The rules-based order that had guided much of the world since World War II has broken down. It has most definitely fractured on global trade, and, after a tumultuous G-7 meeting this month, followed by an unprecedented summit meeting in Singapore, appears to be changing for global diplomacy as well. Another major fault line in the West has been immigration policy and recent political developments in Germany suggest that this may be an area that soon sees drastic change in Europe.

Sceptics have long argued that the rules that have prevailed for seven decades were established by the US and its allies, and have, in a clever way, been “imposed" on all other countries through a framework of post-war institutions, and have generally been framed to benefit the educated elite. The argument goes that this imposition has alienated many countries that have been left out of the development process and many segments of society within their own countries. What we are now seeing is a “reaction" from those excluded segments. At the same time, it is open season for countries that have always nurtured nationalistic pride—such as Russia and China—to join the party.

Last week, India joined China, Canada and Europe in responding to US tariffs on steel and aluminium. The list of products that are now subject to retaliatory tariffs reads like that of a children’s game of tit for tat—felt-tipped pens and playing cards in Canada, peanut butter and orange juice in Europe, walnuts and almonds in India, and soybean, electric cars and salmon in China. We are in the midst of a full-fledged global trade war and the World Trade Organization (WTO) seems ill-equipped to deal with this as the instigator of the violation of its principles is the US, a principal member. Those principles—of predictability, transparency, non-arbitrariness, non-discrimination, and friendliness to developing countries and the environment—appear to have all been violated at the same time. The experience of history strongly suggests that trade wars have never ended well. They will not this time too, but the experiment will prove very costly.

On global diplomacy, the US appears to be alone in attempting to change the rules of the game. US President Donald Trump is publicly taking on his allies and talking with his adversaries. Global diplomacy has always had a healthy dose of ego and personality (remember Henry Kissinger?) but when a country’s long-held principles and positions become hostage to narcissism and whimsicality, you have the makings of disaster—most particularly when it comes from the most powerful country on earth. Capriciousness has the long-shot chance of producing breakthroughs, but as The Economist points out, the “reality show" in Singapore was long on show and short on reality. Trump, who prides himself on being the master of the “art of the deal", is really the master of the “art of the show". The real art of deal-making has not changed in centuries. The demonstration effect of this show, though, has negative consequences for the world, because it emboldens dictators and charlatans.

The immigration framework that has prevailed in the West is another area under threat. More than 12 million people (out of a population of 83 million) living in Germany in 2017 were born in another country. Germany has admitted nearly two million people who have left the conflict zones of Afghanistan, Iraq and Syria. The rapidity and magnitude of that increase has led to deep fractures in German society and politics. German immigration policy and, consequently, European Union policy will likely get rewritten in coming years.

The student and labour markets in the West that have been open to the best and brightest from around the world will become less so. The US is in the midst of a major overhaul of its H-1B category of employment visas and it seems likely that skill-based immigration rules will change in Europe as well. Skilled immigrants have been at the centre of entrepreneurship and employment creation in the US and the long-term effects of these changes are unlikely to be beneficial to its economy.

With trade and immigration more inward-focused and diplomacy becoming more unpredictable, the world is heading towards uncharted territory.

For India, the timing is most inopportune. At its stage of evolution, India is one of the greatest beneficiaries of the older order. It stands to benefit from open trade in goods and services (with friendliness towards developing countries) as it becomes more prosperous and integrated within the global system. As it upgrades its human capital, global migration would have remained one release valve for employment. Indian diaspora remittance remains the magic glue keeping our balance of payments in order. With global trade and migration under threat, the cushion of time to reach middle income is being reduced.

As a consequence, pressures to “transfer" wealth within India’s borders will increase. Excessive taxation of the rich will constrain entrepreneurship, and, in turn, impact employment opportunities. India must prepare for this contingency, but, at the same time, it must champion a return to the older rules-based global order.

P.S.: “You have to learn the rules of the game and then play better than anyone else," said Albert Einstein.

Narayan Ramachandran is chairman, InKlude Labs. Read his earlier columns at www.livemint.com/avisiblehand

Comments are welcome at
narayan@livemint.com

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