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Changes in the international economic order in the post-pandemic and war era and challenges for Korea economic security, international finance

Author Kyungsoo Kim, Hongkee Kim and Chi-Young Song Series 22-26 Language Korean Date 2022.12.30

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The COVID-19 pandemic and the Russo-Ukrainian War marked the end of the post-Cold War era and the beginning of a new Cold War era. From the global economic perspective, it was an event in which cracks occurred in the integration of the world economy, which was completed with China's accession to the WTO in 2001, and de-globalization has begun.

However, these changes did not happen suddenly, and many factors have contributed to this turmoil. Among them, the most fundamental cause can be attributed to the United States’ declining status as a hegemon, which continued to lead the world order since World War II. The declining status as a hegemon is not simply due to the declining trend of the US share of world GDP. Compared to the advanced countries, including the United States, the economies of emerging countries have made a rather explosive growth in the recent decades. Above all, China has achieved strong economic growth and military power to the extent that the G2 has been crowned.

However, the status of the dollar as a reserve currency is still dominant. The dollar occupies an overwhelming share in world foreign exchange transactions, and as a global safe asset and settlement currency for international trade and commodity transactions, it is incomparable to any other currencies. The US Federal Reserve's monetary policy is having a huge ripple effect on the world economy by generating a global financial cycle.

The declining power of the United States’ status as a hegemon should be found within the failure of domestic politics, which has caused much societal conflict and polarization such that no consensus can be reached on everything from masks to abortions. The failure of domestic politics is largely responsible for the vast societal inequality. Loss of jobs caused by China trade shock, automation (from digital technology development) and labor outsourcing (from GVC enabled) has contributed significantly to inequality. The failure of domestic politics also occurred in other center countries of the global world, such as Britain and France.

The failure becomes as a hefty constraint on foreign policy as a hegemon. Moreover, emerging and developing world has brought a skeptical view of the liberal order, the basis of the Bretton Woods system led by the United States.

Continued rise in political conflicts and polarization has prevented science and technology from effectively coping with the aftermath of the pandemic, and vaccine selfishness in advanced countries has contributed more developing countries to fail. As of early 2022, 90 countries, or nearly 47% of UN member states, are receiving financial assistance from the IMF.

President Biden has declared that ‘America is back’. However, the United States cannot return unless the problem of domestic politics is resolved. National Security Strategy 2022 is nothing but the continuation of National Security Strategy 2017 under Trump government, and the IPEF proposed to countries in the Indo-Pacific region emphasized fair trade, not free trade.

Witnessing the humiliating U.S. withdrawal from Afghanistan, Niall Ferguson noted the historical fact that retreating from the status of a hegemon was never a peaceful process and expressed concerns that the world could become embroiled in unnecssary conflicts. His concern became a reality with the Russian invasion of Ukraine in February 2022.

The Russo-Ukrainian war has proved the causal relationship that free trade resolving conflict and promoting peace is fictitious. Opinion leaders accused China and other revisionist countries of taking advantage of the international economic order established by the United States. Without considering economic legitimacy, the argument that the global value chain should be reorganized into countries those share values is gaining more persuasion. The war was a game changer for the hegemon, the United States. A bipartisan agreement has reached when it came to China.

The post-pandemic/war world is expected to be divided into three: developed countries led by the US, Eurasia led by China, and the Global South. The economic interests of the United States and China need each other. However, it is difficult to expect that the new Cold War, wrapped in strategic competition, will end soon. Naturally, it seems inevitable that the geopolitical and geoeconomic risks surrounding Korea will escalate.

In the era of the new Cold War, economic security is a key word in foreign policy. Economic security is the ability to identify and control risks (such as geopolitical, geoeconomic or climate change) to a country's sustainable prosperity. Economic security, so defined, may sacrifice current prosperity for future prosperity. Even if the two countries are allies, the economic security of one country may conflict with the economic security of the other.

Strengthening economic security is a challenge. There are many equations to solve. Define core national interests and goals, list strategic assets and liabilities, identify areas of weakness in foreign policy through mapping between assets and liabilities, and implement policies to fix challenges in an efficient way, etc. In the end, the proper governance structure of the organization in charge of economic security must be established.

We would like to thank to Drs. Jaewoo Lee and Rudolfs Bems at IMF, Senior Research Fellow Scott A. Snyder at CFR, Senior Fellow Joshua P. Meltzer at Brookings, Chai Matthew P. Goodman at CSIS, Managing Director Barbara Weisel at Rock Creek, and Professor Lee Seung Joo at CAU for their generosity to spend time and patiently consult with us on this project. In addition, thanks to many experts and colleagues who shared their wisdom on the various topics covered in this project.

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