& We Are Live Over at the "Milken Review", with: Chickens Coming Home to Roost?: The Perils of Deglobalization
Remember the damage the idiot Tories did to Britain via BREXIT? Yeah, that. A coördinated deglobalization effort will do that to the world. And, whether the world a a whole falls into that trap or...
Remember the damage the idiot Tories did to Britain via BREXIT? Yeah, that. A coördinated deglobalization effort will do that to the world. And, whether the world a a whole falls into that trap or not, it looks as though Donald Trump is about to inflict a triple-strength BREXIT with concommitant damage on the United States of America…
Some Highlights:
“Nations are enthusiastically experimenting with new tools to weaponize interdependence, politicizing market decisions long driven by expectations of profit.”
“A quick-and-dirty index of globalization stood at 60 percent in 2008, shrank to 52 percent at the height of the COVID-19 pandemic, and bounced back to 63 percent.”
“Back before Russia’s invasion of Ukraine, the extraordinary profits from expanding trade still carried the day despite populist opposition.”
“The ‘second unbundling’ driven by efficiency gains in communications and transportation enabled blue-collar workers far from corporate hubs to hitch a ride on the productivity train.”
“Dani Rodrik’s critique of globalization warned that the erosion of the implicit social contract with labor would provoke a backlash of protectionism and nativism.”
“Despite the net positive impact of China’s growth, manufacturing job losses were highly concentrated geographically, leading to persistent regional effects.”
“Globalists like me continue to press our case, but with an increasing sense that we are taking on the role of Sisyphus pushing the anti-globalization boulder up the hill.”
“Friend-shoring rather than self-sufficiency is likely to characterize the new global economy—deep interconnectedness but strategic fragmentation.”
“After politicians promise to restore the good old days, they hand off regional development to bureaucrats who must fit local resources into transnational value chains.”
“Reducing interdependence will cost heavily in terms of reduced innovation and competition, higher prices, and increased diplomatic friction.”
<https://www.milkenreview.org/articles/chickens-coming-home-to-roost>
Full text below the fold:
Chickens Coming Home to Roost?
The Perils of Deglobalization
by j. bradford delong
brad delong is an economist at the University of California, Berkeley, and creator of the blog Grasping Reality. He was a deputy assistant secretary of the Treasury in the Clinton administration.
Published January 23, 2025
Not so long ago, mainstream economists spoke with one voice in celebrating globalization. Oh, if you listened carefully, you might catch the occasional “yes, but.” Nothing, though, that couldn’t be dismissed as an asterisk to a policy widely credited with bringing a billion people out of poverty in a quarter century and sustaining rapid technological change
Today, politicians of every stripe (in particular, newly victorious Trump followers) are stumbling over one another in denouncing the explosive growth in the movement of goods, technology and people across national borders. The most visible fruits of this economic integration – the flood of high quality, inexpensive products available online or at your nearest big box store – no longer seem worth the cost in terms of job insecurity and growing corporate power.
Arguably most troubling, the idea that economic interdependence would bind nations together – that nations would think twice before picking a fight with their trade and investment partners – is being sorely tested by the new Chinese- Russian alliance and the invasion of Ukraine. Indeed, the complex tangle of supply chains proliferating across borders since the early 2000s has created startling opportunities to weaponize this interdependence with the goals of gaining geopolitical power and domestic political advantage. Nations are enthusiastically experimenting with these new tools, shuffling the winners and losers in our current hyper-globalized world economy in the process, and politicizing market decisions long driven by expectations of profit.
But I would argue that a close look suggests that the case against globalism – as well as the probability of significant deglobalization – is overstated. I’m betting that the deintegration of global markets we are seeing now will not go far because too many fundamentals are working too strongly against it.
Let me explain why I think this way.
The world thus remains more globalized than it has ever been by almost any criteria – by the complexity of the value chains of production and distribution, by the portion of these value chains that cross and recross national borders, and by the sheer distance covered by the raw materials and semi-finished elements on their way to factories.
