Our Opinion: 2024
Globalisation is not over yet
In the early 2010s, the British Prime minister, David Cameron, was fond of speaking about the “global race” for prosperity. The idea was that, with capital and goods flowing around the world at ever greater speed, Britain had to work harder and smarter if it was to keep up. More than a decade later, some of those concerns remain relevant; household and government budgets are stretched, and fear of national impoverishment is more acute than ever. But the phrase “global race” itself feels outdated, implying that global economic competition is governed by rules of fair play and a benevolent referee.
Over the last decade, the global runners have started to play dirty – elbowing each other with tariffs and trying to trip each other up with export restrictions. Governments have started helping their own industries with subsidies. Increasingly, international commerce resembles a fistfight. In the worst cases, trade has become a weapon of war. Witness Vladimir Putin’s energy blackmail, which tried (and failed) to bring Europe to its knees in 2022. In response, the West launched sweeping financial sanctions against Moscow, trying (and failing) to trigger a Russian banking crisis. The economic punches might not have landed, but the blows will keep coming.
For Cameron’s generation, it seemed as though globalisation would go on forever. The end of the cold war had ushered in a wave of global integration unprecedented in its speed and scale. Formerly communist countries flocked to join capitalist institutions such as the World Trade Organisation (WTO). Political scientist Francis Fukuyama notoriously declared the era of ideological debate was over, all that remained was to run as fast as possible in the new global economy.
Worldwide, exports of goods and services as a share of GDP had rocketed from 16.7% in 1986 to a peak of 31% in 2008. Trade had dipped slightly after the financial crisis, but a recovery seemed inevitable once the world recovered from the great recession. Who wanted to bet against this multi-decade trend? Yet instead of continuing to grow, world trade stagnated through the 2010s. The 2008 peak was not regained until 2022 and has yet to be surpassed.
At the heart of globalisation lay the growing economic co-dependency between the US and China, say Deutsche Bank analysts in a July 2023 report entitled “The great decoupling? Rethinking sustainable globalisation”. America’s consumers bought the surplus products produced by China’s growing industrial base. Cheap Chinese goods raised the annual purchasing power of the average US household by $1,500 between 2000 and 2007. It wasn’t all one way, either – affluent Chinese consumers eagerly adopted American brands, while increasing their consumption of US food products 16-fold from 2000 to 2022.
The trade winds began to turn in 2018, when Donald Trump’s administration imposed tariffs on imports of solar panels and washing machines, followed by tariffs on steel and aluminium. What started as a quarrel about American factory workers getting a raw deal escalated into a far grander contest about global technological leadership. Phone maker Huawei (a company whose name means “Chinese achievement”) was banished from multiple Western markets on security grounds. Trump and his successor Joe Biden gradually tightened the screws on exports of semiconductor technology to China.
Politicians in other Western countries have, to varying degrees, come on board too. The shortages of the pandemic, followed by the turmoil unleashed by Russia’s invasion of Ukraine, have focused minds on the need to de-risk supply chains. In a health crisis, the best pharmaceuticals are not the cheapest in the catalogue, but the ones that you can actually buy. Resilience, not efficiency, is now the order of the day.
For all the arguments, US and Chinese trade ties remain substantial –both sides are locked into an unhappy marriage by economic necessity. In 2022 America still imported $536.8bn-worth of Chinese goods, more than from any other country (although Mexico is catching up fast). The US, in turn, is still by far China’s biggest export partner.
China’s low production costs and vast consumer market are not so easily ignored. Ignoring the geopolitics, US brands Starbucks and Ralph Lauren are still expanding operations in the Middle Kingdom. German chemicals giant BASF is investing $10.5bn there through 2030.
The Biden administration insists it does not want to sever trade links with China altogether. Washington wants to fiercely defend core national-security interests – such as semiconductors – but is still happy to trade with China in other areas. That approach is unsustainable in the long term. Even if it succeeds in fencing off militarily useful technologies, the US will still face national-security vulnerabilities in areas from pharmaceuticals to batteries, in which China is a major global player. The political pressure to move from cautious “de-risking” to broader “de-coupling” will only grow.
