John, your latest book is coming out on May 5th. Can you explain why you have called it ‘The Death of Globalization’.
I chose a deliberately provocative title because in my view we have entered into a critical new period for global supply chains. Businesses and politicians have to be aware that established thinking has been turned on its head by the rise of China, populism in the West, security, environmental and ethical concerns, not to mention Covid. Trends are towards protectionism and subsidy, and this is leading to fragmentation and more barriers to trade. There will be plenty of opportunities in the new hegemony but everyone needs to be aware that this is a difficult and risky environment in which to do business.
So, politics is playing a much greater role in the development of trade?
Yes, that’s right. Since the end of the Second World War there has been a continual ebb and flow in the balance of power between what could be called ‘dirigiste ideologies’ and ‘free market theory’.
Certainly during the 1980s and 90s, when I first started writing about trade, we saw the primacy of neoliberal policies which were driving the reduction of tariff and non-tariff barriers. At that time, the powers and influence of GATT, the forerunner of the World Trade Organisation, were at their peak. Protectionism was regarded as outdated as communism and I think that the apogee of this trend was China’s accession to the WTO in the early 2000s. This occurred at about the same time as the publications of era-defining books such as ‘The End of History’ and ‘The World is Flat’. China, Russia, former Eastern Bloc countries and markets in emerging markets such as Africa, Latin America and parts of Asia were all expected to follow the Western line that democracy and open markets were the inevitable end point of this social, political and economic evolution.
Of course, this is not what happened. China was expected to get a taste for democratic freedoms and a better standard of living which would be the death knell for communism. Instead, the Chinese government was able to manipulate its access to global markets as a way of creating wealth which it then used to project its own political and economic power throughout the world. We’ve seen that very clearly in its Belt and Road Initiative which has allowed it to gain enormous political influence in many emerging markets. The result has been the creation of a ‘sinosphere’ in which raw materials are extracted and funnelled towards China and in return Chinese manufacturers gain new markets for their goods.
Western politicians have only recently woken up to the threat of China’s new political assertiveness and they are now scrambling to develop some sort of coordinated economic, political and security response. The confrontation with the West has led to attempts by some Western governments to prevent China using advanced technologies for its own military development. There are also suspicions that China is building ‘back door’ vulnerabilities into electronic components which would allow it to gain access to and even control critical infrastructure in Western markets. This has already led to the bifurcation of high tech supply chains, one for the West and its allies and another for China and those countries which fall into its sphere of influence: so-called ally sourcing.
You mention ally-sourcing and a chapter in the book is dedicated to this concept. What is it and will it take off?
The term ally-sourcing has come to prominence in the past couple of years. In theory it involves governments flexing their trade policy in favour of countries with a shared political and economic outlook. Given the geo-political tensions which exist between the West and China, especially now that Russia has pivoted east due to the sanctions placed upon it, ally-sourcing seems to be a very real possibility. It would allow technologies to be shared without concerns over their ‘weaponization’, for instance. In practice, thoughy, it’s going to be very difficult to create a cohesive group of countries which are willing to put their trade differences behind them – just look at the disagreement over the implementation of the US Inflation Reduction Act, for instance. It is difficult to see alignment between the US and Europe, especially now that Macron has said that he would like Europe to pursue its own security policy. And then there is the question of where emerging markets would fit in such an environment. China has invested billions in these countries, and it is difficult to see how they would benefit from falling into line with Western policy on such matters. India, certainly, has its unique vision, competing with China militarily and economically, but not favouring the US or Europe. Its willingness to take cheap oil from Russia is evidence of this. So, geo-politically the world is an increasingly complex place and impossible for the West to control.
What role has domestic politics played in these changing attitudes?
Globalization is a term which often provokes suspicion or downright hostility. This is because politicians in the West were never totally honest with their electorates over the effects of offshoring and outsourcing of manufacturing. Whilst of course the cost of products has come down for Western consumers, fuelling sustained economic growth and benefits for the middle classes, globalization has resulted in the loss of many manufacturing jobs, skills and expertise to Asian competitors. This has led to the growth of ‘rust belts’ in parts of America and Europe which have resulted in many parts of society being left behind. This in turn has caused a so-called ‘democratic deficit’ which has led to the rise of populist policies as people believe they are losing their livelihoods, their communities and their cultural identity. There is a lack of trust in politicians and the many national and trans-national institutions which seem to have so much power over their lives but over which they have no control. Politicians are more conscious now than ever of this discontent and the response has been a rolling back of many liberal trade policies to a world in which subsidy and protectionism have become once again the norm.
