and enforce problem—the government often playing the
the rules or norms that deliver stable international principal role in the provision of public goods
financial markets, or rules-based trade and and enforcing contributions through the tax
investment agreements; to deliver enforceable system (for example, it is this compulsion that
rights across borders; to secure as much consensus forces taxpayers to finance defense expenditures).
as is possible for coordinated international action Internationally, however, there is no similar
in a given area, such as addressing environmental authority to force states to act, to contribute to
degradation or preventing the financing of a global public good against their will, nor to
terrorism; to resolve differences and tensions
5 
Olson (1965), p. 2.
arising from divergent domestic policy preferences;

6 The German Marshall Fund of the United States


force an agreement between states that, although such a significant share of the benefits from the
they may agree on the ultimate objective, refuse good’s provision that it is in its own interest to
to compromise on the approach taken. provide it unilaterally—even if no other country
subsequently contributes to the costs.8 In these
In such an anarchic international system,6 cases, the group is said to be “privileged.”9
the dispersion of power and influence gains
importance. When there are a large number of Even then, however, we cannot rest easy. Certainly
states of comparable size, it can be reasonably power appears to help matters, but it does not,
Even if states
assumed that many global public goods will alone, mean we can assume that any given public
wish to cooperate,
be under-provided because of the free-riding good will be provided (Keohane 2005). As Michael
problem—each would rationally prefer every Mandelbaum argues, “No iron law of history to provide global
other country to provide the good without itself or immutable tendency in international society public goods,
contributing.7 However, where there are only a impels the strongest member of the international the international
small number of states, the good is more likely to system to supply it with public goods.”10 system makes
be provided, both because the costs of agreement such cooperation
and organization are smaller, and it is more It is important to understand that the problem difficult.
readily apparent to other states if one chooses is a largely systemic one. It is not necessarily a
not to contribute (political pressure can thereby failure of will or ambition on the part of states
be brought to bear against the transgressor). that causes the good to be under-provided, but
the international system itself. Even if states wish
Even more likely to lead to the provision of some to cooperate, even if they wish to provide a public
global public goods is when at least one state is good, the system makes cooperation difficult.
so dominant (by virtue of its economic, political,
or military weight and influence) that it gains 8 
A stronger form of this point underlies what is commonly
known as Hegemonic Stability Theory—namely, that a dominant
power is required for the establishment of a liberal international
6 
International relations scholars have long been familiar with economic order. See Gilpin (2001) for a discussion.
this conception of the international system as anarchic. 9 
This is not true of all public goods. Barrett (2007) points out
7 
For example, every country would like the rest of the world that it depends on the type of public good itself, some of which
to address climate change by reducing carbon consumption, (so-called “weakest link” public goods) necessarily require all
without having to bear its own share of the costs. states to act.
10 
Mandelbaum (2005), p. 16.

Guardians of the Global System 7


3 The Need for Economic Governance

Governance occupies a special place among the Indeed, despite the increasing need for
various public goods that can be provided. Not international cooperation, global leadership
only is it a public good in and of itself, but by has failed to keep pace with these demands; the
overcoming some of the problems of an anarchic supply of governance falls some distance short
international system, it increases the likelihood of what is required, so much so that the future
of other public goods being delivered. To the of the international economic system is under
extent that it helps provide the means—or the considerable threat (Atlantic Council 2007).
Strong and opportunity—for collective action in other areas,
effective other public goods are more likely to be supplied— The record is not all bad. Governance has been
strong and effective governance regimes change provided in the past and sustained over time,
governance
the context in which states make calculations of perhaps most obviously through the Bretton
changes the
their self-interest (Keohane 2005). As Ahearne et Woods institutions set up in the immediate post-
context in war period. In some cases, the global community
which states al. (2006) put it, institutions of governance “are a
form of capital because, by relying on founding has proved remarkably successful in delivering a
calculate their number of important public goods; for example,
principles and internal governance rules, they
self-interest— the successful efforts in recent years to address
help tackle new issues as they emerge”.11
and provides the use of harmful CFC gases under the Montreal
the means for Governance, as defined by the Commission on Protocol (Barrett 2007). Equally, however, there
collective action. Global Governance in 1995, is “the sum of the are many more areas that one can point to where
But it is too often many ways individuals and institutions, public governance falls substantially short of its optimal
under-provided. and private, manage their common affairs. It is provision for the global economy. An example is in
a continuing process through which conflicting international monetary relations, where collective
or diverse interests may be accommodated and action has often been conspicuous by its absence.
cooperative actions may be taken. It includes formal
institutions and regimes empowered to enforce The fear remains that recent tensions and difficulties
compliance as well as informal arrangements that in a number of spheres may be symptomatic
people and institutions either have agreed to or of a wider retreat from “internationalism” in
perceive to be in their interest.”12 Governance policymaking, and a strengthening of nationalist
does not mean the same thing as government; tendencies. Ikenberry (2005a) argues that “it is
rather, it is a loose description of the many means striking that over the last few years, almost all
through which international partners can act. of the world’s global and regional governance
institutions have weakened,” which pointed to
Despite its importance to global cooperation, problems then facing (in some cases, continuing
governance falls victim to the same problems as to face) the United Nations, the European Union,
other public goods, too often under-provided. NATO, the G-8, and the Nuclear Non-Proliferation
As G. John Ikenberry puts it, “Even in the best Treaty. If we find ourselves staring at failure within
of times the collective management of the the institutions and agreements that have helped
international system is work in progress.”13 provide governance through much of the second
half of the 20th century, a failure that results from
declining internationalism, what chance do we have
11 
Ahearne et al. (2006), p. 5. of building new governance for the 21st century?
12 
Commission on Global Governance (1995).
13 
Ikenberry (2005a), p. 30.