The Current Scale of Hyper-Globalization
A quick-and-dirty index of globalization (on the trade side at least) is the sum of exports and imports as a share of total production. Worldwide, we estimate this index stood at 60 percent in 2008 on the eve of the financial crisis and the pronounced political-economic turmoil of the 2010s. It did retreat a bit in the 2010s (from 60 percent to 55 percent), and further shrank to 52 percent at the height of the Covid-19 pandemic. But in the wake of the robust economic recovery in the United States, it bounced back to 63 percent. Businesses and consumers are now more dependent on imported goods and services than ever before – just as domestic producers are dependent on their ability to export.
Moreover, anything close to this level of market integration is a pretty new phenomenon. The same index hovered in the neighborhood of 35 percent in the 1980s through the early 1990s. Which was high in comparison to previous decades: the index was just 25 percent or so at the start of the 1970s, before the oil price shocks forced petroleum-deficient countries that wanted heat and power – think Europe and much of Asia – to massively boost their exports to pay for fuel.
Go back further to the 1950s, and the index was only 20 percent, and it had dipped as low as 11 percent during the Great Depression of the 1930s. Before then, it had peaked at 25 percent or so in 1913 as global markets responded to a century of collapsing oceanand rail-shipping costs.
The world thus remains more globalized than it has ever been by almost any criteria – by the complexity of the value chains of production and distribution, by the portion of these value chains that cross and recross national borders, and by the sheer distance covered by the raw materials and semifinished elements on their way to factories.
What’s Juicing Hyper-Globalization?
Back before Russia’s invasion of Ukraine, the extraordinary amount of money to be made by expanding and deepening trade was still carrying the day in spite of populist opposition. As Richard Baldwin – the trade economist who wrote The Great Convergence, the classic study of hyper-globalization in this era of the global value-chain economy – has stressed, the economic gains from what he calls the “second unbundling” were mighty. That process was driven by huge gains in the efficiency of communications and transportation, making it practical to locate factories far from the engineers, designers, marketers and senior managers who ran the company from Cupertino or Wolfsburg or Seoul. The list of enabling innovations covers a lot of ground: think broadband communications, jet travel, shipping containerization, access to low-wage but adequately educated workers and legal systems that facilitated commerce.
This gave blue-collar workers thousands of miles from corporate engineering offices and C-suites a chance to hitch a ride on the productivity train for the first time. And the economic value created by this second unbundling enabled productive value chains to crisscross oceans. However, the process was highly uneven, creating what Baldwin called a “quilted” global economy.
Lucky factory workers (along with their local managers) in Korea, Indonesia, Thailand, Poland, Vietnam and especially coastal China could gain massively. Workers in resource industries in Brazil, Australia, Chile, Nigeria and (before February 2022) Russia could benefit as well. The rest of the emerging- markets world was largely left out.
But there was no reason to believe that other countries couldn’t join the parade. And there still isn’t: in a world in which 3.5 billion people subsist below the World Bank’s poverty line, there is plenty of financial incentive left to integrate currently unintegrated people and places into cross-border value chains. Governments may speak, commanding “onshoring.” But market opportunity speaks as well – and loudly.
Dani Rodrik and the Dearth of Low-Hanging Fruit
Before 2022 these potent pro-globalization forces were strong enough to push hyperglobalization forward. But that did not mean it was an unmixed blessing. Nor did it mean that all thoughtful analysts were convinced that the pluses of ongoing integration outweighed the minuses.
The most prominent critique (and one that is hard to brush aside) was offered by Dani Rodrik of Harvard’s Kennedy School – namely, that globalization has produced politically intolerable societal strains by sharply increasing domestic inequality, by eroding the implicit social contract with labor, and by undermining norms of social democracy. As far back as 1997 Rodrik saw globalization overreach as likely to generate a backlash of protectionism and nativism that would leave the world worse off than before.
The very success of globalization up to the turn of the millennium undermined the case for more integration because trade barriers had fallen so far that there was little potential for further gains going forward in rich, relatively open economies.
This risk of backlash implied that it was irrelevant whether the material benefits of hyper- globalization outweighed the costs since the process was fragile politically. In any event, Rodrik argued, the very success of globalization up to the turn of the millennium undermined the case for more integration because trade barriers had fallen so far that there was little potential for further gains going forward in rich, relatively open economies. So the costs of dislocation – again, referring to high-income countries – were highly likely to outweigh whatever potential gains from trade remained.
