What is the reality of the changing globalisation?

By acclamation in Europe and USA, globalisation is either dead or fundamentally changing. Yet much resulting government action, such as subsidies and extra-territorial regulation, is not new, and trade carries on much as before. Rather than finding a new consensus, we seem to be entering a period of deepening geoeconomic uncertainty and experimentation, caused by a series of major events dovetailing with discontent growing since the global financial crisis, placed on top of a surprisingly fragile existing global system whose complexities were poorly understood.

Covid and the need to stop feeding Russia’s war machine with money for energy were the key events. For politicians, the pandemic was when many discovered modern supply chains, in realising local factories couldn’t just produce more personal protective equipment and drugs. Diversifying energy supplies and dealing with the consequences, in higher prices and risks of shortages, intensified insecurity. Fearing it might get much worse if China invaded Taiwan aligned with defence concerns. All of this came together with increasingly mainstream anti-globalisation sentiments, seen electorally as well as in campaigns against TTIP and TPP trade deals, to become a powerful force.

Globalisation narratives are undoubtedly changed, but the road to a coherent programme of change faces two overriding issues on top of disagreement over the starting point. First problem is the diversity of policy question being addressed, where increasing manufacturing jobs in left behind areas, transitioning to net-zero, and de-risking from China are being conflated, not always convincingly. Second is the constraint that with the rather significant exception of energy, most economic activity and international trade is actually conducted by private sector firms, which governments do not control.

Many difficulties follow from these challenges, most obviously the climate emergency can’t be tackled without China given its size, and that country is also the leading manufacturer of electric vehicles, but the latter is seen as a problem not a solution. Such is de-risking, but it is not self-evident that single country production is more robust than international supply chains. Disagreement on how we got to wherever we are now then becomes particularly pertinent. Growing in popularity is the notion that the previous generation of politicians encouraged a ‘hyper-globalisation’ that was in effect pure free trade based on the creation of the WTO. By implication, today’s leaders can reverse course perhaps with a new ‘Washington consensus’ of intervention.

Trade experts are sceptical of hyper-globalisation. Significant growth in goods trade started in the late 1980s as many countries including China opened their economies, and technology enabled more extensive supply chains to replace large single factories. This was supported but not obviously caused by the formation of the WTO with new disciplines such as on services, as well as numerous bilateral Free Trade Agreements, and deeper regional integration in single markets and customs unions. However, governments also retained significant policy space, such as various Buy America/n provisions and tariffs particularly on agricultural goods, as well as subsidies as evidenced by the long-running Boeing / Airbus case. The volume of regulation, creating new non-tariff barriers, also grew dramatically as governments chose this over direct economic management.

Rather than unalloyed free trade, more plausible is that companies thus became used to navigating regulations while combining intermediate goods and services into various offerings, though SMEs were disadvantaged. Consumers benefitted becoming used to wide choice and stable, often reducing, prices, yet those naming globalisation winners and losers typically ranked them less important than workers in former manufacturing areas. Firms had much else to consider including consumer choices, trade deals, subsidies, skills, infrastructure and much besides as they managed their operations, though their lobbying on these led to suspicions that governments were unduly influenced. Governments in turn had to consider their own policy mixes to influence corporate behaviour.

If the essentials of this system continue, as seems likely, one could then be tempted to say that only the emphasis of governments has changed, that otherwise consumers will continue to drive corporate activity that governments will struggle to influence. Care always has to be taken with what are claimed to be great shifts, but equally the real political change shouldn’t be underplayed. While demands for greater manufacturing are to an extent related to nostalgia of ageing societies, location of swing voters, and lack of awareness of modern production, demands for net-zero including ensuring some relevant national contribution and concerns about security with regard to China are clearly substantive, building on genuine economic discontent in many countries.

Perhaps the best way to analyse these current developments is globalisation in flux, as awareness of how its modern form has evolved becomes more widespread. In this instability, governance institutions such as the WTO are seen as losing credibility, governments are testing different policies such as greater subsidies and extra-territorial regulations, while companies maintain a constant watch on how their various operations will be affected. Not all countries are choosing the path of greater protection however, for example moves towards supply chain integration through African and Asian trade agreements can be seen as going the other way.

Far from a new consensus, confident predictions of where globalisation is headed seem premature, not least as some evidence shows leaders taking too much for granted. Just as those in the UK advocating Brexit have been surprised by the trade barriers that arose, so it is also reasonable to tie some returning inflation to supply chains being disrupted by political choice. Without a deep understanding of either how we got to this point, or what may realistically be achieved in terms of changing that, current geoeconomics looks rather experimental. In no country however do politicians want to admit they don’t really know the consequences of their actions, yet it is also a stretch for analysts to be certain. That the next few years will be rocky in terms of geoeconomics seems a safe if limited bet.

For companies, most of what they can do apart from still trade as well as possible is to pay a lot more attention paid to navigating the changing policies. A certain amount of effort will also likely be going into attempts to protect what is already in place, not least the foundational principles of the WTO, of most favoured nation status for all members, that is clearly threatened. More broadly those who believe the last thirty years delivered rather more than is currently credited will also be playing a defensive game in the most part, even while recognising the weaknesses as well as strengths of the period just gone. They will hope that when the dust settles, it is with a still functional global trade system, or even better one that is somehow strengthened, not least with regard to tackling climate change. The stakes then are high, but the game in many ways just begun.