8 The German Marshall Fund of the United States


In the economic sphere alone, the WTO faces foreign direct investment. And even as the threat to
a considerable challenge from the continuing the planet from climate change is widely accepted,
failure of the Doha Development Round of trade efforts to develop a workable successor to the
talks (for a fuller treatment of these issues, see Kyoto Protocol on climate change remain short
Corbet and Guinan 2008). The World Bank and on firm commitments from powerful key players,
the International Monetary Fund (IMF) require with significant disagreement remaining even
reform and strengthening, as does international on the basis for establishing who should bear the
cooperation to help address the growing energy burden of adjustment and how it will be funded. At the same
challenge. Concerns over the national security time as the need
implications of foreign capital, particularly through In other words, at the same time as the need for
governance is growing, its supply is faltering, for governance
sovereign wealth funds, have assumed a largely
perhaps even declining. The governance gap is growing, its
unwarranted place in domestic policy debates,
is widening. supply is faltering,
reinforcing a wider suspicion of the benefits of
perhaps even
declining.

Guardians of the Global System 9


4 A Transatlantic Responsibility

Bridging the gap between the growing demand The United States remains the world’s most
for governance and its supply should be at the powerful economy. Meanwhile, the European
very heart of transatlantic economic discourse. Union stands, by some margin, as the next most
significant economic power, comparable to the
The first and most fundamental reason why is United States in its population and economic
the economic power and influence of both the weight (see Chart 1: Economic size in perspective).
European Union and the United States, which Other candidates, perhaps most obviously Japan
The United States confer a particular responsibility for leadership to and China, are both markedly smaller economic
and the European help overcome global collective action problems: powers and do not have the same capacity for
Union are the global leadership—leaving the United States and
• Leadership from powerful economies is neither
world’s only the European Union as the world’s only genuine
a necessary nor a sufficient condition for
genuine economic economic superpowers (Bergsten 2002).
international cooperation, but it helps.
superpowers. The global trends that have diluted U.S. power
• It is often the case that the largest economies
affect Europe in the same way. “Europe has
benefit the most in absolute terms (though
become a powerful global player. But the world
not necessarily in relative terms14) from the
has changed too, only more so,” note Jean Pisani-
provision of global public goods.
Ferry and André Sapir.17 Nonetheless, among
• Their ability to provide such governance is prospective candidates for a global leadership
clearly strengthened by their greater ability role, the European Union stands out. It is a
to commit the necessary resources and to significant player in all trade discussions (and,
determine key elements of how the good should with the United States, dominates global trade and
be provided (hence power, including hegemonic investment flows), the world’s biggest aid donor,
power, can facilitate cooperation).15 boasting a genuinely global currency (the first real
challenger to dollar supremacy since it became
• The principle that the most powerful, richest states the global reserve currency, see Bergsten 2005).
should bear the largest burdens in the provision of The European Union cannot challenge the United
global governance is well established.16 States for outright leadership except in specific
areas—perhaps most obviously in some regulatory
14 
The significance of relative versus absolute gains is a key factor
in much of the international political economy, but need not issues (concern exists in the United States regarding
prevent cooperation in this instance. Keohane argues that the the degree to which the European Union has
complexity of multilateral relations reduce such concerns: “Most
issues of potential cooperation, however, from trade liberalization
itself become the global standard-setter)—but
to climate change, involve multilateral negotiations that make rela- even in these areas it is perhaps generally better
tive gains hard to calculate and entail little risk of decisive power described as occupying a position of competing for
shifts for one side over another … the relative gains argument
merely highlights the difficulties of cooperation where there is influence, rather than having assumed the position
tough bilateral competition; it does not by any means undermine of outstanding leader from the United States itself.
prospects for cooperation in general,” Keohane (1998), p. 88.
15 
Daniel Drezner, for example, argues that in the case of global As the world’s two largest economies, their
regulation: “A great power concert is a necessary and sufficient
condition for effective global governance”; Drezner (2007) p. 204. participation is more likely to be necessary
16 
For example, within the United Nations (2004 figures), the (although not always sufficient) to the provision
European Union’s (EU25) Assessment represents almost 37% of of almost any public good than that of other
the UN’s regular budget; while the corresponding figures for the
United States is 22% (the maximum for any single country with-
out which the U.S. contribution would be higher; indeed, in the 17 
Pisani-Ferry and Sapir (2007), p. vii.
UN’s early years, the U.S. bore a far greater share of the burden
reflecting its economic position).

