Thanks to fracturing supply chains, the US-China decoupling and Russia’s invasion of Ukraine, Davos 2023 – held in Switzerland in mid-January – is likely to be dominated by debates on the future of globalisation. However, beyond the catchy headlines, what are the underlying drivers of globalisation, and what does this tell us about the level of deglobalisation that the world may or may not be facing?
The 1990s have often been labelled as ‘the decade of globalisation’ due to its rise in that time. Globalisation, a poorly understood phenomenon at best, is now back on the political agenda, discussed in corporate boardrooms and the centrepiece of many societal debates.
The resistible rise of globalisation
Three decades ago, the political elites were very much in favour of neoliberalism, and as such globalisation was often intertwined with a political agenda of free markets, privatisation and laissez-faire politics. In the early days, there was some resentment towards globalisation, as seen in the battle of Seattle and the demonstrations that would accompany any IMF, World Bank and G7/G20 meetings, although for the most part these protests eventually gave way to a weary acquiescence. Increasingly, globalisation was treated like a God-given right, and those showing resentment towards it were seen as a lacking understanding of its benefits or being prone to exaggerating its downsides.
In fact, globalisation was portrayed as the only alternative after the fall of the Soviet Union and the breakdown of communism (as described in Francis Fukuyama’s ‘End of History’). “There is No Alternative” (shortened to TINA) was the mantra of choice that would show that the only way forward was globalisation. The logic was straightforward: globalisation equals happiness and presents the only way to create economic growth. Talk of deglobalisation was seen as risking ushering in a new dark age.
Today, the global economy is going through a difficult phase; one often hears words such as slowbalisation, deglobalisation or stagnation. Others, who emphasise the regional character of globalisation, prefer to speak of regionalisation. Looking back, there is an increased understanding that the defendants of what we now call ‘hyper-globalization’ may have overdone it, as the benefits of globalization weren’t evenly spread among citizens and societies around the world.
Nor has globalisation created the ‘flat world’, as described by Thomas Friedman. Globalisation did instead create many losers: among nations (through tax and job-shifting) and people (those we term ‘the left-behinds’). This is all without mentioning its devastating environmental effects.
However, we need to be careful. There is not one story of globalisation, and it hasn’t been all bad. Pankaj Ghemawat’s new book, The New Global Road Map: Enduring Strategies for Turbulent Times, is a case in point, presenting as it does a nuanced and differentiated perspective on globalisation that is currently anything but clear-cut. While hundreds of millions were lifted out of poverty in emerging markets because of globalisations, large sections of society in the developed world lost out – but then, was that exclusively on account of the effects of globalisation?
What are the drivers of globalisation?
This article will not discuss whether we are experiencing deglobalisation or regionalisation (in other words, discuss the scope, scale and interconnectedness of globalisation) but will rather emphasise the drivers of globalisation and how they have emerged over the past 30 or so years. Because, if we understand ‘what made’ globalisation, we can then garner a clearer view of today`s developments and how to best address them. The global economy is going through phases of more and less globalisation and interconnectedness.
It should be equally clear that globalisation didn’t just fall from the skies. It was driven by actors (in particular multinational corporations) and the policies of governments. Hence deglobalisation isn’t just happening by accident either. It is equally man-made and driven by someone. Conditions and externalities might have changed, as did attitudes towards it. Crucially, however, we must not forget that we are in control of these conditions and the drivers of globalisation.
Globalisation did, as mentioned, not emerge spontaneously, but was driven by four factors:
- The emergence of low-cost communication and computing-power (technology)
- Containerisation, dramatically reducing shipping costs (logistics)
- The unconditional political belief in free trade/neoliberalism (political will)
- The continuous and systematic reduction of tariffs, quotas and other trade and investment-restricting measures by organisations designed for this purpose (regulatory framework).
Suddenly, getting products manufactured at the other end of the globe (through global value chains) in order to benefit from lower wage costs was possible and led to the emergence of a globalised economy.
With the emergence of powerful technology, it was possible to stay in touch with manufacturing sites in geographically distant, low-labour-cost countries. Breaking up the manufacturing processes (hitherto performed in one site from beginning to end), so that factories would only produce part of the end product, became state-of-the-art in manufacturing. Equally, data-intensive administrative processes such as navigating customs procedures or keeping an eye on local content quotas of individual products, did – despite making the processes more complex – not require whole armies of office workers any longer.
Containers made loading and unloading much faster (and hence cheaper), and the emergence of large container vessels brought overall shipping costs down significantly.
Lowering tariffs and import regulations also made it easier and cheaper to bring goods in from afar. During and immediately after the Second World War, the average weighted tariffs were about 30%; towards the late 1950s and early 1960s these had fallen to about 10% and have been lowered successively ever since. So even if the notion of ‘average tariffs’ isn’t giving us an overly precise picture (most Western countries are approaching 0% in tariffs, while countries such as Chad, the Central African Republic and Djibouti are all above 16%, although rates of tariffs are often different depending on the sector in question), these figures are a good illustration of the notion that globalisation was a deliberate, well-planned and steady process, which culminated in the emergence of a globally interconnected world. A world of multinational corporations and their global networks.
How is globalisation being unravelled?
Increasingly, however, we are witnessing technological developments as well as deliberate political countermoves that are resulting in the undoing of globalisation.
The rapid growth in computing power – once an enabler of globalisation – and the convergence of sensor technology, AI and 3D printing are all opening up new possibilities for manufacturing. In public discourse this is known as the rise of smart factories. For the first time, it will be possible to bring production back to high-labour-cost countries, simply because the labour cost element within the overall manufacturing cost is largely irrelevant given the automation in production. Internet of things devices and computing power allow for the real-time tracking of items and individualised manufacturing steps for each product.