That may or may not have been true when Rodrik first argued the point a quarter century ago. It is almost surely true now.
The China Shock
Rodrik’s case took on greater weight after China’s accession to the World Trade Organization in 2001. China used its freer access to foreign markets to double-down on a strategy of manufacturing export-led growth. Hence what has come to be known as the China shock. Research from David Autor (MIT), David Dorn (University of Zurich) and Gordon Hanson (Harvard) showed that the disruption to the blue-collar male workforce and to manufacturing-dependent communities, especially in the U.S. Midwest, was large and persistent. As of 2010, manufacturing job losses linked to globalization had exceeded two million over a decade. The social impact, moreover, was magnified by the reality that the job losses were highly concentrated geographically
And that was not the end of the story. Negative income multiplier effects kicked in, as new businesses did not arrive to soak up the excess supply of local labor. Instead, redundant workers left the region (mostly for the Sun Belt), took jobs that paid far less (and thus spent less locally), or dropped out of the labor force entirely
You can argue – and I have – that the long duration of these regional effects was primarily caused by failure to stimulate the economy sufficiently in the wake of the Great Recession. You can argue – and I do – that the net impact of China’s export growth on the incomes of Americans, and not just upper-class Americans, has been strongly positive because the gains for consumers (think cheap flat screens and the like), investors and highvalue exporters selling into the rapidly growing Chinese market swamped losses to U.S. manufacturing. You can argue – and I will continue to – that our current laser-like focus on American manufacturing workers is mistaken for two reasons.
First, while focusing on manufacturing is worth doing as a way of nurturing technological development via manufacturing’s strong links with communities of engineering practice, in our post-assembly-line age it can no longer be a major source of good jobs at good wages. Second, what economists call the general- equilibrium effects of the China shock meant that increased the demand for labor in the Sun Belt, with a disproportionate benefit going to Hispanics who generally got the short end of the stick in the job market.
But my analysis and position on this are not popular even among my expert economist peers: the China shock reverberates still.
More Apparent Than Real
Donald Trump’s 2016 election to the U.S. presidency did indeed bring a sharp turn against the pro-globalization “Washington Consensus” of open trade and investment. And President Biden did indeed choose not to reverse Trump’s trade protectionism fully, implying that he believed Trump’s stance was in part justified. The nearly unqualified celebration of free trade has been replaced by caution (at best). At the start of the 2020s, 25 times as many people could be seen on Google Books talking about deglobalization compared to in 2000 (though admittedly, the number in 2000 was very low).
And yet, even as of 2020, we “cosmopolites” still had reasonable hopes for a return to largely win-win trade expansion. We still wanted to give priority to the interests of billions of very poor people around the world, where the big problem was that they were not yet tied into the highly efficient international supply chains. Thus we hoped for still further globalization, first as an engine of faster economic growth for those left behind, second as a check on authoritarian leaders dependent on foreign trade and investment. And third, as a deterrent to the accumulation of corporate monopoly power in protected national markets.
Moreover, there were hints that globalists could hold their own even against the populist tides. Trump, for example, came to power denouncing the North American Free Trade Agreement as “one of the worst trade deals in history.” But he signed the “renegotiated” United States-Mexico-Canada Trade Agreement, which did little more than change the name of the treaty.
That free trade and globalization had gone out of fashion in public discourse did not mean that opportunities to profit from increased global integration would not be grasped. Indeed, it is very possible that, without the “no limits” partnership between Xi Jinping and Putin – and Putin’s invasion of Ukraine – globalization might still be quietly on the advance. Globalists like me continue to press our case. But we do so post-election with an increasing sense that we are taking on the role of Sisyphus pushing the anti-globalization boulder up the hill.
The “No Limits” Partnership
The bells decisively sounding retreat from globalization rang first in Moscow and Beijing, not in Washington or Brussels. The first knell came with Xi and Putin’s declaration that they stood opposed to Ukrainian independence. The second when China responded to Putin’s invasion by opining that “the United States is not qualified to tell China how to respect national sovereignty and territorial integrity.”