10 The German Marshall Fund of the United States


Chart 1: Economic size in perspective

EU27 UNITED STATES JAPAN CHINA INDIA


16,000
14,610
14,000
13,195
In terms of
12,000
supplying global
public goods, the
GDP, US$ billion (2006)

10,000
United States and
the European
8,000
Union do not
get a free ride.
6,000
4,366
4,000
2,645
2,000
874

Source: IMF World Economic Outlook.

states. Both also have a reasonable expectation Neither does the European Union.
of benefiting more than other states from the
provision of global public goods. So while not Secondly, neither the United States nor the
excluding the possibility that other states or European Union alone appear able and/or willing
economic powers might also play a leadership role, to provide the economic leadership necessary for
it is with the United States and the European Union a genuine effort to address the policy challenges
that the primary responsibility for leadership lies. posed by globalization. Neither do they show a
willingness to defer to the leadership of the other.
Joseph Nye captures the special nature of this
responsibility when, referring to the United States’ It would not be realistic or fair of the global
responsibility for global public goods provision, community to expect either the United States or
he says: the European Union to bear that burden alone.
As Scott Barrett puts it, referring to the United
“This puts a different twist on former [S]ecretary States, “[I]t would be a conceit to believe that
of [S]tate Madeline Albright’s frequent phrase that the U.S. and only the U.S. can supply most vital
the United States is ‘the indispensable nation.’ We global public goods unilaterally.”19 Precisely the
do not get a free ride.”18 same argument applies to the European Union.

18 
Nye (2002), p. 142. 19 
Barrett (2007), p. 10.

Guardians of the Global System 11


But what is special about the transatlantic partners Finally, cooperation would help fulfill a number
is that, more than other economies in the world, of shared European and American interests. The
their failure to agree or cooperate condemns most European Union and the United States share,
efforts at global collective action to failure. Agreement along with other market-oriented democracies,
between the United States and Europe will not always a basic interest in furthering a global economy
be sufficient to ensure public goods are provided; that is open, liberal, and based on common
however, more often than not it will be necessary. rules and norms. As a recent Atlantic Council
Agreement report put it: “No two countries or regions
between the So neither would it be reasonable to expect either perceive orderly international economic relations
the United States or the European Union to stand organized along current lines to be in their
United States
aside and defer to the leadership (and interests) mutual interest as much as the United States and
and Europe will
of the other. Each has interests that it wants to be Europe.”21 They share an interest in influencing
not always be considered and respected in any leadership effort.
sufficient—but the development of globalization and ensuring the
As a result, the two need to find ways of working maintenance of a stable, open world economy.
more often than with one another that:
not it will be More specific American and European interests
necessary. • build on and leverage their common leadership are easy to identify. They include an orderly
responsibility; moderation of global economic imbalances;
• acknowledge that each has interests, and a more liberal trading regime (including not
just a reinvigorated multilateral agenda, but
accommodate those as much as possible in any
coordinated approach; also a new approach to dealing with regulatory,
behind-the-border barriers as in the transatlantic
• accept that compromise in some areas within marketplace);22 a long-term solution to energy
the transatlantic partnership is likely to entail issues; policy to address climate change; and
lower costs than a failure to secure global progress on development initiatives. Many of
collective action. these objectives are ultimately shared—though
not always recognized as such, particularly in
The need for such cooperation is perhaps most the short run. (For excellent surveys of common
obvious when the provision of a public good transatlantic interests, see Atlantic Council
depends on the participation of all countries, or at 2007, and Bergsten and Koch-Weser 2004).
least those representing a considerable proportion
of the world’s economic output or population—as, If successful, such cooperation would represent
for example, with a workable agreement to address more than the achievement of an economic
climate change. But it also matters in the context of objective; it cannot be separated from wider
those public goods that can be provided by a single
country or economy, such as regulatory standards
21 
Atlantic Council (2007), p. 22.

