Much has been made of the threat of deglobalisation, fuelled by geopolitical tensions between major powers, Russia’s war on Ukraine, fragmentation of supply chains, and macroeconomic strains. Anxieties about deglobalisation are intensifying amidst tensions that are increasingly taking on a prickly tone.
Despite global fractures and growing economic risks, fears about deglobalisation are exaggerated and based on the wrong mischaracterisation of what is at play. Deglobalisation implies a sustained unravelling of global commercial flows in the form of cross-border trade and investment. This is far from reality.
Whenever major powers tussle, international relations become strained, generating risks to global growth and prosperity. Geoeconomic frictions between China and the US over trade and technology supremacy have been most remarkable in their threat to global stability. The effects of global instability are more menacing for African countries.
The World Economic Forum’s Global Risks Report 2023
shows that the world faces multiple crises. While the economic risks are real, the world is not about to be fragmented into hermetically sealed national economic systems.
Concerns over deglobalisation often take for granted that globalisation benefits all countries equitably when, in reality, inequalities have long formed its backdrop. According to the World Inequality Report 2022
, inequalities today are about the same as in the 1980s. The report states that “the richest 10 percent of the global population currently takes 52 percent of global income, whereas the poorest half earns 8.5 percent of it”.
While countries like China and India may have benefitted from globalisation – with China lifting 800 million people out of poverty in four decades, according to the World Bank – poorer regions of the world like Africa experienced further marginalisation and with a constrained voice in multilateral institutions.
An honest assessment of globalisation must recognise that although it has delivered benefits through trade and investment flows, it has a dark underbelly – inequalities and environmental externalities. In some instances, globalisation has amplified socio-economic tensions within countries. The inclination to populist nationalism and self-determination is partly explained by the propensity of globalisation to redistribute gains to elites in society.
Deglobalisation is not the most crucial challenge of our age. There is no sign that global trade and finance are in a sustained recession to suggest the world has entered a mode of deglobalisation.
Without a doubt, geopolitics, military conflict risks, and pandemics shock global investment flows and disrupt trade. The effects of geopolitics on investment flows were apparent in 2017 when a significant decline in global foreign direct investment flows, by 23%, coincided with the escalation of trade tensions between China and America.
Decreased rates of return, for example, due to a slump in commodity prices and tax reforms in the US during this period, contributed to dampening investment activity. In turn, a fall in investment spending decelerated international trade flows. These disruptions are temporary and contained.
None of this is to say all is well in the global economic system. At the height of Covid-19 and the beginning of Russia’s war in Ukraine, the world experienced a severe economic slowdown due to bottlenecks with supply chains and spikes in energy prices. Further, China’s implementation of the zero-Covid policy had a disruptive effect on global commerce. The global economy may have slowed, but it is not experiencing deglobalisation.
China-US relations will no doubt come under strain for many years to come and be aggravated by the increasingly belligerent posture. However, these economies will not decouple as deep economic and financial ties intricately bind them.
The US might, in the near future, impose further restrictions on China’s access to US-originating technologies, more so in light of the Chinese spy balloon incident, to thwart the Chinese government’s use of such technologies to bolster its civilian-military complex.
We should remember that historically the US has been in the habit of imposing restrictive measures on foreign trade and investment. These measures have entailed a combination of tariffs, imposition of voluntary export restraints, entity list categorisation, and restrictions on investment through the Committee on Foreign Investment in the US that vetoes certain categories of investments ostensibly on security grounds.
America forced Japan to implement voluntary export restraints, in 1955, when the country was acceding to the General Agreement on Trade and Tariffs. America’s action was aimed at undercutting the competitiveness of Japanese clothing and textiles in America. The US would, in the mid-1970s, extend the same illiberal measure to South Korea and Taiwan targeting their footwear exports.
Responding to political pressure at home and triggered by Japan’s burgeoning current account surplus, the Reagan administration in the 1980s would again force Japan to implement voluntary export restraints to curb its sale of fuel-efficient autos in the US market. None of these activities halted the march of globalisation. Today’s geopolitical tensions will not yield a reversal of globalisation either due to deep and interconnecting networks of finance, technology, and trade.
What should worry us more is the divergence in living standards and sustained patterns of inequality within and between countries due to the inequitable distribution of the benefits of globalisation and the emergence of new technologies that reproduce global disparities. Deglobalisation is the wrong target.This article was first published in the South China Morning Post on 18 February 2023