GLOBALISATION AND NATIONALISM

No one on the Dissident Right
has even read Schwab

On the right and to the masses the work of Klaus Schwab is overshadowed by his meme (basically "Dr. Evil"), but the truth is he is a serious intellectual whose ideas need to first be understood to offer any meaningful criticism. Indeed, a proper reading of Schwab's book, Covid 19: The Great Reset (co-written with Thierry Malleret). reveals that far from being a blind promoter of globalism, as claimed by idiot Rightists, he is in fact an incisive critic of it. (C. Liddell)

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by Klaus Schwab

Globalization – an all-purpose word – is a broad and vague notion that refers to the global exchange between nations of goods, services, people, capital and now even data. It has succeeded in lifting hundreds of millions of people out of poverty but, for quite a number of years now, it has been called into question and even started to recede. As highlighted previously, today’s world is more interconnected than it has ever been but, for more than a decade, the economic and political impetus that made the case for and supported the increase of globalization has been on the wane. The global trade talks that started in the early 2000s failed to deliver an agreement, while during that same period the political and societal backlash against globalization relentlessly gained strength. As the social costs provoked by the asymmetric effects of globalization rose (particularly in terms of manufacturing unemployment in high-income countries), the risks of financial globalization became ever-more apparent after the Great Financial Crisis that began in 2008. Thus combined, they triggered the rise of populist and right-wing parties around the world (most notably in the West), which, when they come to power, often retreat into nationalism and promote an isolationist agenda – two notions antithetical to globalization.

The global economy is so intricately intertwined that it is impossible to bring globalization to an end However, it is possible to slow it down and even to put it into reverse. We anticipate that the pandemic will do just that. It has already re-erected borders with a vengeance, reinforcing to an extreme trends that were already in full glare before it erupted with full force in March 2020 (when it became a truly global pandemic, sparing no country), such as tougher border controls (mainly because of fears about immigration) and greater protectionism (mainly because of fears about globalization). Tighter border controls for the purpose of managing the progression of the pandemic make eminent sense, but the risk that the revival of the nation state leads progressively to much greater nationalism is real, a reality that the “globalization trilemma” framework offered by Dani Rodrik captured. In the early 2010s, when globalization was becoming a sensitive political and social issue, the Harvard economist explained why it would be the inevitable casualty if nationalism rises. The trilemma suggests that the three notions of economic globalization, political democracy and the nation state are mutually irreconcilable, based on the logic that only two can effectively co-exist at any given time. [1]

Democracy and national sovereignty are only compatible if globalization is contained. By contrast, if both the nation state and globalization flourish, then democracy becomes untenable. And then, if both democracy and globalization expand, there is no place for the nation state. Therefore, one can only ever choose two out of the three – this is the essence of the trilemma. The European Union has often been used as an example to illustrate the pertinence of the conceptual framework offered by the trilemma. Combining economic integration (a proxy for globalization) with democracy implies that the important decisions have to be made at a supranational level, which somehow weakens the sovereignty of the nation state. In the current environment, what the “political trilemma” framework suggests is that globalization must necessarily be contained if we are not to give up some national sovereignty or some democracy. Therefore, the rise of nationalism makes the retreat of globalization inevitable in most of the world – an impulse particularly notable in the West. The vote for Brexit and the election of President Trump on a protectionist platform are two momentous markers of the Western backlash against globalization. Subsequent studies not only validate Rodrik’s trilemma, but also show that the rejection of globalization by voters is a rational response when the economy is strong and inequality is high. [2]

The most visible form of progressive deglobalization will occur at the heart of its “nuclear reactor”: the global supply chain that has become emblematic of globalization. How and why will this play out? The shortening or relocalization of supply chains will be encouraged by: (1) businesses that see it as a risk mitigation measure against supply chain disruption (the resilience versus efficiency trade-off); and (2) political pressure from both the right and the left. Since 2008, the drive towards greater localization has been firmly on the political agenda in many countries (particularly in the West), but it will now be accelerated in the post-pandemic era. On the right, the pushback against globalization is driven by protectionists and national-security hawks who were already gathering force before the pandemic started.

Now, they will create alliances and sometimes merge with other political forces that will see the benefit of embracing an antiglobalization agenda. On the left, activists and green parties that were already stigmatizing air travel and asking for a rollback against globalization will be emboldened by the positive effect the pandemic had on our environment (far fewer carbon emissions, much less air and water pollution). Even without pressure from the far right and the green activists, many governments will realize that some situations of trade dependency are no longer politically acceptable. How can the US administration, for example, accept that 97% of antibiotics supplied in the country come from China? [3]

This process of reversing globalization will not happen overnight; shortening supply chains will be both very challenging and very costly. For example, a thorough and all-encompassing decoupling from China would require from companies making such a move an investment of hundreds of billions of dollars in newly located factories, and from governments equivalent amounts to fund new infrastructure, like airports, transportation links and housing, to serve the relocated supply chains. Notwithstanding that the political desire for decoupling may in some cases be stronger than the actual ability to do so, the direction of the trend is nonetheless clear. The Japanese government made this obvious when it set aside 243 billion of its 108 trillion Japanese yen rescue package to help Japanese companies pull their operations out of China. On multiple occasions, the US administration has hinted at similar measures.

