Globalisation recedes, conflicts multiply

This special analysis is an edited version of a speech delivered by Suzanne Berger at the ‘Global policymaking in the Trump-Xi Era’ event at Bruegel on 17 January 2025.

In 1914, globalisation ended in one week – between 31 July when the London Stock Exchange closed, and 4 August when the British government declared war on Germany. International trade and capital flows subsequently collapsed – not only for the duration of the war but for more than six decades. Only in late 1970s did the level of cross-border flows of capital and trade return to the 1913 levels. In 1914, however, after a half century of globalisation, people’s views on how damaging the changes would be – even how damaging the war was likely to be – were quite optimistic, and wrong. Even John Maynard Keynes, for example, still claimed: “War absorbs current savings and current income; it consumes and depletes our stock of consumable goods. But only to a very slight extent indeed does it destroy or diminish the world’s accumulated improvements” (Keynes, 1914). 

Today, the costs and dangers that the end of globalisation is likely to bring are again greatly underestimated. There isn’t even agreement on whether globalisation is over. Is deglobalisation happening? Or is there something like half-globalisation, with trade in goods and foreign direct investment falling but trade in services rising? Or is reglobalisation being organised in regions? Goods from China are still arriving in US markets, though they now arrive after long detours via Vietnam and Mexico. And these detours mean, of course, that they are more expensive.

For a political scientist, a simple definition of globalisation is the most relevant for understanding the current predicament. Globalisation is a state of the world economy in which strong competitive pressures force firms to behave as if there were a single world market. In short, it’s a world in which firms above all else seek to lower costs and prices. In the past, distance and time were the main factors that blocked the emergence of a single world market. The border-level barriers that states raised in the form of tariffs to tax cross-border flows certainly played a role, but ‘natural’ barriers such as distance did much of the work. Think of the huge flows of capital from France to Russia at the end of the nineteenth century (Crisp, 1976), but the absence of any significant flows of goods from low-cost labour working in French-owned factories in Russia back into France. Few manufactured goods made the trip across great distances. 

The new technologies of the 1980s and 1990s eliminated barriers of distance and time that had hindered the emergence of a single world market. Digitisation, container shipping, new financial instruments – these helped erase those obstacles. Once it was possible to send a digital file from chip designers in California to a chip fab in Taiwan there was no longer a need to co-locate the chip designer and the engineer making the mask. The emergence of large new semi-skilled, low-cost labour markets in Asia made offshoring feasible. For the past thirty years, firms have in fact behaved as if they were competing in a single world market. The advent of digital technologies in the mid-1990s allowed them to outsource and offshore just about everything. And financial markets reinforced the message by privileging those firms that were ‘pure-play investments’. Firms that had outsourced and offshored everything except their ‘core competence’, and got rid of factories and workers, did best on Wall Street.

Barriers going up

Today, we are moving in a very different direction from the past forty years. States around the globe are raising the political barriers that surround their territories ¹ Pinelopi Koujianou Goldberg, ‘Are Tariffs Worth It?’ 20 November 2024, Project Syndicate, https://www.project-syndicate.org/commentary/trump-tariffs-risk-inflati…. . It’s true that the overall level of trade has been fairly stable since peaking in 2008. That is why people disagree about whether what’s happening is deglobalisation or reglobalisation or new globalisation. Those who disagree about the reversal of globalisation tend to point out that Apple is still in China, as is Tesla, or that what leaves China gets sent to Vietnam or Mexico. But uncertainty is the greatest pressure on firms today as they consider markets and location.

This uncertainty is not only about what can be sold to, or exported from, an increasingly hostile China. It’s uncertainty even about what comes and goes from allies. Consider the restrictions in the US Inflation Reduction Act on green production subsidies. Or the refusal to allow Nippon Steel to buy U.S. Steel ² See Nippon Steel press release of 3 January 2025, ‘Nippon Steel Corporation and U.S. Steel Condemn U.S. Government’s Unlawful Decision to Block Proposed Acquisition of U.S. Steel - Companies will take all appropriate action to protect their legal rights’, https://www.nipponsteel.com/en/news/20250103_100.html.  – even though Nippon Steel is a company from the US’s principal Pacific ally. For American firms the greatest uncertainties and the roughest rides are yet to come under the second term of President Trump – The Mighty Disrupter. But it’s worth noting that none of the border-level barriers erected during Trump’s first administration were dismantled during the Biden administration. On the contrary: during the Biden presidency, in then-US National Security Advisor Jake Sullivan’s ‘high fence, small yard’ approach, the ‘small yard’ kept expanding and the ‘big fence’ kept rising. So, waiting it out is not a rational strategy. This is not a situation that is likely to reverse four years from now.

