Over the last half-century the world has been transformed by huge flows of trade and investment. The source of our food and the manufacture of everything from trainers to mobile phones has been revolutionised. Bank inquiries in Newcastle are handled in Bangalore. Secure industrial jobs have evaporated in Europe and North America and reappeared on the other side of the world. Exports, which amounted to less than 10% of global GDP in the 1970s, now stand at 25%.
Globalisation has been a massive social and economic transformation. It has, by the same token, been hotly contentious, creating losers as well as winners. And this raised the question: would it be brought to an end by eruption of opposition? Again and again – after the 1999 Seattle WTO protests, September 11, the financial crisis of 2008 and the election of Donald Trump – there have been predictions of globalisation’s terminal crisis. In the background lurks the memory of the 1930s and the Great Depression, when trade and capital flows contracted, not to recover for the best part of half a century.
But the Covid-19 shock has raised globalisation angst to a new pitch. The World Trade Organization (WTO) is predicting that trade may fall by a record 32%. The lockdowns were disruptive enough. But as the economic crisis deepens, 2020 is beginning to look like something worse: a perfect disruptive storm.
To see why, consider the range of factors that shape the international division of labour. Start with politics.
The pursuit of profit extends across national borders and lines of political conflict. But if you are going to set aside politics and diplomacy, you need to agree to differ. It helps if you have an arbiter, a global hegemon. It is no coincidence that the surge in global trade and investment coincided with what seemed like decisive American victory in the cold war.
In addition to politics, the flow of goods is driven by technology. The Industrial Revolution of the late 18th century centred on cotton. A quarter of a millennium later the garment supply chain still spans the world, from the cotton farms of Australia to sweatshops in Bangladesh and big box malls in American suburbs, now empty of customers. Twenty-first century smartphones are produced by a hyper-sophisticated network linking labs and software coders in the west with chip foundries in South Korea and Vietnam and assembly lines in China and Vietnam. The greatest single driver of globalisation in recent years has been containerisation, which slashed the cost of shipping.
Apart from politics and technology, who makes what, and where, is decided by the terms of trade, which depend on the balance of costs and prices and the matrix of exchange rates. Sudden movements in currencies shift costs, disrupting existing patterns of demand and supply.
Finally, whether we have the appetite to buy goods – made at home or abroad – depends on the overall state of the economy, on what economists call “aggregate demand”, the sum of consumption, investment and government spending.
Add together technology, price effects, macroeconomics and geopolitics and it becomes clear why, in 2020, we face a perfect storm.
On the technological front, containerisation and the revolution in outsourcing have run their course. The car industry, which operates the most complex supply chains, is undergoing a technological revolution. The advent of electric cars (or what the industry calls “e-mobility”) will simplify and shrink production, cutting millions of jobs. Consultants like McKinsey’s reckon that it will only be a matter of time before the armies of female factory workers currently employed in cutting and sewing clothes will be replaced by robots.
Meanwhile, the Covid-19 recession has slashed consumption and investment. The US is by far the largest importer, and its demand has been hammered. The current strength of the dollar will go some way towards offsetting the fall in American consumption. A more valuable dollar makes it more attractive to export to the US. But it may also trigger new trade wars.
Particularly aggravating to the White House will be the fall in the Brazilian currency, the real. Trump may regard the Brazilian president Jair Bolsonaro as a kindred spirit, but he will not like the huge surge in Brazilian exports as China’s pig farmers opt for the cheapest source of animal feed.
The promise of increased agricultural exports from the US to China was key to the so-called phase one trade deal, solemnised in January. At least for a few weeks early this year Trump stuck to the phase one script. But that restraint has not lasted. Since April there has been a truly spectacular escalation in rhetoric between Washington and Beijing.
Trump’s nationalist bluster plays to his gallery. China makes a good stick with which to beat Joe Biden, who is reputed to favour a more cooperative line. Altogether more serious is the systematic reorientation in US strategy towards China that had already begun under Barack Obama, with the “pivot to Asia” in 2011, and culminated in May 2020 with the release by the Trump administration of a comprehensive new strategy document.
The document ends any further discussion in Washington of the possible convergence of China with the western model. Instead, all branches of American government are sworn in on a posture of great power competition. Nor is this merely rhetoric. It goes hand in hand with a further round of sanctions against China’s telecoms champion, Huawei. By refusing to allow chips for Huawei, even chips of Huawei’s own design, to be manufactured on ultra hi-tech equipment that Taiwanese chip foundries source from the US, the Trump administration has effectively declared a technological war.
Meanwhile, the UK has announced its decision to exclude Huawei from its 5G network within three years. Australia and China are embroiled in a mini-trade war over barley and beef. Huawei executive Meng Wanzhou awaits her fate under house arrest in Canada. If she is extradited to the US, expect a storm to break loose.
Of course, there are countervailing forces. Business, including American business, remains deeply committed to foreign investment and trade. Europe is reluctant to choose between the US and China. Angela Merkel has announced that she will make relations with China one of the priorities of Germany’s presidency of the European council.
But, deal-making apart, the broader vision of the flat world of globalisation is dead. The institution that most clearly embodied that “end of history” vision, the WTO, was launched in January 1995. Today, the WTO is in tatters. Its dispute-processing procedures have been paralysed by deliberate American obstruction and its head, Brazilian Roberto Azevêdo, has announced that he is resigning a year ahead of time, which leaves the WTO leaderless in the face of the greatest shock to world trade since 1945.
Comparisons with the 1930s should not be taken too far. We don’t live under the shadow of total war, and there are good reasons to welcome the end of 1990s-style hyper-globalisation. But we should not underestimate the break with the recent past or kid ourselves that there is any obvious alternative on offer.
• Adam Tooze is a professor of history at Columbia University