For nations without a large domestic economy, adequate resources and a need for export markets, a retreat from global integration poses challenges. For example, smaller nations cannot influence exchange rates to the same extent as the major powers. Instead, countries require pragmatic strategies to prosper.
In a world of low growth and increased competition, economic nationalism reasserts itself and free trade and movement of capital may decline. Alternative trading blocs to counter the shift to closed economies may evolve. The recent rush to negotiate bilateral free trade agreements reflects this pressure.
Countries rich in natural resources may ally themselves with major nations, such as the US, Europe or China, becoming preferred suppliers of food, energy or raw materials. In turn, they can reciprocate by becoming markets for products or services and investment.
African countries are pursuing this policy, concluding long-term supply agreements for agricultural or mineral products sought by China. In return, China is expanding investment, trade and development aid preferentially with these nations, co-ordinating transactions by Chinese businesses and banks.
Australia has emerged as an important source of raw materials for China. Russia has become an energy and commodity supplier to Europe. Within the framework of Nafta, Canada has become an important energy supplier to the US while Mexico provides low-cost labour to American businesses.
Strategically located, smaller nations such as Switzerland or Singapore can become important centres providing trading, logistics, financial or investment services.
The UK faces challenges in this new environment. British excellence in real economy activities, like manufacturing, has declined, although there are notable exceptions. With the decrease in North Sea production, its oil industry cannot be a prominent growth engine.
In services, Britain continues to be a force, but its once-prominent role in entertainment, fashion, art and other soft-power industries has also declined.
With its banking sector trying to recover from imperial over-reach, London’s role as a financial services centre is increasingly under challenge, both from Europe and the US. In the 2000s, London became the world’s dominant finance hub. Non-intrusive, market-responsive “light touch” regulation was a factor in its success. Damage to London’s reputation from matters like the Libor fixing scandal and stricter regulation would allow New York and European centres to regain competitive ground.
An equivocal relationship with Europe also remains problematic. After the Second World War, American Secretary of State Edward Stettinius told US President Roosevelt that Britain’s problem was “emotional difficulty ... in adjusting to a secondary role after always accepting a leading role as a national right”.
Great Britain took many years to recognise the benefits of the EU, with less than full engagement, having chosen, perhaps fortunately, not to adopt the single currency.
In reality, Europe remains a major trading partner and market. In practical terms, Europeans will question London’s role as the Continent’s main financial and trading centre, particularly for the euro, as long as it remains equivocal. The rise of anti-Europe political movements and also the planned referendum about EU participation are unhelpful.
The UK still has formidable advantages – its language, its law which is the basis of commercial and financial contracts globally, its elite universities, its cultural heritage and its history as an entrepot commercial and financial centre. But it will need to manage these advantages cleverly.
In the new Great Game, nations will have to abandon historical ties and biases, trading off political status against economic prosperity and security. In the TV series Downton Abbey, Cora Crawley asks her mother-in-law: “Are we friends, then?” The Dowager Countess’s reply is instructive: “We are allies, my dear, which can be a good deal more effective.” Smaller nations, unable to retreat into closed economies, will need to adjust strategies to make the most of the new world order.
Satyajit Das is a former banker and author of 'Extreme Money' and 'Traders, Guns & Money'