…A tripolar globalization
On March 24, 2022, in a letter to his shareholders, Larry FINK wrote: “The Russian invasion of Ukraine has put an end to the globalization we have experienced over the last three decades.” Another end to globalization, one could say. I wouldn’t rush into such predictions. I’d rather take a step back and offer you a reading of the way the world works from an economic and geopolitical standpoint and its possible direction, precisely based on this tripolar logic that is taking shape.
To begin with, we could start by listening to Western governments, which helps realize how things have changed in a couple of decades – which is relatively small on the scale of History. In March 2000, Bill CLINTON, who was then waiting for a visit by the Chinese prime minister to negotiate what became the terms of the bilateral agreement on the accession of China to the WTO, described things as follows: “By joining the W.T.O., China is not simply agreeing to import more of our products; it is agreeing to import one of democracy’s most cherished values: economic freedom.” Another statement I find rather significant in this context, this time by Tony BLAIR in 2005, who said: “I hear people say we must stop and debate globalization. You might as well debate whether autumn should follow summer. They’re not debating it in China and India.” Also quite revealing and politically very important, on November 15, 2008, in the heart of the financial crisis’ storm, G20 heads of states and governments underscored “the critical importance of rejecting protectionism,” announcing efforts to “strive to reach agreement this year on modalities that leads to a successful conclusion to the WTO’s Doha Development Agenda […].”
Fast-forward: ten years almost to the day after this G20 Declaration, Donald TRUMP boasted on social media, calling himself “Tariff Man.” Emmanuel MACRON’s statement right before lockdown in March 2020, despite its much more civilized, less head-on tone, was also significant: “What this pandemic has shown is that some services, must remain outside of market law. Entrusting our food, our protection, our ability to provide care, our living environment in short, to others, is madness.” It is crystal clear that globalization has changed. A few days ago, China withdrew as AFC Asian Cup 2023 host. This means that, today, China believes that next year, three and a half years after the pandemic began, it still won’t be able to welcome foreigners in great numbers. Something has changed. Not only because of the war in Ukraine, and actually not a monolithic evolution.
To understand this breaking point, using a tripolar frame of reference is enlightening, not because these three poles are the most important part of the world, far from it since China, the European Union, and the United-States only account for 30 percent of the world population. Other areas are vital in other respects but, today, these three poles are structuring for the way the world and the economy operate. Let me try to show you why. In terms of size, these three blocs account for 53 percent of global GDP, which is funny because it is very close (1 percent) to their combined size in 1975. It is also almost exactly their share in manufacturing exports and in the filing of triadic patents worldwide. Most importantly though, in addition to their weight, they are structuring, which means that they are at the center of networks – the rest is organized around them. To try and show how interactions between these three poles have shaped the way the world economy works, we need to take a few steps back, especially to the 2007-09 economic and financial crisis. Indeed, this was really a breaking point, as a lot of graphs can show, and it reached a peak in terms of worldwide trade openness (which has not really gone down since). It was the end of what some call ultra-globalization: a period of accelerated globalization because of the extension and intensification of mutual economic dependence since the beginning of the 1990s, during which worldwide trade openness nearly doubled and the stock of foreign direct investments almost tripled in proportion to world GDP. In terms of politics, this was a time when western governments made commitments towards China, especially with its accession to the WTO in December 2001. This was also a strong era for the US, politically. Since then, things are not going exactly the same. Something has happened. What is it?
First, what has been done is done: value chains were set up, foreign investments were made, they could not be made again. Besides, China upgraded (and upped its prices!). No one gets paid $5 in China anymore, this trend sped up during that period and even kept going. So much so that, in 2016, minimum wage in Shanghai was over €300, that is the same amount as Hungary and twice as much as Bulgaria. Then, this Dantesque financial crisis endangered the financial system and had extremely deep trade and economic consequences across the globe. What did our nig players do? At that time, China had two major challenges: firstly, to maintain its growth. China was going through a period of ultra-growth at the time – how to avoid economic disruption that would question the country’s social stability? Secondly, China needed to restore a growth balance after realizing that it was too dependent on foreign countries, on exports and on the manufacturing sector. Enormous amounts were deployed: in 2009, China implemented a stimulus plan of nearly $600 billion. Some actually called 2009, “the year of the Chinese miracle.” In practice, it introduced a massive recovery policy and few people in the West realized how China lessened the economic depression that followed this crisis. What did China do? Credit, and massive infrastructural investments, which is very important. It is the State, with markets for Chinese companies. It could have done it differently, transferring wealth to families, but it didn’t.