and approaches in certain globalized markets. In


22 
The deep bilateral trade and investment ties between the Unit-
ed States and Europe are described by Hamilton and Quinlan
these cases, transatlantic cooperation may not be (2005) as “… by a wide margin the deepest and broadest between
critical to the provision of a governance regime, but two continents in history – and those ties are accelerating.” The
demands of such a deeply integrated relationship are forcing
can help avoid duplication and redundancy, or the both politicians and officials in Europe and the United States
creation of two mutually exclusive, independent to develop new means of cooperation and governance which,
while not immediately relevant to many other countries, will be
systems that other states must choose between.20 relevant to, and benefit, more and more of the global economy as
global integration continues apace.
20 
See Barrett (2007) for an excellent overview of differences in
global public goods, and the different cooperative approaches
they each require.

12 The German Marshall Fund of the United States


foreign policy objectives because a stronger imposed on tradable goods, or carbon emissions
international economic system leaves us better permits, or of the economic regulation required
able to deal with collective political, security, and to prevent money laundering and cross-border
environmental challenges. It facilitates international financing of global terrorism), they will themselves
cooperation by changing the incentives facing risk generating economic disagreement between
policymakers in areas such as counterterrorism, states over the best way to tackle the problems.
disease, and climate change, or by bringing states The firmer the foundation of governance for
into an open international economy based on international economic relations, the less likely Iriuscidunt verci
transparency, accountability, and the rule of law. these are to harm international commerce. tinciduisi. Lis ad
And since addressing many of these challenges is What we achieve here, in terms of governance, elessi. Um alis
likely to have a clear economic component (think, determines much of what we can do elsewhere. dolor si. Ing eum
for example, of environmental standards or taxes dolorem nullaor
tionseq uipsum
ipsusto dolore
feum quiscil iscilis
er si et vent amcor
ad dio eum vel

Guardians of the Global System 13


5 Why the Transatlantic Economic
Relationship Requires a Strategic Purpose

Understanding the need is one thing, making it as the anchor currency; and an institution
happen is another thing entirely. The foundation geared at financing economic development
for future transatlantic economic cooperation (the International Bank for Reconstruction and
is weaker than might be first thought, despite a Development, now part of the World Bank Group).
largely impressive post-war record of cooperation
centered on the transatlantic relationship. The United States, as the undisputed global
economic hegemon, provided the lynchpin
The foundation Much of this can be traced back directly to the around which negotiations took place. It began
for future decisions made in the early 1940s (see Keohane to supply other public goods based on security.
2005 or Ikenberry 2005b) and the particular The United States helped ensure access to oil
transatlantic
circumstances that prevailed—not least the from the Middle East, in part by providing
economic
interplay between economic policy and wider security of supply (Mandelbaum 2005 and
cooperation is security concerns. Even before the United States Keohane 2005). More broadly, the United States
weaker than entered World War II, President Franklin D. also supplied a security umbrella for various
often assumed. Roosevelt’s administration had begun preparing regions of the world, most obviously Western
for the post-war economic order, drafting (with Europe and Japan, facilitating trade and economic
British Prime Minister Winston Churchill) the cooperation through stability, with the intention
Atlantic Charter that set out, inter alia, a “desire to that the two should be mutually reinforcing.
bring about the fullest collaboration between all
nations in the economic field” and a commitment Key to the United States assuming these
“to further the enjoyment by all states, great or responsibilities was the fact that its self-interest
small, victor or vanquished, of access, on equal was seen as being consistent with the objective
terms, to the trade and to the raw materials of of a stable, open international order, particularly
the world which are needed for their economic given the wider foreign policy and security
prosperity.”23 These objectives embodied a clear concerns that characterized the Cold War era.
desire to avoid the economic turbulence of the The United States was both the pre-eminent
inter-war years when a return to economic economy, best able to benefit from openness, but
nationalism had ended the first era of globalization. also needed to build up European economies as
economic partners and as a bulwark against the
The Bretton Woods Agreement, focused on Soviet threat and the spread of communism.
fostering global economic stability in the post-war
period, put the spirit of these goals into policy. Moreover, domestic political interests in the
What emerged were, in effect, a number of public United States (and Europe) were supportive of this
goods—a stable, open trade regime (the General internationalism. As Ikenberry (2005b) argues,
Agreement on Tariffs and Trade, or GATT, and the domestic political debate then prevailing in
subsequently the World Trade Organization, the United States emphasized the “New Deal-
or WTO); a monetary regime founded on the era liberal ideas about economics and politics
gold standard, facilitated by the creation of a and security”—and there was a huge degree of
new institution (the IMF) with the U.S. dollar confluence in interests among domestic voices:
“Realist geo-strategists, free traders and business
internationalists, anti-communist crusaders,
The Atlantic Conference: Joint Statement by President
23 
old-style Atlanticists, and one-world idealists all
Roosevelt and Prime Minister Churchill, August 14, 1941 (often
known as “The Atlantic Charter”).
could support the synthesis of internationalism

