Globalisation: why it went into retreat
- August 4, 2022
- Michael Lind
Thanks to cold war, hot war, and the revived quest of many nations for a degree of industrial self-sufficiency, free market globalisation has peaked for the foreseeable future.
In a speech in Washington, D.C. in 2019, ex-British prime minister Tony Blair declared that ‘globalisation is a force of nature, not a policy; it is a fact.’ He echoed President Bill Clinton back in 2000: ‘Yet globalisation is not something we can hold off or turn off. It is the economic equivalent of a force of nature — like wind or water… But there is no point in denying the existence of wind or water, or trying to make them go away.’ A generation ago, sentiments like these struck many otherwise intelligent people as profound. Now they seem quaint.
Globalisation is under fire. In the last decade, the partial deindustrialisation of Western democracies by a combination of corporate offshoring and cheap imports from China and other low-wage nations has contributed to populist insurgencies against trade and immigration policies on both sides of the Atlantic. In the US in 2016, votes for Bernie Sanders and Donald Trump were high in areas that had lost a lot of manufacturing to global competition. In Europe as well, anti-system populism is strong in post-industrial areas like eastern Germany and Britain’s Red Wall.
Among trans-Atlantic elites, the consensus in favour of free market globalisation that dates back to the end of the Cold War remains, but it is showing cracks. Shortages of protective personal equipment (PPE) and medicinesduring the COVID-19 pandemic dramatically revealed how dependent the US and Europe are on fragile supply chains and suppliers, many of them located in China. At the same time, what many see as a new cold war between the West and China and Russia, catalysed by Russia’s invasion of Ukraine, has led to economic warfare in the form of sanctions and embargoes that have disrupted global markets and may result in the disintegration of the world economy into rival military and economic blocs.
If that occurs, it will mark a return to the historic pattern of ‘jealousy of trade’ and economic nationalism. Since the Industrial Revolution began in Britain in the 1800s, every great power has sought to obtain its own share of industries that are viewed as critical to military strength and economic growth, from textiles and steel in the nineteenth century to automobiles and aerospace in the twentieth and drones and artificial intelligence in the twenty-first.
For generations, national industrial policies have been justified by several rationales. National security is the most important. In the industrial era, a country cannot be a military power of the first rank if it is dependent on other countries for weapons and military supplies. And it is more efficient to convert a civilian industrial base to wartime production than it is to pay to maintain a wholly separate military-industrial base.
Another factor is the ‘terms of trade.’ Manufacturing is high-value-added. Agriculture and mining are low-value-added. It takes enormous quantities of iron ore to buy a few refined metal goods and a great deal of crude oil to buy plastics made from advanced chemistry. As a result, in international trade, there tends to be a seller’s market in manufactured or refined products, and a buyer’s market in food and raw materials (unless those are very scarce). Most countries, as they develop, therefore seek to shift their economies from low-value-added sectors like resource extraction and agriculture to high-value-added manufacturing of various kinds. In today’s era of transnational industrial production, the same logic leads developing countries to want to move from low-value-added to high-value-added links in supply chains.
Yet another reason for national fostering of industry consists of the spillovers from a dynamic manufacturing sector to the rest of a national economy. Manufacturing creates more jobs and generates more research and development opportunities than resource extraction, agriculture, and low-productivity services like tourism.
Unlike purely domestic goods and services, manufactured products can be sold to customers in other countries as well as at home. Professional services like global banking and insurance are part of the ‘traded sector’ as well, but a much smaller part than manufactured exports. While the customers for non-traded goods and services are limited, manufacturing for export potentially can enjoy a market of hundreds of millions or billions worldwide.
Manufacturing is characterised by increasing returns to scale — the more a firm produces, the cheaper it is to produce. In manufacturing industries there is a natural tendency for one or a few big firms to dominate a market. Likewise, in the global economy there is a tendency for one or a few countries to dominate entire sectors (one Chinese firm, DJI, makes more than 70% of all civilian drones in the world). Even though these firms have global markets, most are based in one home market which benefits from the global success of such a ‘national champion.’
