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26 July 2023

The end of globalisation

With war in Ukraine and China’s Belt and Road project faltering, the era of open commerce is over. Who will dominate the deglobalised world?

By Wolfgang Münchau

If you want to look for evidence of deglobalisation, you won’t find it in the trade statistics. But you will find it in places like the lowlands of Germany. One such place is the industrial city of Duisburg in the western Ruhr valley. Over a decade ago China identified Duisburg as one of the hubs for its Belt and Road project, a network of roads, railways and shipping routes to connect China with the rest of the world. It chose Duisburg as its west-European hub because the city has the largest inland river port in the world. In 2011, the first train on the China-Europe Railway Express arrived in Duisburg from Chongqing in south-western China – via Russia and Belarus. The 10,000th arrival was just over a year ago.

Then came Covid and the war in Ukraine. Sanctions against Russia meant that rail traffic had become too expensive to insure. Belt and Road is China’s version of globalisation. But European countries, under pressure from the US, have reassessed their relationship with Beijing. Cosco, the Chinese port operator, has since sold its shares in the Duisburg port terminal. That decision and other unfulfilled Belt and Road projects symbolise the gap between what China and Germany expected to happen ten years ago, and what is actually happening now.

Belt and Road came at the end of a distinct period in modern economic history – the age of hyper-globalisation. This period started with the cessation of the Cold War and ended with the pandemic. Its first decade was mostly about trade liberalisation: the World Trade Organisation became the new global trade authority. Countless trade deals followed. The 1990s were also the decade of the internet and of financial deregulation. In Europe, it saw the introduction of the single market, and set the stage for the enlargement of the EU in the subsequent decade.

But the most consequential change of all was the integration of China into the global economy. China supplied the world economy with cheap labour. Germany, China and other Asian countries were the workshops of that system. They ran large and persistent trade surpluses against the rest of the world. The US and the UK were the system’s bankers. The US acted as the benign hegemon. It absorbed the world’s excess savings by running large and persistent trade deficits. Global imbalances were not a bug of the economic system, but a feature.

Globalisation was not primarily about the trade in goods. The share of goods trade increased rapidly in the 1990s and early 2000s, peaked around the time of the global financial crisis in 2008, and has stagnated since. What distinguished the period from 1989 onwards was the globalisation of other factors: capital and labour. Freedom of movement in the enlarged EU brought to western Europe the “Polish plumber” and the “Lithuanian waiter”. Trade is not what our modern era of globalisation is about. It is about people.

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Globalisation was a win-win game for the world economy at an aggregate level. What the supporters of globalisation did not see, or did not want to see, were the rising numbers of losers: in the Rust Belt of the US, in northern England, northern Italy, northern France and eastern Germany. Donald Trump’s America First campaign in 2016 was a reaction against globalisation. So was Brexit. Each country has become unhappy in its own distinct way. But what they have in common is a fall in political support for the old system.

In the EU, which often follows global trends with a delay, the worst is still to come. The foreseeable decline of the automobile industry feels like a slow-moving car crash. The global automotive industry was until recently dominated by three countries: Japan, Germany and South Korea. Then, in 2022, China suddenly emerged as the world’s largest car exporter. When German car companies were busy fitting emissions-test cheating devices to their diesel engines, China started strategic investments with the intent to control the entire supply chain of electric cars. It succeeded.

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To understand what is happening to the global economy, it is best to look at where money is made, not where cars are produced. The main source of profits in the sale of a fuel-driven car are the engine and the after-sales service. Electric cars are, in their essence, iPads with wheels and a large battery. They have comparatively simple engines. They also require less servicing. The big earners for electric car companies are the batteries and the software – something that Europeans are not good at making. China now controls the critical nodes of the e-car supply chain, from rare earth elements and lithium to AI software and batteries. The EU is close to losing one of its most important industries.

[See also: How Saudi Arabia is buying the world]

The resistance has started, led by the Biden administration. The political brain behind the operation is Jake Sullivan, the US national security adviser. During a speech at the Brookings Institution in Washington on 27 April he gave a succinct definition of the problem: “A shifting global economy left many working Americans and their communities behind. A financial crisis shook the middle class. A pandemic exposed the fragility of our supply chains. A changing climate threatened lives and livelihoods. Russia’s invasion of Ukraine underscored the risks of over-dependence.”

What he proposes is a more sophisticated version of Trump’s crass America First policies. Sullivan was Hillary Clinton’s foreign policy adviser during her failed presidential bid in 2016, and reportedly one of the few staffers who advised her to spend more time campaigning in the Midwest.

The backlash he is now spearheading has many names: deglobalisation, de-risking, bifurcation, friend-shoring. It has three components: subsidies, supply-chain security, and sanctions. The main programme of subsidies comes from Biden’s confusingly named Inflation Reduction Act and its $500bn of clean energy and healthcare spending, which is open to investments by foreign companies. This is America’s answer to the EU’s Green Deal, which is smaller in size and more bureaucratic in its delivery.