At the same time, we are seeing a freight cost explosion for shipping goods from Asia to Europe and the US, resulting in an increase of transportation costs by a factor of ten. Added to this, the unprecedented unreliability of shipping, the regular breakdown of supply chains and the resulting frequent ‘stock-outs’ are beginning to make the business model of globalisation look less attractive. Also, the political will to enable globalisation through the continuous reduction of measures limiting trade and investment is gradually turning into its opposite.
The US, despite its rhetoric on free trade and open markets, is among the most protectionist nations when it comes to foreign direct investment (FDI) regulations, the latest example of which is FIRRMA, or the Foreign Investment Risk Review Modernisation Act. However, China is going down a path of increased protectionism too, on account of “national security considerations”, with the country consistently tightening FDI regulations, in particular with the 2020 passing of the China Foreign Investment Law.
European countries have also passed legislation that is increasing restrictions on FDI, such as France’s Loi portant Plan d’Action pour la Croissance et la Transformation des Entreprises, Austria’s Investment Control Act of 2020, the Netherlands’ Uitvoeringswet Screeningverordening Buitenlandse and Denmark’s Investment Screening Act of 2021. The same is happening on the trade side. Thailand is limiting the export of pork, China – weaponising key chemicals and rare earths – is restricting the export of these commodities periodically, and India is categorically insisting on a ban on exporting food products due to overriding national interest.
Maybe most noteworthy, however, is the general public discourse on our economic model. After Fukuyama declared the victory of the Western model and the end of history, it was all neoliberalism and Washington Consensus. Anything other than free trade and liberalisation was madness, pushed by a few cranks who were quickly sidelined from public discourse. Globalisation turned into hyper-globalisation and discussions were had over whether we actually still needed the nation state. That has changed fundamentally after the 2008 financial crash and then Covid-19. Neoliberalism is discredited, and with the return of geopolitics, history has emphatically not ended. Anything but in fact. Gordon Gekko’s mantra of ‘greed is good’ has been replaced by a more communal, ecological and social world view, and public discourse now looks very different to what it was 20 years ago.
So where do we go from here?
So where does that leave us? And where should we go from here?
First and foremost, we should be careful not to silence dissenting voices quite as much as we did 20 or 30 years ago. There is no single, irrefutable truth for every country and industry. “There is no alternative” was wrong – and still is. Hence we should steer clear of throwing the baby out with the bathwater and marching unthinkingly in the opposite direction, as many of the proponents of deglobalisation are suggesting. A careful reassessment of the benefits of globalisation and its downsides, and an honest open discourse within politics and boardrooms to discuss these issues, may be a good starting point.
Equally though, carrying on as usual is not an option. As illustrated by Donald Trump’s election victory in the US in 2016, where he claimed to be “standing up” for white working-class men whose jobs had been relocated to Mexico, ignoring the growing discontent of those losing out is not a viable strategy.
However, not only do we have large sections of our societies left behind, the model as such simply isn’t working any longer. After two years of persistent supply chain breakdowns, and the transmission of hyperinflation across most countries, questioning the economic model of globalisation doesn’t seem to be overly premature. With every disruption at the other end of the globe immediately feeding through to home markets, and with the ripple effects of the war in Ukraine, Fukushima, or any lockdown or harbour closure in China laying European factories low, one might be forgiven for wondering if we are still doing the right thing. There is a lot of talk about us having to make supply chains more resilient, but what if the underlying premise is wrong? Maybe it isn’t the lack of resilience of supply chains but supply chains themselves that are the problem.
Driven by lean and mean production structures (versus the vertically integrated, conglomerate structures of the 1980s), offshoring and outsourcing were the economic mantra of corporate growth of the 1990s and 2000s. This, however, meant that globalisation became ever more complex. With the ever-tighter interconnectedness, and with feedback loops that provide real-time data immediately, we are reaching the point of unmanageable complexity. Despite – or maybe because of – our computing power and real-time communication, we can´t handle the complexity any more.
And it isn’t just bold political statements any longer (such as Jens Stoltenberg`s “Freedom is more important than free trade” quote at the 2022 Davos meeting, arguably the very heart of the globalisation movement); instead, multinational companies have started to act already. Partly under the pretext of rebuilding broken down supply chains in the post-Covid era, and partly due to the new geopolitical circumstances, supply chains are disentangling, shortening and becoming simplified. One of the corporate mantras now is “in the region for the region”. Production capacity is built within the big blocks – actively supported by substantial government help such as the US Chips Act or its European equivalent, to name but a few. The reshoring of manufacturing is now the talk of the town. Export-led economies such as the Netherlands or Germany will face significant changes in their business models, and regional economic blocs such as the EU need to be reformed and strengthened.
To maintain globalisation will necessitate a functioning, rules-based trade system. Instead, the US largely abandoned the notion of open markets and multilateralism during the Trump years (and has hardly changed its stance, if not the tone, in the Biden administration). China is starting to throw its weight around, actively pursuing a policy of decoupling, and is quick to weaponise trade to further its political ends. Even if we all wanted to maintain a 1990s-style globalisation, the era of open markets seems to be drawing to a close. But then, a more regionalised or more local economy, even if only taking a break from hyper-globalisation, doesn’t equate to economic suicide (as we are often led to believe) by those benefitting handsomely from it.
Globalisation didn’t turn out to be the “great equalizer”, as predicted by Friedman, and the aggressive cost-cutting of corporations by relocating to low-labour-cost countries led to job losses and seriously impacted the customer experience. So do we really have that much to lose – or might we instead not take a step towards a more stable and equitable future?