Consider these examples. For decades the global wide-bodied jet manufacturing industry has been a duopoly dominated by Boeing and Airbus. In 2019, 66.8% of new automobiles were manufactured by the ten largest global car companies: Toyota, VW, Hyundai, GM, Ford, Nissan, Honda, Fiat, Renault, and PSA. In 2021, the global drone market was dominated by the Chinese company DJI (54%), followed by Autel (7%), Custom/DIY (4%), Skydio (3%), Parrot (3%), and others. In 2020, the largest commercial shipbuilding companies in the world were Hyundai Heavy Industries (South Korea), STX Offshore & Shipbuilding (South Korea), DSME (South Korea), Samsung Heavy Industries (South Korea), Sumitomo Heavy Industries (Japan), Fincantieri (Italy), United Shipbuilding Corporation (Russia), CSSC (China), Sembcorp Marine (Singapore), and Tsuneishi Shipbuilding (Japan).
The semiconductor market in 2021 was dominated by a single company, Taiwan’s TSMC, with 54% of the global market share, followed by South Korea’s Samsung (17%), Taiwan’s UMC (7%), with US-based Global Foundries coming in fourth at a mere 7%. In 2021 the global lithium-ion battery market was dominated by China’s CATL (32.5%), followed by South Korea’s LG Chem (21.5%) and Japan’s Panasonic (14.7%). Four-fifths of the world’s plate glass market in 2017 was dominated by five companies: Asahi Glass, Saint-Gobain, Nippon Sheet Glass, and Guardian, while Corning had 52% of the global liquid crystal display glass market, followed by Asahi Glass (24%), Nippon Sheet Glass (17%), AvanStrate (2%) and others (5%). The global steel market is much less concentrated, with the top five companies — China Baowu Group, AreclorMittal, HBIS Group, Shagang Group, and Nippon Steel Corporation — making up only 17.5% of global manufacturing in 2020. This list is far from comprehensive and it leaves out alliances among companies, as well as arm’s-length supply chains coordinated by a single firm.
The country that dominates global trade in manufacturing at any given time — Britain in the 1840s, the US in the 1940s, and perhaps China in the 2040s — often preaches universal free trade, in the hope that its own superior manufactured goods will drive those of other nations out of the global market, forcing its trading partners to be suppliers of resources and food and low-value-added components rather than industrial rivals. In the mid-nineteenth century, British economist Stanley Jevons boasted: ‘Unfettered commerce … has made the several quarters of the world our willing tributaries.’
Because firm scale acts as a barrier to entry for competitors, it is in the interest of countries that want to catch up with the manufacturing leaders to discriminate in favour of their own ‘infant industry’ firms or global transplants with measures like subsidies or tariffs. On December 5, 1791, Alexander Hamilton, the first Secretary of the Treasury of the United States, presented the US Congress with ‘The Report on the Subject of Manufactures,’ or the Report on Manufactures, as it is often known. Hamilton made the case that the US would benefit from a share of advanced technological production:
The employment of Machinery forms an item of great importance in the general mass of national industry…[M]anufacturing pursuits are susceptible in a greater degree of the application of machinery, than those of Agriculture … The substitution of foreign for domestic manufactures is a transfer to foreign nations of the advantages accruing from the employment of Machinery, in the modes in which it is capable of being employed, with most utility and to the greatest extent.
Hamilton recommended that the federal government promote ‘infant industries’ in the US by bounties (subsidies), which he preferred to tariffs. In 1832, a 23-year-old politician announced his first campaign for the Illinois state legislature by endorsing the American System, as the Hamiltonian programme for national development was then known:
Fellow-Citizens: I presume you all know who I am. I am humble Abraham Lincoln. I have been solicited by many friends to become a candidate for the Legislature. My politics are short and sweet, like the old woman’s dance. I am in favor of a national bank. I am in favor of the internal improvement system, and a high protective tariff.
Lincoln’s successor in the White House, Ulysses S. Grant, mocked British critics of American protectionism, saying that ‘within 200 years, when America has gotten out of protectionism all that it can offer, it too will adopt free trade.’ It only took 50 years. Behind a wall of tariffs, the US with its single continental market and its dynamic manufacturing firms caught up with and surpassed Britain to become the leading manufacturing power in the world by the early twentieth century. Only after the Second World War, when the US no longer feared industrial competitors and wanted to open foreign markets to its exports and investment, did Uncle Sam, like industrial Britain a century earlier, convert to the gospel of free trade.