14 The German Marshall Fund of the United States


and national security liberalism that defined the enemy in the form of the Soviet Union
evolving post-1945 American vision of order.” weakening a sense of need for a community of
security (see, for example, Kupchan 2006).
It also rested on a degree of complicity from
the United States’ partners in Europe (and • Last, the domestic coalitions that sustained
Japan), many of whom wanted U.S. leadership, support for post-war policies appear to be
despite occasional grumbles to the contrary no more; a quick look at Ikenberry’s (2005b)
(Kagan 2004 and Lundestad 2003); in the analysis captures the change. Realist geo-
Iriuscidunt verci
monetary field, for example, Germany and strategists, rather than facing a challenger
tinciduisi. Lis ad
Japan were the largest holders of dollar reserves, contained and ultimately undermined by
effectively paying a security tax for U.S. the open world economy (the Soviet Union), elessi. Um alis
support (Mandelbaum 2005). Underpinning are instead facing a system in which those dolor si. Ing eum
the relationship was an understanding that same economic forces are now the source of dolorem nullaor
“military-political considerations almost growth for major emerging players like China, tionseq uipsum
always took precedence over economic ones.”24 India, and Brazil, and work to strengthen ipsusto dolore
This was the grand transatlantic bargain. some potential security challengers through feum quiscil iscilis
worldwide demand for natural resources. er si et vent amcor
While American power helped provide the Meanwhile, the poor quality of debate on ad dio eum vel
foundation for much contemporary economic trade and openness too often brings “one
governance, it was far from being the only factor. world idealists,” increasingly emphasizing
The same conditions do not exist today, helping to their commitment to fair, rather than
explain the apparent decline in the willingness of simply free, trade, and the pursuit of global
states to supply governance observed in recent years: environmental and labor standards, closer to
• First, and most obvious, is the decline in the protectionist lobby. Finally, Atlanticists and
American power in relative terms. Even as it anti-communist crusaders can no longer rely
remains the world’s single most important on a broad-based appeal against the threat of
communism to solidify an open global order
economy, and the most dynamic in the
based on the transatlantic partnership.
developed world, its relative power has been
eroded by the growth of other economic The degree to which this post-war era was an
powers—and an increasingly assertive role they exception, not the norm, is all too easily under-
have been able to play. estimated.
• Second, perhaps the most obvious example of A new transatlantic bargain?
a rival economic power is the European Union
itself, which has asserted its interests forcefully What would a new transatlantic bargain, based
in some spheres (most apparent in trade policy). on leadership of the global economy, look
like? What could the underlying principles
• Third, there has been a gradual unwinding of be? What would the next era of international
the post-war transatlantic bargain between economic cooperation look like?
the United States and Europe—geopolitical
change, and the apparent lack of a common

24 
Lundestad (2003), p. 289.

Guardians of the Global System 15


There are some clear messages for both partners. to rebuild and focus on a sustainable political
and economic resolution to intra-European
For the United States: rivalries. Now, however, that orientation
must change. The European Union needs
• Above all, it means listening to, working with,
to move from what British Prime Minister
and compromising with the European Union,
Gordon Brown has called “trade bloc Europe
in a way befitting a near-indispensible partner.
to global Europe.”26 Encouragingly, there are
That, in turn, requires moving toward the more
Above all, the welcome steps in this direction, with greater
“globalist” approach to foreign policy taken
United States attention being paid to international economic
by the European Union, which, as Ivo Daalder
must listen to, policymaking by the Barroso Commission
points out, is largely based on the premise that
and compromise than its predecessors (Sapir 2007).
today’s policy challenges, largely created by
with, the European global integration, require cooperative solutions • It also means that the European Union, in
Union, a near- among states.25 deepening European integration, will have to
indispensible give greater consideration to the external impact
• It means for the United States to recognize that
partner. of its own internal liberalization and legislative
the European Union has a valid interest in U.S.
Meanwhile, the processes (see, for example, Peterson 2001)—in
domestic policy.
European Union particular, on the deep transatlantic trade and
must accept that • It also means that the United States needs a investment relationship. Again, the Barroso
its economic better understanding of the European Union— Commission is taking steps in this direction.27
power comes with its capacity, its functions, its competencies (and
• And, as for the United States, it means
responsibility— how these are shared with the member states);
Europe must recognize that its internal
and become more where the European Union is a united group and
economic policies are a matter of genuine
can act; and where it cannot. This also requires
outward-looking. interest to its American partners.
a degree of sensitivity as to why the European
Union does not always speak with one voice—it In this regard, Europe has a great story and
is, and will continue to be, an unprecedented a wealth of experience to offer. Through the
means of international cooperation, not a nation unprecedented degree of international economic
state. A failure to recognize this can lead to cooperation among its members, the European
excessively high expectations of the European Union provides regional public goods in a wide
Union, a factor that Peterson (2001) argues range of areas from the economic (the open
marred transatlantic relations in the 1990s. pan-European market built through progressive
liberalization, the intra-eurozone macroeconomic
For the European Union:
stability afforded to countries which have adopted
• It means accepting that, above all, power the euro as their currency, and the influence in
comes with responsibility. The European global trade talks provided by negotiating as
Union has often looked inward as a response to a single body) to the political (cooperation on
globalization, drawing on the idea that Europe
can insulate itself to some degree from the 26 
Brown, G. (2005). According to a recent U.K. government
challenges of globalization, an entirely rational paper: “Europe has the opportunity and, more importantly, the
responsibility to work to deliver an inclusive globalization that can
and necessary response to the demands of be a force for good across the world,” U.K. government (2007).
the post-war era when Europe’s priority was 27 
For example, European Commission (2006).