It was a pivotal era. Comparing China’s GDP to the US-EU average, in 2007, China accounted for 48 percent. It has reached 75 percent in 2012. It is a pivot in terms of quantity but also of quality because the credit engine was massively lit, and China has not been able to stop it since. The desire was to restore balance but in practice it was a loss of balance. In terms of impact, looking at China’s account surplus, it is lower than before the crisis but when examining the trade surplus of the Chinese industry, compared with the world’s GDP, it amounted to 0.8 percent in 2007 and had doubled in 2015 to reach 1.6 percent.
What did the US do during and after this crisis? Obviously, the challenge was the devastating impact on the American economy and society. It revived wounds that were already deep in terms of industrial decline and inequalities. Like everyone else, they saw that China was changing categories and becoming a much more serious competitor. The US’ first reaction was macroeconomic: they put out all the stops to use their financial power and their status as world reserve currency, with which they can borrow without limit. Secondly, because of this new status for China, they put an end to their own engagement policy. Under Obama, this translated into what is called the Asia pivot, which means putting Asia in the center of military and strategic priorities, especially to contain China, considered as the main competitor. This strategy was essentially based on transpacific and transatlantic partnerships. The WTO also started actions, which the US had not done much before. Thirdly, at that point, it became clear that the US no longer wanted to pay for their global leadership. The main consequence was a geopolitical break.
In this context, how did the European union go through this phase? First, it was a time of economic weakening, which is a bit contradictory since it was an American crisis. But this is mostly because, financially speaking, Europe is not as central on the world stage. This crisis rubbed salt into the wound and showed how the dynamics in place since the eurozone was created was unsettling in Europe. It was based on a diverging mechanism rather than a converging system, and this crisis was very hard to manage for Europe. It revealed major divides and heterogeneity, with Germany doing much better than its neighbors, as well as an industrial focus and the size of the gaps between the countries, as well as the need for State intervention to change all this – in addition to fixing banking activities. It also revealed vision gaps, which have become even clearer over the years:
- A German vision guided by an ordoliberal economic approach and a contractual view of the European contract,
- In southern Europe, rancor for enduring most adjustments in many cases,
- A French vision giving much more weight to political decisions, even if it means taking liberties with agreements or rules – economically or geopolitically,
- Central Europe, focused on its own economic development and on nationalism, as it was the time when it was finally free of imperial rule.
The main lesson to learn from this era in Europe was the time from 2007 to 2016 approximately when it was faced with the politicization of globalization – within Europe itself and in foreign affairs. Europe likes multilateral relations, it is its DNA, its principles, its interest, though realizing that rules are not enough, especially to manage competition with China. Public debate shifted, notably in Germany, in the summer of 2016 when China’s Midea bought Kuka, the world’s leading industrial robots manufacturer. Germany realized that a massive wave of Chinese purchases was taking over high-tech companies, which obviously was not the result of an economic strategy but the direct consequence of the “Made in China 2025” program implemented in 2015 – one of that era’s structuring facts.
This brought France and Germany closer in the way they looked at managing these external relations. Regarding the evolution of China, one of the main aspects over the period was Xi Jinping arriving to power, a turning point in Chinese policy, with a vigorous grip, a will to reduce foreign dependence and to bet on self-sufficiency in several sectors. In Europe, the politicization of globalization also materialized with the migrant crisis, which had a huge impact, with a greater concern for power balance. Since then, there have been three structuring crises: Trump, Covid and war in Ukraine. For Trump, the foundation is a change of US strategy regarding globalization in general and China in particular. It was one of his main campaign arguments: getting out of the WTO, going towards frontal confrontation, naming China a strategic competitor (2017), contesting globalization, which leads to an attempt to destroy the framework, with very few constructive initiatives. Some agreements tried to condition exchanges to the unionization of labor law, which can be a good thing, but which has so far played a minor part – the Biden administration is currently working on it. There have been more and more extraterritorial sanctions, as well as export restrictions. External relations became very political and contentious, especially with China, but there were no structured alternative proposals.
How did China react to this crisis? Mostly, it assumed its place, which was a real break from the previous administration. Realizing how unreliable America was came as a shock for Chinese leaders. The result was an acceleration of the ongoing recentering and political reassertion, hence the importance of having “independent, controllable” value chains. In practice, according to European businesses set up in China, what it means is that they often have to get their supplies in China. China wants to depend on the outside as little as possible and is implementing very clear economic and political efforts to that end. There was also an acceleration of investments into the military and artificial intelligence.