Global trade relationships have shifted dramatically in the five or so years since the tariff wars began. Developing countries’ share of overall Chinese trade recently hit 36%, surpassing the 33% level for China’s trade with the US, Europe and Japan. The Middle Kingdom now trades more with Russia than it does with Germany and more with Southeast Asia than it does the US.
Yet many of the old trading patterns are unchanged. A growing share of Western consumer products may say “made in Vietnam” or “made in Mexico”, but production in those places now relies more on Chinese inputs than ever. Chinese sales of electronic components to Southeast Asia have soared 80% over the past five years, with exports of car parts to Mexico doubling in the same period. In some cases, Chinese goods are simply being repackaged and sent via third countries to the US to work around tariffs. After all, if China was the most efficient producer of a particular good before the trade war, new US rules won’t change that underlying economic logic. Chinese producers remain critical to much of the trade that the US does with third countries.
The danger is that efforts to de-risk supply chains simply give us more expensive, opaque and complex ones. Global supply chains have lengthened since 2021, but not become denser. That means that many goods are still made by the same number of companies, with actual competition among suppliers failing to increase. The goods themselves are just being sent on more circuitous trips around the world, meaning higher end costs for consumers.
Still, such supply-chain shifts are not entirely pointless. Some of the movement represents a real improvement in the manufacturing know-how of countries beyond China, knowledge that should gradually increase over time. In the worst-case outcome – a war in which supplies of goods between China and America are almost completely severed, it would still be an improvement for the US to deal only indirectly with Chinese firms on the soil of third countries.
The world is slowly fracturing into economic blocs based around the two superpowers. In pure economic terms, that is bad news for everyone. Prices will be higher and growth slower than if capital, ideas and people were allowed to flow more freely across borders. Supply chains will have to be duplicated and companies contend with greater uncertainty, meaning higher costs.
The International Monetary Fund (IMF) has warned that a full-scale breakdown of relations between the two blocs could cost the world economy 7% of GDP, but that looks like an overstatement. For one thing, there is no reason to think that fracturing will lead to a wholesale reversal of globalisation itself. Globalisation wasn’t just between the US and China, after all. It has also happened within blocs: the UK, for example, is not going to trade less with Japan or India, even if it starts doing less business with China. For now, the US-led bloc seems to have the economic advantage. China aside, the world’s leading economies are almost all aligned to the US to varying degrees. China’s closest big partner, Russia, is a relative economic minnow. That said, alliances can always shift, as Saudi Arabia’s ongoing pivot away from Washington shows.
In any case, neat talk of two emerging superpower blocs has a distinctly cold-war-era ring, and one that may not be an accurate representation of a multipolar world that is rather messier. Not all countries will be hustled so easily into one of the two groupings. Singapore and several of the Gulf states are seizing the opportunity to serve as trade and finance hubs that are accessible to both sides. Dubai, for example, has emerged as a key centre for commodity markets after sanctions on Russian products forced the migration of many traders from Switzerland. Producers of vital green commodities, such as copper and lithium champion Chile, have strong hands and will be happy to play off both sides in pursuit of the best deals. From Mexico to Brazil and Vietnam to India, countries that used to struggle to compete with Chinese manufacturing are finding a new niche as alternative suppliers to the West, even while continuing to trade and do business with China. After years of sucking up most of the foreign direct investment into Asia, in 2022 China attracted less than India or Vietnam.
Fragmentation seems to be working in favour of several key emerging economies. As China and the West trip each other up, other emerging markets are gaining a lead in the global race. After a long run of disappointment, now might prove a good time to invest in emerging markets again.
The post-cold-war wave of globalisation was powerful, but not wholly unprecedented. Globalisation has gone through stops and starts before. A wave of globalisation between the 1850s and the First World War raised living standards in poorer European countries. Populist backlash is also not new. An influx of immigrant labour into the US in the late 19th century prompted politicians to impose new migration restrictions in the 1890s, leading to a virtual shut down of migration by the 1920s. The report notes that new technologies – whether railways and steamships in the 19th century, or containerisation in the 1950s – have always been key to driving new waves of globalisation. While trade barriers are going up, digital technologies should keep globalisation running in some form. World trade as a share of GDP has stagnated, but it is still more than double the level in 1970.
Political tensions cannot reverse the tide of underlying economic forces. The era of globalisation may be over, but we’re still living in the world that globalisation created.
12th April 2024