25 
Daalder (2003).

16 The German Marshall Fund of the United States


justice issues and efforts to leverage the combined For both partners, it means moving beyond
influence of member states in the foreign policy earlier political tensions and recognizing that this
sphere). The parallel between the European cooperation is neither about spreading a particular
success story and what is required globally is American economic model, nor a continental
startling—and while Europe benefited from a set European economic model, but the building of the
of very specific circumstances that gave rise to next era of global economic governance on shared
and facilitated its creation, Europe’s responsibility principles. It means putting transatlantic economic
should be to use this experience and expertise cooperation at the service of the global economy. Transatlantic
such that others might benefit in a similar way. cooperation
But the potential for progress, and agreeing on a
The United States could see this as an opportunity. new transatlantic “economic bargain,” is perhaps should be put
Europe’s experience, and the source of its legitimacy, limited by, and linked to, defense and security at the service
has immense value, and the stronger the European questions. Remember, the post-war bargain traded of the global
Union is, the more influential a partner it can be. the American security umbrella for complicity economy—to build
As then-U.S. Secretary of State James Baker put it in the U.S.-led liberal economic order. Where we the next era of
in 1989: have come from will no doubt influence where global economic
we can go—and in this case, it may be difficult for governance.
“As Europe moves toward its goal of a the United States and Europe to agree on a new
common internal market, and its institutions bargain regarding economic cooperation without
for political and security cooperation evolve, also coming to a simultaneous bargain on foreign
the link between the United States and the policy issues. If one side is, or perceives itself to
European Community will become even be, shouldering a disproportionately large burden
more important. We want our transatlantic of responsibility in defense, security, and foreign
cooperation to keep pace with European policy issues, would it be willing to accept a more
integration and institutional reform.”28 equal role for the other in economic policy?
28 
Baker (1989).

Guardians of the Global System 17


6 Prospects for a Cooperative
Partnership

Setting these issues aside, at least two significant compromise of a liberal order “that would not
obstacles stand in the way of cultivating a new ultimately trump the domestic concerns of states
transatlantic bargain. participating in the system.”30

The first is the absence of political leadership. Indeed, with the continued failure to bring
The relationship has certainly been put under the Doha Development Round to a successful
strain because of a number of high-profile conclusion, the chief characteristic of contemporary
Political will for trade disputes (among them, bananas, aircraft global trade liberalization efforts is bilateralism.
genuinely close “hush-kits,” subsidies to aircraft manufacturers, There is considerable concern that this “spaghetti
genetically-modified organisms, and hormone- bowl” of preferential trade agreements can not
cooperation
treated beef)29—although these, and other, only lead to trade diversion (which can have a
seems to be
disputes still cover only a small fraction of non-negligible economic cost if it leads to imports
lacking. But strong overall trade, and disagreements were common from less competitive sources), but that it may
political leadership even under close post-war cooperation. also threaten the global trade system by eroding
is required at the the key principle of non-discrimination that lies
highest levels of More significant, perhaps, is the approach that at the heart of the GATT/WTO (Wolf 2007 and
government. each is taking in global trade liberalization, an Bhagwati 2005). On the one hand, it makes the
area of economic policy where the European system more complex from an administrative
Union and the United States have previously perspective due to the plethora of rules necessary
been characterized as operating a de facto G-2 for preferential deals to function. On the other,
leading global policy (Bergsten and Koch- there is suspicion that it encourages powerful
Weser 2004). It is widely recognized that their economies—in particular the United States and
ability to finalize agreements on a number of the European Union—to engage in a competitive
sensitive areas led directly to the conclusion grab for market access. In other words, far
of the Uruguay Round of trade negotiations from putting the joint stewardship of the global
(see, for example, Pollack and Shaffer 2001). economic system at the heart of their international
The trend, however, appears to be toward economic policy, the European Union and the
domestic considerations carrying a progressively United States risk doing precisely the opposite.
greater weight in calculations of economic self-
interest. Meunier and Nicolaidis (2006) point to At the highest levels, political will for genuinely
developments on both sides of the Atlantic: close cooperation seems to be lacking. John
Peterson describes the relationship as being
• The United States began to lower its characterized by “profound ambivalence,” resulting
commitment to multilateralism after calculating from increasingly “powerful domestic constraints,
that bilateral deals might better advance some weak political leadership, and a set of trade
of its key interests, particularly in services and relations that have become emphatically issue-based
intellectual property. (i.e. often uninformed by overarching strategies).”31
• In the European Union, public demands Yet the evidence suggests that a cooperative
for protection from global integration relationship requires strong political leadership
and liberalization go beyond the post-war
30 
Meunier and Nicolaidis (2006), pp. 510–511.
See European University Institute (2002) for a detailed
29 