In Europe, the Trump “crisis” was mostly a trust shock, but it also raised awareness: many believed that Trump was not completely wrong and that, indeed, China was not “playing along.” Effectively, all our attempts to enforce international agreements in the past 15 years have been quite frustrating in their results. When Trump really started to implement its trade wars with China in the spring of 2018, Europe lodged a complaint with the WTO, aligned with the US, notably on issues of technology and protection of intellectual property rights. A tripartite (US, Japan, and Europe) working committee was actually set up on the way to develop rules on the WTO’s industrial subsidies. In 2017, during the Taormine G7 summit, Angela Merkel declared: “We Europeans really have to take our destiny into our own hands,” which is a good summary of the stunned assessment Europeans made of the US, to whom they had mostly subcontracted security, that they were not a very reliable partner.
As far as Covid is concerned, several interesting lessons can be learned. First, it is a globalization crisis, even in its physical sense. All value chain malfunctions that appeared revealed a certain weakness but also agility. Indeed, even though there were a lot of disruptions, the shock was extremely sudden and violent, but world trade followed and has even gone up since. Vaccines were found in record time, based on international cooperation. No country can say they could have done it alone. In Europe, what came out was how dependent we were, which strengthened a certain will to go towards strategic autonomy. For the US, at first there was a failure of soft power, with the dreadful image of their first answer to the pandemic. In political and economic terms, “Buy America” policies were strengthened, with local restrictions to government purchase spending, which have remained since. The macroeconomic response was massive: they used their unique central role in the global financial system. It even seems like they did too much. This is fundamental data to understand the way globalization works today. For China, it strengthened the belief that it needed to protect itself from the outside. It started with a sort of superiority complex regarding its governance system. Another significant element was the failure to enhance this initial good reaction in terms of soft power, which shows that they didn’t really understand the game, being too aggressive in their diplomatic approach. Strangely, isolation has had little economic impact so far, but it does not mean that it will not have deeper consequences on mutual links and comprehension skills. It has been nearly three years since China became physically isolated, which is setting a new deal. There is currently pressure, maintained by the Chinese government, to Sinicize the general staff of foreign businesses set up in China.
Third structuring shock: Ukraine, with the cruel realization, for those who believed it, that globalization did not guarantee peace. It was a rather brutal reminder that trade relations have political conditions. It also showed that, in this globalized context, repercussions are international. It is a deep shock, notably because, in addition to its political dimension, it is characterized by the fact that economic sanctions have reached a new dimension, at least since the second world war. Trade relations are increasingly politicized and, quite ironically, Europe is the first one to do it, even though it is rather ill-prepared to deal with the consequences. There are two keystones – a financial part and the real sanctions. In the interwar period, regarding economic sanctions, in the UK, there was talk about the Treasury’s vision – meaning draining target countries of their currency – and the Admiralty’s vision – focusing on draining material supplies. Today we do both, with an ultimate threat now clearly defined in both cases: freezing the Central Bank’s reserves and banning exports in general, especially sensitive technology. It is a new dimension of globalization, which is now going to have a central role: in addition to the macroeconomic shock, it is important, to think about the future, to understand how this changes behaviors. In this new context, all governments are going to give more weight to security, with four main objectives:
- Securing supplies, especially for products that are uneasily replaced, notably raw materials. In this respect, Europe is lagging behind.
- Guaranteeing strong value chains and critical infrastructures to better anticipate shocks.
- Trying to be “on the right side”: more and more networks are focusing a lot of power in their center, notably in the finance, digital or information sectors, which gives rise to major unevenness.
- Mastering critical technology, which has gained ground.
So, what does this all amount to? Has de-globalization happened? The answer is no: globalization may have slowed down a bit, the openness level has not increased but it remains high. Compared with the end of 2019, in volume, in February 2022, global trade was 8 percent higher. Global trade bounced back quite well. Even bilateral trade between the US and China has gone up again recently, in spite of their conflicts. Yet we should not have a monolithic vision. Analyzing the evolution of trade openness since 2008, it is a mixed picture: in China, the average of export and import of merchandise in proportion to GDP has gone from 27 percent in 2008 down to 15 percent in 2019, almost half, which is a real break. The US went from 11 percent in 2008 to 9 percent in 2009 – a downturn rather than a real decreases. Lastly, Europe went from 13 percent in 2008 to 15 percent in 2019 – intra-European trade excluded –, which is a sizeable increase.
Heterogeneous trends, growing geopolitical tensions, but the European Union remains important to think about all that, because it is the only historical industrial power that has really held its position. In the 1980s and 1990s, there were three superpowers: Japan, the United-States and Europe. When analyzing the evolution of their market shares between 1997 and 2020, there is a collapse for the US and Japan – minus 55 and 51 percent respectively, and only 12 percent for the eurozone. Economically speaking, it means that this polarization is not always a bad thing for Europe. The other fundamental aspect is the common challenges we are all facing.
