Lecture by Mojmir Mrak PhD

Going 100 years back

Mojmir Mrak, PhD, Research Fellow and Professor of International Finance

In a high-profile lecture hosted by the Inštitut Naprej in mid-April, the renowned economist highlighted the importance of current developments in a world that is moving from a more or less unipolar to a multipolar structure, a process that is accompanied by growing tensions between major political and economic players. The world is moving from a unipolar system dominated by the US and international organisations to a multipolar and transactional system, with increasing geopolitical risks. This change has implications for global trade, inflation and food security.

Mrak highlights three main factors that are accelerating the transition to a multipolar world:

Technological change, including artificial intelligence and advances in recent years;
Changing globalisation – certain segments (finance, IT) are still experiencing strong globalisation, while others are undergoing transformation;
Different models of globalisation – Chinese model – comparable to 19th century British imperialism – the Silk Road is that with investment they will get access to markets, access to repro materials, virtually completely worldwide. They are strategically investing and buying shares in ports, not that they are the majority owner, but they want a strategic position and they are financing routes to the interior of the continents.

It is important to understand that the Chinese presence is growing rapidly in regions where it was almost non-existent before: “Until five years ago, the Chinese were non-existent in Latin America, but now in a few years they have become key investors in Argentina, Brazil for repro-materials such as rare earths.”

Policy shifts and changes in global economic governance

After the Second World War, under the strong influence of the US, a system based on relatively clear rules of the game was established under the guidance of international institutions. This system is now being transformed into a different set-up with different legalities.

Key differences between the old and the new system:

Old system: unipolar with US dominance, strong international institutions, globalisation focused on the economy, integration of China into the world economy;
New system: more powerful players with growing tensions, weaker international organisations (WTO not functioning, IMF under question), economics becoming an instrument to achieve strategic objectives, political risks are an integral part of any decision-making.

””What Trump is doing with tariffs is a direct dismantling of the system America has been building for 40 years.”

The consequences of these changes include fragmentation of supply chains, diversion of foreign investment and differentiation of inflation rates across regions.

Trump’s protectionist policies and tariff measures

In his second term as President, Trump has surrounded himself with very loyal colleagues who follow him unquestioningly, and the first months of his second term have brought an aggressive customs policy that has triggered a series of drastic measures. In his first term, Trump has had to use the traditional structure of the Republican Party to recruit. These were not his people, his fanatics, whereas now, with a more convincing victory, he has been able to select people for these key positions on the basis of their loyalty to him or their adherence to his ideas.

Trump’s safeguards are at pre-World War II levels; we are returning to a different world. His commitment to protectionism stems from: his belief that tariffs are an instrument to fill the budget (as in the US at the end of the 19th century), the need for fiscal revenues because of promised tax cuts, and the belief that trade deficits are unfair and harmful (although he only looks at trade in goods, not trade in services, where the US has a surplus)

Tariff measures to date:

These are not reciprocal tariffs, but pre-targeted against those who are a “problem” for Trump, notably China and the EU.
Methodologically incorrect tariff rate setting (example of Switzerland and 39% tariffs due to one-off gold exports).
Freezing of measures for 90 days due to financial market pressures.

Changed position of the dollar in the world

Traditional crises have seen the price of gold and the value of the dollar rise. Now, however, the value of the dollar is falling, indicating a different pattern of crisis. The dollar’s role in the world is changing and it is losing its position as the only global currency. The dollar is no longer the main currency for payments, but is already on a par with the yuan. As foreign exchange reserves, the dollar is still dominant because China does not want the yuan to serve this purpose, mainly because, in that case, the yuan would have to become convertible.

Where will this world go?

Mrak believes that “the cards are now being shuffled for the next decades” and that this is not just a cyclical change of a few years. He identifies three main groups of countries in this new order:

The West, which, with the advent of Trump, is divided between the US and other Western countries
the East, dominated by China
the South, with India leading the way

The essential changes include: parallel payment systems, the increase of the yuan as a currency of payment (already at dollar level), oil trading in different currencies, not only in dollars Everything Trump is doing now is breaking the West. The EU may be able to do something on trade together with Canada, but there will be no more united West, Mrak believes.

Challenges for the European Union

The EU is facing a structure that is less adaptable to rapid change. The transition from a rules-based to a transactional system brings major challenges.

Historically, there have been two visions of the European economic integration process:

The French vision of a “European State” with trade protection and protection of the domestic industrial sector
The Atlantic view of Europe, strongly linked to the US, both economically and in terms of security, sharing liberal values

The second concept prevailed – Europe liberalised and opened up at a time when the world was governed by an orderly structure and an international economic order based on the rules of the game. The European Union as a concept was very appropriate in circumstances where the rules of the game prevailed, as we have had for the last decades. Let us not forget that the European Union is made up of small countries, Mrak points out. And the few countries that do not yet know they are small are paraphrasing a famous politician.

The key challenges for the EU in this context are:

More openness compared to competitors (more affected by protectionist shifts)
Rigid competitiveness policy
Disunity between countries (need for consensus on decisions) If the EU wants to be a partner at the global negotiating table, it will have to decide and decide on foreign and security policy, not just seek consensus.
The problem of decision-making (need for qualified majority for foreign and security policy)
Budgetary challenges (conceptual illogic between fiscal rules and the need for more investment)

“Slovenia is small and will get by, but not at the level we would like if the EU as a whole were to function as a serious actor.”

Slovenia’s challenges

If we have decided to have our own country, we need to know roughly what we are going to do with it. Let’s remember Covid, how the trade routes in medical devices started to sprout up, Mrak warns. As a small EU member state, Slovenia needs to actively participate at EU level, but at the same time faces internal challenges:

Pressures to consolidate public finances
Low competitiveness (stagnating or falling on the competitiveness ladder)
Need for structural reforms (taxes, pension reform)
Organisational weaknesses in the coordination of European affairs

The lecturer therefore proposes the development of scenarios for different options for the development of the EU, the reflection on self-sufficiency in food, energy, etc., the restructuring of budgetary priorities (defence, wages, social transfers), the systemic improvement of competitiveness, better organisation of European affairs.

As a final thought, Dr Mrak stresses that “Slovenia is small and will get by, but not at the level we would like if the European Union as a whole were to function as a serious actor.”