With the return of major-power war to the continent of Europe and the decision by China to merely “note” that Russia was undertaking a “special military operation,” national security concerns suddenly took priority. Overnight a consensus formed that, borrowing Adam Smith’s words, “defense is more important than opulence.” Whatever shape the debate about globalization and its management might have taken if Trump had lost his reelection bid, argument for a further increase in integration or even a halt to the rollback is automatically trumped by policymakers playing the national security card.
National Security Fears
As information technology evolves, the uncertainty surrounding its potential has fueled profound anxiety within the national security establishment. The technological landscape is fragmented, with subsectors ranging from semiconductor manufacturing to artificial intelligence to cybersecurity advancing along separate trajectories. In each, a high-tech edge is viewed not merely as an economic advantage but as a key to buttressing geopolitical power. The power is not just about the potential to outcompete rivals economically but about the very capacity to deter aggression or to prevail in future conflicts. And this uncertainty makes security experts eager – no, desperate – to maintain technological superiority in every dimension of IT.
Once one is aware that there might someday be potential military applications for tech innovation, the next logical step is to prevent rivals’ acquisition of cutting-edge capabilities and critical inputs to production. Focus has thus shifted from hope for mutual gains through economic integration to a zero-sum climate in which others’ prosperity is seen as a source of risk.
With this shift has come a renewed emphasis on economic resilience and autonomy. Governments began considering how their dependence on foreign technologies could be weaponized against them in times of conflict. National security strategists concocted scenarios in which foreign-built digital platforms (TikTok?) or infrastructure (5G telecoms) could be compromised to cause massive economic disruption. Thus some “decoupling” of supply chains is seen not just as a matter of economic efficiency in the event of, say, a pandemic, or job protection for steelworkers in Indiana and Pennsylvania, but a necessity to secure the economy from foreign manipulation.
The story of Stuxnet, a sophisticated cyberattack on Iran’s nuclear facilities attributed to U.S.-Israeli collaboration, has been repeated ad nauseam. Stuxnet certainly demonstrated the potential for software-based attacks to achieve strategic objectives without direct physical confrontation, altering the calculus of military strategy and underscoring the critical importance of cybersecurity as a component of national defense. Indeed, in a world of great technological uncertainty and fear of adversaries’ motives and capabilities, the line between prudence and paranoia truly becomes blurred.
Regress or Freeze?
National security concerns did not trigger the slide toward deglobalization. But they do seem more likely than not to freeze the overall level of globalization, albeit with substantial shifts in specifics and new lists of winners and losers emerging from a changing pattern of the quilt of international economic organization.
For one thing, it is of course the case (especially in software we label “artificial intelligence”) that uncertainty and fear are the flip side of exuberance and profit. Worries that some subsectors might become truly strategic can provide opportunity for riches – just check out the market capitalization of Nvidia. Boosterism came with a rush, as advocates sought to frame their specific technologies not merely as economic assets but as essential components of national security.
The shape of industrial policy seems urgent as we restructure manufacturing capacity with security in mind, even as we attempt to cope with climate change through breakneck technological change.
Each subsector’s proponents argued that their innovations had transformative potential, capable of not only revolutionizing industries but tipping the balance of global power. The vagueness of potential threats combined with the high stakes encouraged panic, with governments under pressure to Anti-globalization protest in the Philippines. 22 The Milken Institute Review support information-technological development along a very broad front.
Hence massive support of domestic hightech industries has become priority-one in every country that seeks to gain or preserve a place in global high technology. And this quickly forced an acknowledgement that no single country could shift every link in a high-tech value chain to within its borders – not even the United States.
Even leaving to one side production exploiting the enormous efficiencies from outsourcing low-skill assembly work to lower-wage economies, there is virtually nothing the United States makes from start to finish. The poster child is advanced digital electronics, which now depend on rare-earth minerals from China, super-high-tech lithography machines from the Netherlands and chip fabrication in Taiwan, plus a surprisingly large share of critical software components from Israel, Europe and Southeast Asia. And what’s tough for the U.S. on its own is virtually impossible for other countries with much less broad technological infrastructure.