In 1987, the economist Paul Krugman observed: ‘If there were an Economist’s Creed, it would surely contain the affirmations “I understand the Principle of Comparative Advantage” and “I advocate Free Trade.” … Yet the case for free trade is currently more in doubt than at any time since the 1817 publication of Ricardo’s Principles of Political Economy.’ Indeed, while opposition to protectionism remains the dominant creed in the English-speaking world, some of the greatest economists of the past half century have undermined its dogmas.
In the 1960s, the British economist Nicholas Kaldor showed that the classic Ricardian argument for free trade based on comparative advantage does not work when one trading partner has industries that enjoy increasing returns to scale, like most manufacturing industries. Another blow to free trade orthodoxy came in 2001, when William J. Baumol, one of America’s leading economists, and Ralph Gomory, a leading mathematician, demonstrated in Global Trade and Conflicting National Interests that some countries could benefit at the expense of others in a world economy based on technological innovation and giant firms. In a 2004 article in The Journal of Economic Perspective, Paul A. Samuelson, known as the dean of American economics, upset free-traders by showing how the combination of free trade and mass migration could harm a country.
In spite of these powerful intellectual challenges to free trade orthodoxy, a commitment to increasing trade liberalisation was shared by elites on both sides of the Atlantic in the early 2000s. The rise of China as both an economic and a military power has provided a challenge to the free-market consensus more powerful than academic arguments. When the Clinton administration brought about Permanent Normal Trade Relations (PNTR) with China in 2001, it was widely assumed that China would continue to specialise in low-wage, low-value-added links in global supply chains — and it was hoped that a rising Chinese middle class would press for political liberty and democracy. Instead, China has used its model of illiberal state capitalism to try to corner one global manufacturing industry after another. In 2015, the Chinese government announced its ambitious ‘Made in China 2025’ strategy for systematically raising the Chinese domestic content of key manufactured goods, displacing foreign importers and suppliers.
Meanwhile, instead of becoming more liberal and democratic, China has become more authoritarian under Xi Jinping. Chinese foreign policy has taken an aggressive turn, with China unilaterally annexing disputed islands in the South China Sea, engaging in bloody skirmishes with India, and building up its military forces with the goal of replacing the US as the dominant military power in Asia.
The response has been what many view as a new cold war in what the Pentagon calls the ‘Indo-Pacific,’ with China allied with Vladimir Putin’s Russia against the ‘Quad’ or quadrilateral alliance of the US, Japan, India, and Australia, joined by Britain in the AUKUS group. Viewing China as an economic as well as a military threat, American leaders have followed one of two strategies.
One strategy is to maintain a commitment to free market globalisation among the US and its allies and neutrals on a smaller scale, while excluding China until it reforms. Freezing China out of a US-dominated Asia-Pacific trade bloc was the goal of the Obama administration’s ill-fated Trans-Pacific Partnership (TPP) agreement. But many Americans have soured on globalisation, which they associate with the outsourcing of industry and the replacement of good jobs by bad ones, and both Hillary Clinton and Donald Trump denounced the TPP in 2016. President Trump took a much more unilateral approach to trade policy, imposing tariffs on European allies and Canada as well as rivals like China to protect favoured American industries.
President Joe Biden has sought to repair relations with some allies angered by Trump’s tariffs, but at the same time the Biden administration has kept some tariffs on China imposed by Trump and favours a national industrial policy to reduce US dependence on countries like Taiwan for critical technological products like semiconductors. The COVID-19 pandemic revealed the dependence of the US on China, India, Vietnam, and other countries for essential health care supplies, and the inflation that followed the pandemic has been driven largely by disruptions in global manufacturing and energy supply chains. Russia’s invasion of Ukraine, followed by the impositions of severe sanctions by the US and its European allies, has accelerated the fracturing of the world economy into rival blocs centered on rival military great powers.
Thanks to cold war, hot war, and the revived quest of many nations for a degree of industrial self-sufficiency, free market globalisation has peaked for the foreseeable future. Tony Blair was wrong. Globalisation is not a force of nature, it is a policy. Or perhaps, in the past tense, it was a policy.