The most likely outcome along the globalization–no globalization continuum lies in an in-between solution: regionalization. The success of the European Union as a free trade area or the new Regional Comprehensive Economic Partnership in Asia (a proposed free trade agreement among the 10 countries that compose ASEAN) are important illustrative cases of how regionalization may well become a new watered-down version of globalization. Even the three states that compose North America now trade more with each other than with China or Europe. As Parag Khanna points out: “Regionalism was clearly overtaking globalism before the pandemic exposed the vulnerabilities of our long-distance interdependence”.[4] 

For years, with the partial exception of direct trade between the US and China, globalization (as measured by the exchange of goods) was already becoming more intraregional than interregional. In the early 1990s, North America absorbed 35% of East Asia’s exports, while today this proportion is down to 20%, mainly because East Asia’s share of exports to itself grows every year – a natural situation as Asian countries move up the value chain, consuming more of what they produce. In 2019, as the US and China unleashed a trade war, US trade with Canada and Mexico rose while falling with China. At the same time, China’s trade with ASEAN rose for the first time to above $300 billion. In short, deglobalization in the form of greater regionalization was already happening.

COVID-19 will just accelerate this global divergence as North America, Europe and Asia focus increasingly on regional self-sufficiency rather than on the distant and intricate global supply chains that formerly epitomized the essence of globalization. What form might this take? It could resemble the sequence of events that brought an earlier period of globalization to an end, but with a regional twist. Antiglobalization was strong in the run-up to 1914 and up to 1918, then less so during the 1920s, but it reignited in the 1930s as a result of the Great Depression, triggering an increase in tariff and non-tariff barriers that destroyed many businesses and inflicted much pain on the largest economies of that time. The same could happen again, with a strong impulse to reshore that spreads beyond healthcare and agriculture to include large categories of non-strategic products. Both the far right and the far left will take advantage of the crisis to promote a protectionist agenda with higher barriers to the free flow of capital goods and people. Several surveys conducted in the first few months of 2020 revealed that international companies fear a return and aggravation of protectionism in the US, not only on trade, but also in cross-border mergers and acquisitions and government procurement. [5] 

What happens in the US will inevitably ricochet elsewhere, with other advanced economies imposing more barriers to trade and investment, defying the appeals from experts and international organizations to refrain from protectionism. This sombre scenario is not inevitable but, over the next few years, we should expect the tensions between the forces of nationalism and openness to play out across three critical dimensions: (1) global institutions; (2) trade; and (3) capital flows. Recently, global institutions and international organizations have been either enfeebled, like the World Trade Organization or the WHO, or not up to the task, the latter due more to being “underfinanced and over-governed” [6] than to inherent inadequacy.

Global trade, as we saw in the previous chapter, will almost certainly contract as companies shorten their supply chain and ensure that they no longer rely on a single country or business abroad for critical parts and components. In the case of particularly sensitive industries (like pharmaceuticals or healthcare materials) and sectors considered to be of national-security interest (like telecommunications or energy generation), there may even be an ongoing process of de-integration. This is already becoming a requirement in the US, and it would be surprising if this attitude does not spread to other countries and other sectors. Geopolitics is also inflicting some economic pain through the so-called weaponization of trade, triggering fear among global companies that they can no longer assume an orderly and predictable resolution of trade conflicts through the international rule of law.

As for international capital flows, it seems already evident that national authorities and public defiance will constrain them. As already shown by so many countries and regions as different as Australia, India or the EU, protectionist considerations will become ever-more present in the post-pandemic era. Measures will range from national governments buying stakes in “strategic” companies to prevent foreign takeovers or imposing diverse restrictions on such takeovers, to foreign direct investment (FDI) being subjected to government approval. It is telling that, in April 2020, the US administration decided to block a publicly administered pension fund from investing in China.

In the coming years, it seems inevitable that some deglobalization will happen, spurred by the rise of nationalism and greater international fragmentation. There is no point in trying to restore the status quo ex ante (“hyper-globalization” has lost all its political and social capital, and defending it is no longer politically tenable), but it is important to limit the downside of a possible free fall that would precipitate major economic damage and social suffering. A hasty retreat from globalization would entail trade and currency wars, damaging every country’s economy, provoking social havoc and triggering ethno- or clan nationalism. The establishment of a much more inclusive and equitable form of globalization that makes it sustainable, both socially and environmentally, is the only viable way to manage retreat. This requires policy solutions addressed in the concluding chapter and some form of effective global governance.

Progress is indeed possible in those global areas that have traditionally benefited from international cooperation, like environmental agreements, public health and tax havens. This will only come about through improved global governance – the most “natural” and effective mitigating factor against protectionist tendencies. However, we do not yet know how its framework will evolve in the foreseeable future. At the moment, the signs are ominous that it is not going in the right direction. There is no time to waste. If we do not improve the functioning and legitimacy of our global institutions, the world will soon become unmanageable and very dangerous. There cannot be a lasting recovery without a global strategic framework of governance.

Notes:

[1] Rodrik, Dani, The Globalization Paradox, Oxford University Press, 2012.
[2] Pastor, Lubos and Pietro Veronesi, “A rational backlash against globalisation”, VOX, 28 September 2018, https://voxeu.org/article/rational-backlash-against-globalisation.
[3] Huang, Yanzhong, “U.S. Dependence on Pharmaceutical Products From China”, Council on Foreign Relations, Blog post, 14 August 2019, https://www.cfr.org/blog/us-dependence-pharmaceuticalproducts-china
[4] Khanna, Parag, “Post-pandemic: welcome to the multi-speed world of regional disparities”, Global Geneva, 26 April 2020, https://www.global-geneva.com/post-pandemic-welcome-to-the-multispeed-world-of-regional-disparities.
[5] Global Business Alliance, “Inbound Investment Survey”, May 2020, https://globalbusiness.org/dmfile/GlobalBusinessAlliance_InboundInvestmentSurveyFindings_May2020.pdf
[6]  Paulson, Henry, “Save globalisation to secure the future”, Financial Times, 17 April 2020, https://www.ft.com/content/da1f38dc-7fbc-11ea-b0fb-13524ae1056b.