Is Globalization Changing or Dying? Part Two.

Stephen DeAngelis

June 30, 2020

Even before the coronavirus swept around the world, the future of globalization was being questioned. In Part One of this article, I examined some of the reasons pundits are declaring an end to globalization. They believe globalization was dying before the pandemic struck. Some believe globalization is now dead and the coronavirus pandemic is the last nail in globalization’s coffin. The pandemic increased calls for reducing reliance on China and for bringing manufacturing back to the United States. Stanley Chao (@stanleychao6), managing director for All In Consulting, reports, “We’re seeing mounting pressure from political pundits, policymakers and the American public to decouple our supply chains from China, particularly in the medical and rare earth elements industries. During last year’s trade war, Trump ordered the Pentagon to seek alternative sources for rare earth elements used in defense systems, claiming that China was no longer a reliable partner. There’s even legislation in the works. Sen. Tom Cotton, R-Ark., is sponsoring a bill that would require government agencies like Medicaid and VA hospitals to cease purchasing drugs that contain Chinese-made ingredients by 2025.”[1] Journalist Martin Sandbu (@MESandbu) notes, “The Covid-19 pandemic has strengthened the hand of those who have long opposed economic openness between countries.”[2] Chao asks the question of the day: “Can we really go back to the heyday when America was the world’s factory?” If the pandemic proved one lesson, that lesson should be that world progresses faster and moves in a better direction when countries work together than it does when countries act separately.

Why globalization remains important

“Covid-19 has resulted in more than a deadly pandemic,” writes Henry Paulson, former U.S. Treasury secretary and Chairman of the Paulson Institute. “It has tipped the world economy into its most severe crisis since the Depression. As the virus’s spread slows and governments rebuild, they face another force sweeping in its path: isolationism. The impending battle will pit forces of openness rooted in market principles against those of closure across four dimensions: trade, capital flows, innovation and global institutions. Allowing an economic iron curtain to descend would imperil the recovery and jeopardize economic and social stability. Individual nations must resist efforts to slash cross-border linkages and global institutions will need to step up and transform.”[3] Paulson goes on to argue the world has prospered because of integration, not in spite of it. However, as Jared Bernstein (@econjared), a senior fellow at the Center on Budget and Policy Priorities, explains globalization doesn’t always come up roses. He writes, “Most of us probably appreciate trade’s cost-side benefits through increasing the supply of goods and services, while harboring a vague sense that there’s a downside to globalization that policymakers have long ignored.”[4]

Bernstein made his comments in a review of Fred Hochberg’s book Trade is Not a Four-Letter Word. According to Bernstein, Hochberg, a former head of the Export-Import Bank of the United States, “is a cheerleader for globalization”; nevertheless, Bernstein notes, Hochberg “recognizes trade’s downsides and warns his fellow advocates that if they fail to adapt a more balanced take on the issue, we’ll end up with less trade and more walls and tariffs. … Trade economists have long understood that trade with low-wage countries hurts our low-wage workers. We just don’t talk much about it.” Despite the downside of globalization, the upside is considered much greater. Sandbu explains, “The argument that we must cut back on globalization for the sake of national resilience is tempting. But it is wrong and must be resisted, or it will lead us astray as we set policy when coming out of the crisis.” He explains, “For most countries, being self-sufficient for every eventuality is prohibitively expensive. Rather than producing a full line of everything from food and fuel to medical textiles to respirators at home, the best bet for states is to group together with trustworthy partner countries, in the expectation that whatever is produced in the larger bloc will always be accessible to all members.”

The way ahead

In answer to his question — Can we really go back to the heyday when America was the world’s factory? — Chao expresses uncertainty. If the country moves in that direction, he writes, “Businesses and policymakers will have to contend with some unattended consequences from bringing back supply chains.” Some of those consequences, he insists, include higher consumer costs, environmental concerns, and government subsidies. Journalist Mike Bird (@Birdyword) predicts America won’t move in that direction. He writes, “Those expecting large-scale deglobalization and the return of domestic production for many goods might be disappointed.”[5] He explains, “It would be inefficient for wealthy countries to attempt to resume much low-value production currently done abroad. Even in high-value sectors, a lack of knowledge, experience and competitiveness in niche areas would prove difficult to surmount.” Which is exactly why Sandbu is convinced the better way forward is for trustworthy partner countries to strengthen ties.

For years I have argued that globalization was becoming more regionalized — and the pandemic could accelerate that trend. Susan Lund, a partner at McKinsey & Company, an expert on global interconnectedness, agrees. “She envisions not so much a full-scale retreat from global trade as a shift toward regional trade blocs and greater emphasis on having companies build redundancy into their supply networks.”[6] Shannon K. O’Neil (@shannonkoneil), a Vice President at the Council on Foreign Relations, argues, “‘Reshoring’ will cause more problems than it will fix in the short and medium term, and in the long term it will make U.S. businesses less competitive. Instead of abandoning global supply chains, governments and boardrooms should focus on making them more redundant. More suppliers and more inventory might make global manufacturing processes slightly less efficient, but these redundancies will increase reliability and resilience, benefiting countries, companies, and consumers alike.”[7]

O’Neil adds, “In the long term, dismantling international supply chains will make U.S. businesses less competitive and will blunt their global technological edge. The benefits of comparative advantage that led buyers and suppliers to look abroad in the first place haven’t disappeared. … Isolation isn’t the answer — especially not when the enemy is a plague. … Businesses and policymakers must work to strengthen supply chains, not shut them down.” Like many analysts, Paulson sees the current situation as a good time to reassess where globalization is headed. He writes, “We should recalibrate while retaining the best features of globalization. The right policies lie not on an end but on the continuum between openness and closure.” Nevertheless, he notes, “Intense battles are sure to be fought over trade. Multinational companies will ensure that they no longer rely on a single country to source each necessary component. Each country will also need to source some critically important medical products domestically.” He just doesn’t believe the battles should be taken to the extreme.

Concluding thoughts

Bird concludes, “Ideological commitment to globalization didn’t drive the growth of major value chains in the first place, and its decreased popularity is unlikely to unwind them even with the current pandemic. Without gargantuan subsidies or even more punitive trade restrictions, the seemingly fragile spider’s web of global commerce may remain surprisingly resilient.” Paulson adds, “The recovery — and the future — can only be secured if major economies pull together. Strategic competitors and adversaries struggle to find common ground even when it is in their self interest. But there will be no lasting recovery if the largest economies, especially the US and China, cannot find a workable strategic framework. The global economic order is not perfect. But it truly is too big, and too essential, to fail.” The pandemic is only one global challenge requiring cooperation and collaboration. Ideally, the world emerges from this crisis with a better understanding about how to confront remaining challenges together.

Footnotes
[1] Stanley Chao, “Do We Really Want Our Supply Chains Back?Supply Chain Management Review, 3 May 2020.
[2] Martin Sandbu, “Globalisation and national resilience can coexist despite Covid-19,” Financial Times, 1 April 2020.
[3] Henry Paulson, “Henry Paulson: Save globalisation to secure the future,” Financial Times, 17 April 2020.
[4] Jared Bernstein, “Trade is Not a Four-Letter Word — the pros and cons of globalisation,” Financial Times, 5 February 2020.
[5] Mike Bird, “Globalized Commerce Might Prove Resilient to the Pandemic,” The Wall Street Journal, 22 April 2020.
[6] Neil Irwin, “It’s the End of the World Economy as We Know It,” The New York Times, 16 April 2020.
[7] Shannon K. O’Neil, “How to Pandemic-Proof Globalization,” Foreign Affairs, 1 April 2020.