In her book about the history of capitalism, professor Joyce Appleby asks whether “the universal benefits of global access to goods and information will triumph over protective impulses.” At the time her book was published (2011), this question sounded more speculative than as a reflection of reality. Eleven years later, things have changed so dramatically in the global stage that questioning the sustainability of economic globalization is no longer a theoretical matter.
I see three developments that have pushed globalization to the corner. The first was the rise of economic nationalism in the U.S. and other western countries. The second, is the global aspirations of China. And the third is the Russian war on Ukraine this year.
In modern times, we have witnessed ebbs and flows of economic globalization. In the 19th century, a wave of globalization prospered during the Victorian era under the aegis of Pax Britannia and lasted until the break out of World War I in 1914. This was followed by 30 years of protectionism and economic instability. Then in 1944, the Bretton Woods agreements put the foundations of the post-war international economic order with the creation of institutions, like the World Bank, the International Monetary Fund (IMF), and the GATT (a precursor of the World Trade Organization). Still though country by country differences in trade and investment restrictions as well as the abstention of the Soviet Block and China from this economic order made globalization spotty and terribly incomplete.
Then in the 1980s, a wave of deregulation and liberalization across the globe as well as the introduction of the market economy in China and the countries that emerged from the break-up of the Soviet Block ushered an unprecedented growth of transnational commerce and business.
These periods of economic globalization share a common condition. Namely, the presence of a world power that maintains freedom of movement, enforces a framework of resolving economic disputes, and has a strong currency to serve as the international means of payment. This role, however, requires domestic political and economic strength and stability. And this is where we find the weak point of the global economic order. That was the case with Great Britain, which, exhausted from two world wars, had to relinquish its global leadership to the US. So, we have to ask what staying power the U.S. now has to continue in this role.
J. M. Keynes had recognized that domestic instability is the main threat to international stability; and, furthermore, that unemployment and worker discontent breed populism and political instability. Unfortunately, the architects of the latest global economic order failed to heed this lesson. Instead, they placed more weight on the aggregate gains (e.g., GDP) from international trade than its effects on blue-collar workers and their communities. Without a policy of blunting the blow of global competition through income support programs and retraining, workers were left to bear the brunt of globalization. The main issue was not unemployment per se but the loss of reliable and well-paying jobs caused by de-industrialization due to the offshoring of U.S. jobs mostly to China.
Their electoral revolt against the political establishment in D.C. came in the presidential election of 2016. We saw the same political reaction in the Brexit vote and the Yellow Vest protests in France. Now even the Biden administration has been forced to adopt a more cautious stand toward globalization despite the presence of many globalists in its ranks.
Even before the war in Ukraine, the growing antagonism toward China had led many policy makers within and outside the U.S. government to the conclusion that economic disputes and grievances could not be defended if the production and control of important goods and technologies were controlled by global rivals. Semiconductors, 5G technologies, and Artificial Intelligence are some of the most important areas where U.S. dependence on foreign producers is deemed to pose a national risk. The Russian invasion in Ukraine brought forth the same problem for the European countries which are heavily dependent on Russian energy.
Free markets work when buyers and sellers can uphold the free flow of goods and market dominance does not impose unfair burdens to others (as, for example, big tech firms, like Apple and Google, are often accused of doing). The same principle holds in international markets. Nonetheless, countries, like individual firms, have incentives to exploit their dominance in certain markets to further their national and economic interests. Take, for example, the U.S. practice of using its currency to impose financial sanctions on rivals. It is natural then for rival powers to look elsewhere for alternative payment systems. Whether it is energy, technology, currency or the financial system, once countries lose their trust that access to these “goods” is unencumbered, they start to retrench from international commerce.
Another by-product of global distrust is the pursuit of national industrial policies in economic sectors different countries value as essential to their security. The U.S., for example, has earmarked billions of dollars to support industries in sensitive tech fields. The adoption of an industrial policy in a country where it was previously an anathema signifies the strength of the forces that are now working against economic globalization.
Finally, the uni-polar paradigm that had sustained long periods of economic globalization is now challenged, not only by China, but other countries as well, including Russia and India. In a world in which countries vie for global influence, economic and technological advantages inevitably become the means toward attaining global aspirations. None of that works in favor of economic globalization.
In light of these developments, we have to ask: Is economic globalization possible if the leading participants fail to maintain domestic economic and political stability? Is economic globalization possible in a multi-polar world where national interests clash with the free flow of goods, information, and know-how?
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