overview. 31 
Peterson (2001), p. 45.

18 The German Marshall Fund of the United States


at the highest levels of government. The steps institutional dialogue in 2007 (the Transatlantic
forward taken during the 1990s, under the auspices Economic Council) to provide political impetus
of the New Transatlantic Agenda (NTA), were, to transatlantic marketplace discussions already
according to Pollock and Schaffer (2001), still risks being swamped by demands for the dialogue
largely driven by these “inter-governmental” to take on a range of issues more global in
links rather than links at lower levels of nature—most notably sovereign wealth funds.
government or among civil society groups.
The European Union and the United States
The European
Considerable progress has been made over the must not underestimate the importance of deep
Union and the
years, particularly in dialogue that relates directly personal contacts in building a foundation
to the development of a deeper transatlantic for strategic cooperation. Closer formal and United States
marketplace (Phillipart and Winand 2001). informal ties—involving consultation, dialogue, must not
A growing number of “trans-governmental” and efforts to build mutual understanding— underestimate
networks (i.e. official, governmental links not change the context in which policymakers the importance
controlled by the policies of heads of government), make calculations of self-interest, and making of deep personal
such as those involving regulatory agencies, it more likely that American and European contacts in
have emerged in many areas, most notably in approaches, policies, and conceptions of building a
financial market issues. Anne-Marie Slaughter interest will be complementary, and that those foundation
argues that such networks of officials can provide complementarities can be sustained in the future. for strategic
a considerable degree of governance,32 and cooperation.
their development across the Atlantic is to be This is by no means an argument for more set-
encouraged. But progress across sectors has been piece summitry, but relationships and dialogue
mixed, and has tended to fall short of what had matter. It is widely recognized that there are
been hoped, despite pressure from the Transatlantic significant structural weaknesses in the existing
Business Dialogue, an influential CEO-level channels of dialogue—both in the bilateral
group that has done much to advance the cause framework, and in each side’s approach to dialogue
of a more open transatlantic marketplace. in recent years (European Commission 2005).33

Beyond the transatlantic marketplace, however, The European Union is itself a perfect example
there is little evidence that the dialogue between of the utility of such strong relationships, and
the highest levels of government is sufficiently how they can embed cooperation. Robert
deep as to be able to support the kind of Cooper describes the European Union as
sustained cooperation that is required over representing “a quality of political relations
the long term. The EU–U.S. Summit process and a stability in political relationships never
appears relatively weak, struggling to secure known before. To create an international society,
significant progress, and has been reduced international socialization is required.”34 The
from a twice-yearly exercise to an annual event
since the NTA was signed. And it surely says 33 
Among the defects of the New Transatlantic Agenda identi-
fied by the report are: in the United States, a low public profile
something about the adequacy of the existing for transatlantic dialogue, and a tendency for political represen-
level of cooperation when the creation of a new tation in the dialogue to be “…dependent on the personal incli-
nations of senior officials” (p. 6); and in the European Union, a
lack of transparency in European processes “… leading to a low
sense of ‘ownership’ on the part of the EU’s member states.” (p. 5)
See Slaughter (2004) for a thorough overview of such groups,
32 

and their potential for governance. 34 


Cooper (2003), p. 36.

