The Banking Executive Magazine - July 2022 Issue

A New Form of Deglobalization Ahead If governments get it right, a more subdued, but also more sustainable and longer-lasting kind of globaliza- tion will emerge. And in an open and growing world economy, peddlers of deglobalization theories will find it easier to change jobs and re-skill. “The left and the right united shall never be defeated,” claimed the Chilean poet Nicanor Parra, and the current debate over deglobalization illustrates the point. So-called pro- gressives never liked fast growth in world trade and now greet any rever- sal with cries of “I told you so!” Globalization-supporting conserva- tives, on the other hand, react to the smallest setback with Chicken Little- like cries that “the sky is falling!” Both camps have an interest in exag- gerating the extent of deglobaliza- tion. The result is a widely accepted narrative of decline: After repeated fi- nancial crises, a nativist reaction, the COVID-19 pandemic, and now Rus- sia’s war on Ukraine, globalization’s days are numbered. It’s an eye-catching claim. But is it true? According to the World Bank, trade in goods and services as a share of global GDP fell from a peak of 61% in 2008, just before the global finan- cial crisis, to 52% in 2020. But this figure is still very high by historical standards – the trade-to-GDP ratio averaged just 42% in the 1990s, when critics were already complain- ing about hyper-globalization. Once final data are available, they will show that trade recovered in 2021 and 2022 as the pandemic receded. More interestingly, the all-out tariff war predicted by trade skeptics never erupted. Starting in 2018, then-US President Donald Trump increased tariffs on some Chinese goods, China retaliated, and the dispute spilled over into a handful of other markets. President Joe Biden initially found it expedient to keep some of Trump’s tariffs, but now plans to roll them back in an attempt to reduce US in- flation. A worldwide escalation in tariffs and quotas will not happen, for the sim- ple reason that voters do not want it to happen. In rich and poor countries alike, a parent can buy a pair of Chi- nese-made children’s sneakers for $10 or less. A generation ago, the only option in most places was a lo- cally-made pair costing several times that. Protectionism is supposed to be pop- ular with voters, but the reality is subtler. As any pollster will tell you, the statement “government should do what it can to protect local busi- nesses and local jobs” typically elic- its overwhelming support. The statement “government should pro- tect local industry even if that means much higher prices for consumers” meets with widespread derision. Three big changes are afoot in world trade, but none of them need imply widespread deglobalization. The first change is the reconfiguring of global supply chains. As the media have reported in gory detail, first the US-China tensions, then the pan- demic, and now the Russia-Ukraine conflict caught many global firms – in sectors ranging from cars to baby formula – without a Plan B to source the inputs they need. So, they are now switching from “just-in-time” to “just-in-case” supplies. “Resilience,” “near-shoring,” and “friend-shoring” are the buzzwords du jour. The expansion of world trade over the past two decades resembled the Gold Rush or the dot-com bubble of the early 2000s. Firms that found the lowest-cost supplier internationally, with little regard for the risks in- volved, could make big money. Other companies followed suit be- cause their competitors were doing it. Eventually, something had to give. While the dot-com crash took away Pets.com, it gave us Facebook, Ama- zon, and Netflix. This time around, crises are causing firms to diversify suppliers and draw up plans B, C, and D. Costs will increase, but so will safety and reliability. Crucially, most supplies will still come from abroad. Apple recently decided to move some of its assembly opera- tions from China to Vietnam, not to Arkansas or Alabama. As I wrote in a previous commentary, Guangdong’s loss could well be Guadalajara’s gain. The second big change is a gradual ISSUE 163 JULY 2022 the BANKING EXECUTIVE 31