US and Europe are at odds and threat of a disastrous end to era of free trade is very

Israel’s retaliatory raid on Iran provides a sharp reminder of how geopolitics is distorting global economic relations.

The immediate reaction to events in the Middle East is seen on financial markets, where shares have fallen back from their highs, the dollar has strengthened and gold reasserted itself as a safe haven.

Behind the market headlines, Russia’s war on Ukraine and Israel’s defence against Iranian aggression, in Gaza via Hamas and directly with drone and missile attacks, is in danger of shattering globalisation.

The peak of global co-operation was reached in the aftermath of the great financial crisis when then prime minister Gordon Brown created the G20 in the heat of economic catastrophe.

The exclusive club of rich G7 nations was widened to include new economic powers including India, China, Brazil, Russia as well as Saudi Arabia.

Collision course: The US and Europe are at odds on trade

Collision course: The US and Europe are at odds on trade

The era of Western domination of economic and strategic decision-making was being displaced by a new global steering group empowering rising nations.

The Group of Seven – the US, Japan, Germany, UK, France, Italy and Canada – was reduced to a secondary role. How quickly all that has changed. At this week’s IMF and World Bank sessions in Washington, the key word has been ‘fragmentation’.

The most obvious signs of this are America’s reassertion of economic nationalism through Joe Biden’s misnamed Inflation Reduction Act and the Chips Act, which aim to build US resilience in climate change and semi-conductor making.

The World Trade Organisation is being devalued on a daily basis through unilateral steps such as a tripling of American tariffs on steel and aluminium from China, and a never-ending stream of financial sanctions imposed on countries as geographically apart as Iran and Venezuela. The widespread assumption about fragmentation is that it is largely a battle of wills as the US – and to a lesser extent Britain – seek to become less dependent on Chinese goods.

Finance ministers and officials attending this week’s G20 argue that something far more sinister and difficult to fix is afoot.

The speed and determination with which the Western democracies have come to the rescue of Ukraine and the staunch support for Israel in its war in Gaza have created a bitter divide which goes well beyond previous stresses between North and South.

At the G20, the fissures were on full display. Russia’s economic renaissance, in spite of Western sanctions, should be no surprise

Vladimir Putin is known to be supported by China and India in refining its oil. It was also evident that many of the larger emerging market nations are deeply resentful of the way in which the West stepped up so quickly to assist Ukraine.

As worryingly, the same forces which have been driving pro-Palestinian marches in London and disrupted university campuses from Columbia in New York to Glasgow are infecting the global dialogue. There is deep resentment of the unreserved American and British support for Israel, in spite of the atrocities of October 7. The scale of support is contrasted to the West’s lack of response to conflicts in Africa, such as Sudan.

Among the most agitated countries is South Africa, which led the effort to label Israel’s actions in Gaza as a genocide.

The worrying thing is that democracies such as India and Brazil have lined up with autocracies of Russia and China in geo-political conflagrations.

A consequence of this has been to re-empower the G7 where critical decisions on using frozen Russian assets to prosecute the war in Ukraine are being taken.

There is a concern among Western democracies that the Ukraine conflict, at the heart of Europe, could be longer than the First World War.

It is also the case that the G7 is far from unified in its purpose.

Disruption on the Republican right means that America cannot get its act together on Ukraine military assistance. The US and Europe are at odds on trade. President Biden is building up support for climate investment and tech production as Europe is seeking to eliminate subsidies.

The threat of a disastrous end to the era of free trade is very real.

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