Three destructive forces

Three big changes have been at work to destroy globalisation: first, reactions to job losses arising from imports; second, the lessons people drew from COVID-19; third, war: war in Ukraine and the threat of war with China.

On the first point, globalisation was great for much of the world, with extreme poverty levels falling from 42 percent in 1981 to 9 percent in 2018 (Aiyar, 2024). But globalisation was not great for US and other liberal democracies. American blue-collar workers lost 6 million jobs because of imports, and parts of the country – Youngstown, Ohio; Detroit, Michigan; parts of Wisconsin – that were basically single-industry towns became wastelands. The same phenomena fed into Brexit and other developments.

COVID-19, meanwhile, taught the public that there are severe dangers in a production system based on just-in-time production, zero inventory and extended supply chains. The problem was not just the length of supply chains, but the basic firm structure that had emerged in the US because of globalization. Forty years ago, the greatest American companies were all vertically-integrated firms: IBM, Motorola, Dupont, Texas Instruments, GE. Not one of these firms remains structured today as it was then. Under pressure from financial markets, these companies all broke apart into ‘core competence’ firms, and outsourced and off-shored everything they could. These companies became highly dependent on suppliers. And COVID-19 highlighted that dependence. Companies were largely inspired by ‘lean manufacturing’ mantras: eliminate waste, eliminate inventory, Six Sigma (a process improvement methodology). This production paradigm – inspired by the Toyota model ³ See https://global.toyota/en/company/vision-and-philosophy/production-syste….  – emphasises optimisation of current practices and tends to discourage innovation. In fact, introducing innovation and experimentation on a factory floor is costly and disruptive.

The COVID-19 experience dealt a serious blow to the lean-manufacturing paradigm. It led to a higher valuation of resilience. But it also highlighted the lack of experimentation and innovation in manufacturing. The manufacturers that survived after the waves of offshoring had lost 6 million jobs. They are wary of innovation and they are risk-averse. The manufacturing eco-system has been thinned out, drained, depleted.

Shortly before COVID-19, I visited an Ohio manufacturer with about 300 workers. I asked him what he looks for when hiring. He said: someone who’ll come on time and stay. I asked how much he was paying: $13/hour. Did he ever think about hiring people coming out of community colleges who’ve taken classes in robotics and 3D printing. “No: I want people who can work on the machines I have”. I visited his factory floor and saw 1940s Davenport milling machines his grandfather bought alongside a few new CNC (computer numerical control) machines. The general picture in manufacturing is of a few new great companies such as Tesla and Rivian, while the vast majority of suppliers remain stuck in a low-tech, low-skills, low-productivity, low-wage trap.

This matters all the more because as war with China comes to seem possible – the third major factor in the receding of globalisation – American policymakers, whether Republicans or Democrats, will be raising even more border-level barriers.

The US’ difficulty in supplying arms to Ukraine since 2022 is an ominous sign of how far US defence manufacturing has declined over the past thirty years. In the defence industry, there are a few great companies at the top: Raytheon, Lockheed Martin. There are some new high-tech Silicon Valley defence manufacturers such as Palantir and Anduril, which are still in their infancy. And then there are the myriad suppliers that are small and medium-sized firms employing fewer than 500 workers. Of the sample of small and medium manufacturers we interviewed in Ohio, roughly 40 percent had had at least one defence contract in the previous ten years. So, the hollowed-out manufacturing ecosystem that I have described is the defence production base. Given the predictions about the likelihood of war, it can be safely predicted that the barriers around the American economy will only rise in the next years.

I believe globalisation will recede as uncertainties undermine all dealings between nations. In the past, the US has been an ‘indispensable’ partner in sustaining international order and cooperation. Now, Europe must learn to live without this partner ⁴ “Il va falloir apprendre à se passer d . Even further: I fear the consequences as Europe has to deal with such a nation as the US is becoming.

References

Aiyar, S. (2024) Income inequality and the liberal economic order: a not entirely Western perspective, Essay, Bruegel, available at https://www.bruegel.org/system/files/2024-04/Essay%2002%202024_0.pdf

Crisp, O. (1976) ‘French investment in Russian joint stock companies, 1894–1914’, in Studies in the Russian Economy before 1914, Palgrave Macmillan, available at https://link.springer.com/chapter/10.1007/978-1-349-02307-3_7

Keynes, J.M. (1914) ‘War and the financial system’, The Economic Journal 24(95): 460-486, available at https://doi.org/10.2307/2222023