To understand the coming period, I believe two observations are both new and possibly structuring. The first is the fact that we are in a situation of close economic interaction, with a lot of political tension, which has no historical precedent. The second is that the world has become small having regard to the common challenges we are facing. Let us start with the first – close economic interdependence under political tension. After World War two, globalization grew under American leadership, with no comparable tension, and the US’ superiority that followed the end of the cold war was not seriously contested. The current situation is new; is it viable? It remains an open question, we cannot look at history to find an answer. We are in a context when trade relations are going to be a political lever rather than a vector of softer habits, as Montesquieu believed. Are we headed towards a block logic? Even though China is traditionally closer to Russia, it is not openly its ally and would rather limit its support’s cost, so nothing is certain. Are we headed towards decoupling? The answer is not the same in all countries: the US is looking for it, at least partially. Other important point: American democracy is sick, with bad blood between political parties, which is a real problem. China’s self-sufficiency tendencies are currently getting stronger, which for businesses mostly means a kind of sorting: if you are bringing new technology that can be useful to China, you are welcome – you are even helped! If on the other hand you are in a sector where China believes it no longer needs the outside, you are at least facing obstacles, or even completely excluded from the market. In some sectors, you will be accepted as a competitor because you help prices go down, which is good for the Chinese power. Another consequence is a form of decoupling, not between blocs but rather within companies: many western companies are now realizing that they cannot have unified governance as the Chinese authorities are forcing them to apply different rules – on digital aspects for instance. Faced with this risk, the European Union is, for now, the only one that still believes in multilateral relations. However, security issues are being emphasized, strengthened by concerns about the dysfunctional nature of American democracy, which represents a real threat for us today.
All these political tensions are also running against the tide: leading technologies have reached such a level of sophistication that it is impossible to stay on top without a highly advanced division of labor at global level. You need the best in the world, and they are not all in the same country. It is obvious in the pharmaceutical or aviation industries. Also, the world is getting smaller, meaning that human society has become so large that it has become a problem, and this is new. The first challenge – but not the only one – is global warming: the loss of biodiversity is equally alarming. Health has also become a global problem, as was clear with all the Covid variants. Technology and research are international. Peace is also a global theme. Possible massive conflicts over resources are already taking shape, for instance with the Grand Ethiopian Renaissance Dam on the Nile. These common challenges require us to make painful choices, to successfully control ourselves, collectively, because the planet is having an increasingly hard time coping with the human footprint. In today’s world, made smaller because of our means of communication and transportation, one can no longer remain isolated; withdrawal is not an option. We must manage what Asians call ‘connectivity’, but which has different models in the US, China, or Europe. China is struggling to be in the center, as seen with the Belt and Road Initiative. It can rely on its industry, on innovation in a few sectors but its political governance, its lack of alliance and its inability to reform are true weaknesses. The United-States want to maintain a global influence. In terms of means, they are still ahead in the military and finance, they master several networks, they have long-standing and extended alliances, powerful multinational corporations, but their industry is weak, and their deep internal malfunctions impairments result in a record level of inequalities, among other things. In Europe, objectives are structured around our liberal democracy, a sort of mission to defend human rights, and a depoliticized management of international relations. All of this is based on a social market economy, a system of exchanges open to international trade. Europe has significant strengths: its industrial and commercial power, its standardizing power – which is large – its democratic governance, its soft power – more and more so. However, it lacks hard power, and its US dependency is a weakness. Its true disadvantage is a lack of political cohesion, but it is the very nature of the European Union.
To conclude, I would like to highlight a typical feature of the EU: its standardizing power. Today, at least for technical standards, Europe <i> is </i> the standardizing power. In the 1970s, it was the California effect. California was a pioneer in ambitious standards, which then spread to the rest of the country and often to the rest of the world. California was the first state to ban fuel from gas, a standard that was later adopted in the rest of the US, then everywhere else. Today, that is what Europe does. Let us take for instance the regulation of electronic waste. Europe was the first to make choices that led to the removal of heavy metal from its composition, which was copied in California and then China a few years later. Indeed, Europe has a large market, which no global company can avoid; the highest standard for technical regulation; more ambition than the others. This all means that, for products where businesses do not want to bother with different standards, they all come together with the European standard.
I tried to share with you my understanding of the deep crises that have shaken us since the 2008- 09 financial crisis, which is not much from a historical perspective, and how they can be understood through tripolar relations between the European Union, the United-States and China. Simply put, my conclusion is this: we are in a small, troubled world, which means that interdependence cannot be avoided and that we must face the challenges ahead together. In this context, for many governments, security is becoming, if not an obsession, at least a compass.