What about the impact of Covid?
The Covid crisis really accelerated these supply chain trends. At the outset of the pandemic it became very obvious that Europe and North America were almost completely dependent on Chinese manufacturers for the supply of personal protective equipment. This led to calls from politicians such as Emmanuel Macron for more ‘strategic autonomy’ so that Europe and other Western economies were never put in that such a position again. Later on in the crisis we saw the impact of governmental stimulus packages which resulted in logistics systems becoming overwhelmed by demand for consumer goods. Ports, shipping lines, airlines, rail networks and trucking services buckled under the volumes. This, combined with many of the other issues I’ve already highlighted, has led to many manufacturers and retailers producing goods or sourcing products much closer to the end market, in other words reshoring or near-sourcing.
Are there any other reasons for de-globalization?
It is not just political developments which are leading to manufacturers to reappraise the benefits of globalization. The last ten years or so have seen corporations gain a more accurate view of supply chain risk and they are beginning to factor in the cost of many threats to their businesses when it comes to remote production. Let me give you some examples. About a decade or so ago there were another a number of natural disasters in Asia – the Japanese tsunami and the floods in Thailand are the best known – which showed that outsourcing production to the region was not just a one way bet on lower labour and transport costs. A lack of supply chain visibility and control over suppliers in Asia resulted in assembly lines being halted on the other side of the world.
And shortly afterwards there was the factory disaster in Bangladesh which led to over 1,000 workers losing their lives. The reputation and brands of many Western manufacturer and retailing companies were tarnished as consumers became aware of the conditions in which fashion and textile goods were being produced in remote locations.
Whilst its been much easier for manufacturers to quantify the cost of labour, transport and inventory, its far more difficult to measure supply chain risk taking into account probability and consequential loss. However, its something now that most global companies attempt to do which means that their sourcing strategies have become far more sophisticated. In other words, its not all about off-shoring to Asia anymore.
Will sustainability also play a role?
Definitely. There is legislation going through in Europe at the moment – the Carbon Border Adjustment Mechanism – which is designed to prevent ‘carbon leakage’, that is preventing manufacturers from off-shoring production to markets with lower carbon emissions standards. This is to prevent a new wave of out-sourcing due to higher costs of production in Europe which result from higher environmental standards and regulations. Imports of certain goods will have to pay a ‘tax’ which inevitably means that they will become less competitive. Although you can understand the reasoning, it is still, at the end of the day, another barrier to trade. Then there is the Inflation Reduction Act in the US which is providing billions of dollars of subsidy to manufacturers which establish production of ‘future technology’ in the country. This looks like it will lead to less products being imported to the US from the EU and Asia as supply chains will become more domestic in nature. Whilst there are plenty of political arguments for such an initiative, this looks very much like the old subsidise and protectionist policies of the 1970s.
What will the global economic environment look like in the future?
As I said at the outset, the macro environment will get a lot more complicated very quickly. Add energy and data protection policies to the mix of domestic politics, sustainability, ethics and international relations and you get an environment which is very hostile to the concept of frictionless, borderless and globalized markets. This is a shame, as many emerging markets will miss out from integration within the global trading economy and the benefits that this would have brought. There are very few organisations standing up for globalization and this is unsurprising given everything that I’ve discussed. Depending on who you talk to, people see it as a vehicle for Chinese expansionism, exploitation of workers, a cause of greenhouse gas emissions or the loss of Western jobs. Whilst trade in many sectors will keep growing for many years – it is just not feasible to decouple from China in the short term – the barriers and cost of this trade will rise. This will present many opportunities for manufacturers based in Europe and North America and re-balance the relationship between risk, inventory, transport and labour. Of course, this re-balancing may occur much more quickly if relations between the West and China deteriorate further with Taiwan being the obvious flashpoint.
Thank you, John, for your insights and good luck with the book!
Author: Julia Swales/John Manners-Bell
The Death of Globalization is now available to purchase here.