Globalization is dead. BlackRock’s Larry Fink says so. Again, Mark Mobius of Mobius Capital Partners says he’s wrong. What opinion of a legendary investor to take blindly on trust? Maybe we could take a look ourselves.
Pessimism about the survival of post-Cold War globalization seems more justified today than in multiple previous episodes, when its demise was confidently but mistakenly predicted. (For the record, these include the bursting of the tech bubble of the 1990s, the September 11 attacks, the Sars epidemic of 2003, the avian flu epidemic of 2005, the food crisis of 2007-08, the financial crisis of 2008 and the initial impact of Covid.)
The war in Ukraine has worsened supply chain congestion and energy shocks have made transporting goods more expensive. More sustainably, governments would supposedly retreat into a national security defensive hunkerdown where they rely only on foreign policy allies (if indeed anyone) for strategically important trade.
Vladimir Putin’s war may indeed be an inflection point. But unless sanctions and rich-world embargoes extend to serious economies like China, there are good reasons for optimism. Here are five.
First, cross-border trade in goods is regularly seen as an indicator of globalization, and admittedly it has stalled relative to global gross domestic product for more than a decade. But as Scott Lincicome of the Cato Institute points out, most of the other measures you could choose from — international trade in services, foreign direct investment, migration, data flows — were doing well before the pandemic and seem to have picked up over the course of the last year.
The nature of globalization has changed: trade in goods is less relevant. In the two decades since 1990, vast efficiency gains have been made through the arbitrage of labor costs in the manufacturing sector, with China and other mainly Asian countries exporting to the status from middle-income countries. Much of this wiggle room has now been used and China has become more of a consumer market than an export platform. Multinationals are now in China as much to produce and sell as to get supplies.
Second, the more sophisticated the supply chains, the more difficult they become without international specialization. The emblematic product, semiconductors, is a very good example. Of course, you can waste public money that subsidizes factories to produce low-value “legacy” chips for the automotive industry. It would waste resources and cause trade friction through dumping, as has happened with steel and shipbuilding, but it would do little to destroy globalization.
In reality, the high value-added links in the chain are often geographically concentrated and difficult to replicate. Advanced chip research and lithography machine manufacturing are respectively dominated by research and development center Imec in Belgium and lithography machine manufacturer ASML in the Netherlands. Imec’s managing director told Trade Secrets recently that he would set up a research branch in the United States, but that his center of gravity would still be the headquarters in Flanders. You want semiconductor research, you have to call Belgium.
Third, high energy prices make freight more expensive, yes. This might encourage offshoring to rich economies, but it also makes fertilizer-intensive manufacturing and agriculture more expensive, which will discourage it. This last effect will often be predominant. Despite the popular image that freighters are huge carbon emitters, transportation generally accounts for a fairly small share of the carbon footprint of traded goods. (This even goes for goods mistakenly considered emissions villains, such as cut flowers flown from Africa to Amsterdam and apples and lamb shipped from New Zealand to the UK). Some relocations have already begun: bicycle manufacturers have suspended plans to migrate to Europe due to particularly high energy prices. Sure, the EU is planning a carbon frontier mechanism to prevent emissions-induced offshoring, but that’s still early days.
Fourth, it is not easy to divide the world into economic spheres and force countries or companies to choose one. China’s trade with the EU continued to grow despite trade tensions and recovered in 2021 with the United States after a few bad years. And as a non-Chinese example, we often talk about the division of the world into three competing models of personal data management: authoritarian China, American laissez-faire, Europe of the right to privacy. But in fact, a country like Japan has succeeded perfectly in keeping a foothold in both the American and European camps, signing the American-style free flow of data while having its data protection regime recognized by Brussels.
Well, call it blind faith, but the last rites of globalization have been read several times, and each time he bounced from his sickbed looking quite brisk. Corporations have been resourceful, have supported technology, and even actively destructive governments have not crushed it.
The accumulation of US-China tensions, Covid, the supply chain crisis and now the war in Ukraine is certainly giving globalization its greatest test since the Cold War. But there is a good chance that the international integration of markets will also survive this time around.
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