The emphasis on protecting supply chains stems from a realisation that their interruption poses security risks to the nation. The EU and the US are about to start negotiating a critical-minerals agreement, to connect European and US supply chains. This will take years, and there is no guarantee that it will ever be concluded, especially under any future Republican administration.

Sanctions are perhaps the most consequential of the three pushbacks. The US and the EU have imposed economic sanctions on Russia, so far with only modest success. The US and some European countries have excluded Huawei, the Chinese mobile telephone company, from building 5G mobile communication systems. The most far-reaching restriction of all is the US ban on the sale of high-performance semiconductors to China.

The US did this ostensibly to stop China developing high-precision missiles, but it was also to protect America’s own technological leadership in this sector. The Biden administration then pressured the Netherlands to get ASML, the Eindhoven-based maker of high-precision lithography equipment, to comply with the ban. These are the machines that pattern fine details on microchips.

The reason the US can extend its own sanctions to third countries is related to the role of the US dollar as the leading global currency. If two people – one in Russia, say, and one in China – transact in dollars, they are subject to US legislation at the point at which the flow of the payment goes through US territory. The US can also ban any foreign banks from access to the US market if it lends to sanctions busters.

Westbound service: a China-Europe Railway Express train departs from Guangyuan City in central China, November 2022. Photo by ChinaImages/Sipa USA/ Alamy

The global political and economic consequences of this enormous policy reversal have not been fully understood. One of them is a new global division, with Russia and China once again on the other side of an Iron Curtain.

It’s not just Russia and China. The five countries known as the Brics – Brazil, Russia, India, China and South Africa – used to be seen as the emerging tiger economies of the 21st century. They were supposed to be on the side of the American-led West. But not one of them is complying with those expectations any more. One side effect of Western sanctions over Ukraine has been that China’s trade with Russia hit an all-time record last year.

[See also: A continent drifts]

The five Brics countries have set themselves the goal of becoming less dependent on the US, but they have not quite figured out how to achieve this. China and Russia have both worked on creating payment systems to make each other less reliant on the US and Europe for transactions. The world of crypto-currencies and blockchains has opened up still unexplored opportunities to bypass Western financial monopolies. The Brics have been discussing a joint reserve currency. That would be a big deal.

Western economists have ridiculed this idea on the grounds that the use of currencies reflect flows of trade and investment. The Brics are still running their old economic models geared towards export surpluses. You can either be a mercantilist state or a geopolitical power that is using its currency for political ends – but not both at the same time.

China would have to undertake a huge economic policy shift away from investment towards domestic consumption. That won’t be easy. It would mean depriving powerful provincial party chiefs from funds and diverting those funds to consumers. The upshot of such a policy shift, though, would be a reduced vulnerability to US sanctions.

The Brics are also working on strengthening the New Development Bank (NDB), which provides finance to its five founding states. Four other countries have since joined the NDB: Bangladesh, Egypt, the UAE and Uruguay. It could take a decade or two before the Brics develop a coherent economic union, a counterweight to the West. Until then, the US will continue to enjoy the exorbitant privilege that arises from the dollar’s global role. But I wouldn’t bet on this still being the case in 2040.

There are also signs of a revolt against the Biden administration’s China strategy from Europe: the pushback against the pushback. Olaf Scholz, the German chancellor, presents China both as a strategic competitor in some areas, such as car production, and a partner in others, such as climate protection. On 13 July, the German government announced its China strategy, which emphasised both competition and cooperation. The economic interdependence between the countries on the Eurasian continent is still strong. Should there ever be a military conflict between the US and China over Taiwan, I struggle to see Germany siding with the US. Germany wants to trade with both.

Illustration by Cold War Steve

There are good reasons for the age of hyper-globalisation coming to an end. But we should be under no illusion about the economic costs of de-risking, such as chronic labour shortages and inflation. Hyper-globalisation pushed prices down. De-risking pushes them back up again. Climate change imposes huge costs on governments and the private sector. It is unclear whether voters are willing to pay the price for this.

The period of globalisation was an era of plenty – for some. During that time, central banks and governments were able to support their economies almost without limits. De-risking brings back old policy constraints. Sullivan is right to say hyper-globalisation left many people behind. Many of those people ended up voting for Trump. But a poorly managed deglobalisation could prove even worse for them economically – and their political anger might intensify as a result.

I can see the case for supply-chain diversification – but less so for technology bans, economic sanctions or subsidy wars. We should have compensated the losers of globalisation rather than undo globalisation itself. But I fear it is too late for that. Globalisation gave rise to a populist backlash, but so will a bungled deglobalisation. Herein lies the ultimate irony. Trump will still be there when nations de-risk.

This article appears in our Summer Special

[See also: The left must embrace law and order]

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This article appears in the 26 Jul 2023 issue of the New Statesman, Summer Special