Guardians of the Global System 19


transatlantic partnership need not enjoy the responsibility can still be made. Despite a number
same depth of personal contact and dialogue of concerns, recent survey evidence (Perspectives
as European ministers and officials do on Trade and Poverty Reduction Key Fundings
within the European Union, but it is a useful Report, 2007) suggests that a majority of both
model. Ivo Daalder made this point clearly Europeans and Americans continue to hold a
during the period of tension over Iraq: favorable view of international trade (75% and
64% respectively); of freer trade (69% and 60%);
A domestic “Contrast the paucity of recent transatlantic of the promotion of trade with poor countries
coalition of personal interactions with the European norm. (76% and 69%); and, small majorities even look
European foreign ministers see each other as favorably on globalization itself (53% and 52%).
support will not
often as three times a month. There are monthly
be built without
General Affairs Council meetings of the EU, the Perhaps more striking in this context, majorities
leadership—and quarterly meetings of the European Council, of both Europeans and Americans believe that
a persuasive case biannual and annual meetings of international free trade makes the world more stable and that it
to which people organisations ranging from NATO to the United increases prosperity around the world. Moreover,
can relate. Nations General Assembly, and frequent bilateral clear majorities in both economies supported an
contacts. Each meeting provides an opportunity to initiative to deepen transatlantic economic ties
resolve outstanding questions—and often enables (69% in Europe and 64% in the United States)—the
countries to pre-empt disagreements that would most popular reason for which was because it
otherwise occur. Of course, frequent contacts do would “help the European Union and the United
not guarantee that conflict will be avoided, nor States to set standards for the world economy.”
is infrequency of contact a guarantee of conflict.
But it helps create mutual understanding, making Political leaders would appear to have some
conflict less, and agreement, more likely.” 35 foundation on which to build support for
engagement. In the United States, there may
The second problem facing the United States be an opportunity to appeal to the tradition of
and the European Union is seemingly weak global engagement in the post-war period. In
domestic support for their global mission, Europe, the challenge is perhaps more difficult,
which cannot be separated entirely from the because while survey evidence indicates a
fact that there has too often been little effort similar attitude to economic openness as the
paid to communicating a strong political case in United States on aggregate, that picture varies
favor. The tone of public debate gives cause for widely across member states. Support is weakest
concern; in both the United States and Europe, toward international trade in France and
economic populism has become a siren sound among the newer member states surveyed.
in public discourse. Populism and skepticism of
the benefits of globalization have been apparent The public views outlined above are by no means
ahead of the November 2008 U.S. presidential universal, and exist alongside considerable fears,
election, particularly since (at the time of this particularly over foreign investment and the impact
writing) vibrant primary contests were ongoing of openness on jobs and domestic economic/
to identify each party’s nomination for office. social inequality. The challenge will be to address
those concerns without compromising global
Nonetheless, there are some grounds for believing responsibilities. However, a domestic coalition of
that an argument for openness based on global support will not be built without leadership—and
a persuasive case to which people can relate.
35 
Daalder (2003).

20 The German Marshall Fund of the United States


7 Adopting a Mission

Today’s increasingly integrated global economy gains from the removal of trade barriers. But for
brings immense opportunity, but also a wealth as long as transatlantic cooperation is conceived
of challenges in the foreign, economic, security, of in terms of short-term gains or costs and
health, and environmental fields. More and tradeoffs, political and public support will not be
more, those challenges require solutions sufficient to sustain the longer-term role of the
developed and delivered by international transatlantic partners. Can the United States and
cooperation. The international system makes the European Union build the shared political
delivering such cooperation more difficult than understanding, a sufficient web of dialogue and If the United
is often appreciated—and confers a particular consultation, or strong-enough domestic coalitions States and
responsibility on the most powerful economies of support necessary to sustain cooperation? European
to lead these efforts. In particular, it means
If the United States and the European Union begin Union act as
leadership to provide genuine global economic
to define their interests broadly—as guardians guardians of the
governance—the foundation not only for
of the international economic system—and international
sustaining the positive side of our economic
inter-dependence, but also, through providing their actions reflect that role, it will help secure economic system,
the means for cooperative action, the foundation greater legitimacy for their wider influence in it will help secure
for future international cooperation to address the world. As Joseph Nye points out: “We gain greater legitimacy
the wider challenges of globalization. doubly from such a strategy: from the public for their wider
goods themselves, and from the way they influence.
Making this argument for transatlantic leadership legitimize our power in the eyes of others.”36
in global economic governance matters almost
as much as the argument itself. Before one can To Atlanticists, the value of stronger transatlantic
truly look at how to address a problem, one needs economic cooperation is self-evident. To
to understand why. The ability of the United others, the idea can, like its foreign and
States and the European Union to play the role security counterparts, sometimes be rather
outlined is constrained precisely because that role cynically viewed as a solution looking for a
is not well understood, and is, without doubt, problem. For good or ill, it shouldn’t be.
poorly communicated to the public. Both sides 36 
Nye (2002), pp. 143–4.
have a tendency to think of their interests too
narrowly—in terms, for example, of the potential

Guardians of the Global System 21


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