Thus the priority of national security will almost inevitably lead to policies based on friend-shoring rather than self-sufficiency. And the likely outcome is a global economy characterized by both deep interconnectedness and strategic fragmentation. Countries regarding themselves as great-power actors will be caught fearing interdependence even as it becomes more necessary to stay at the cutting edge by friendshoring.
New Sputnik Moments?
Just as the 1957 launch of the basketball-sized Soviet satellite spurred the United States to massively invest in science and technology, the current technological race between the U.S. and China (and, to a lesser extent, Russia) is triggering waves of public spending. Back then, the scope and scale of Sputnikmoment investments were vast, encompassing everything from basic scientific research to applications in critical sectors ranging from robotics to missile guidance technology. Back then, the urgency of the security competition provided a political justification for significant government support for R&D that would otherwise have been unthinkable in the post-New Deal Eisenhower era. As then, so now.
Moreover, the economic currents pushing globalization forward have hardly ebbed. The pulls of cost efficiencies and ever-rising consumer demand coexist (albeit uneasily) with the backlash. And by the same token, there’s the reality that international supply chains are here to stay.
After politicians visiting marginalized manufacturing plants have promised to restore the good old days, they hand off the regional-development problem to local elected officials and national-level bureaucrats with the demand that they do something. But doing “something” requires investors willing to bet on finding a way to fit regional resources into a productive, and almost surely transnational, value chain. How is that not going to be a force for, rather than against, further globalization?
Trade barriers may seem the most direct route to a return to viability, but sustainable regional recovery calls for the reverse. Which approach prevails turns on what kind of industrial policy we settle on – one based on a genuine desire to build local economies that are viable in the face of inevitable change, or one that expresses local grievances over what has been lost and will be lost again once protectionism ceases to be the flavor of the month.
A Silver Lining?
With a lot of luck, we might wind up having what we have never had before: a substantive debate about industrial policy in our market-based economy.
Market fundamentalism is no longer even a hypothetical option if we accept that government has a substantial role to play in sustaining technological leadership, protecting national security, and buffering communities and people against great forces of economic change. Historically, the trump card used by skeptics has been to dismiss attempts to rationalize and improve existing industrial policy – no country avoids all industrial intervention – by labeling it as government overreach or an invitation to inefficiency and corruption.
Delivering rising living standards down the road while simultaneously protecting national security requires a more productive economy, which is only possible with flexible international supply chains whose operations increase the risks of domestic economic and social dislocation.
That critique had traction on the center and right when the debate was dogged by worries that government didn’t have the capacity to create and manage rational intervention and skeptics could plausibly claim that we don’t face a big enough problem to justify inherently risky changes. But now the shape of industrial policy seems urgent as we restructure manufacturing capacity with security in mind, even as we attempt to cope with climate change through breakneck technological change.
Final Thoughts
Globalization isn’t about to make a comeback in terms of popularity in high-income countries anytime soon – indeed, what was unlikely before the 2024 election is now unthinkable. But beneath this hostile consensus lie some deep ironies. Security concerns led governments to seek to both curb international integration – fearing other states will weaponize others’ dependence on critical materials and technologies – and at the same time accelerate integration since it remains the key to full access to cutting edge technology.
Or to put it another way, a mix of populist ideology, special pleading and concern for those left behind leads governments to protect constituents from the shocks ongoing economic integration will bring. But delivering rising living standards down the road while simultaneously protecting national security requires a more productive economy, which is only possible with flexible international supply chains whose operations increase the risks of domestic economic and social dislocation. The turn away from free trade reflects a response to genuine challenges. And yet history strongly supports the view that reducing interdependence will cost heavily in terms of reduced innovation and competition, higher prices and diplomatic friction.
* * * * * * * * * * * *
Six years ago, the populist wing of the British Conservative Party led the UK to abandon the hard-won benefits of economic integration with continental Europe. The consequences of Brexit have been productivity-draining adaptation, disappointment for the populists who saw it as a silver bullet, and political disaster for the Conservative Party that staked its future on Little Britain going it alone. Is that the result Republicans and Democrats alike are willing to accept for the United States?
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Globalisation in the strong sense of a single rules-based world order is already dead, replaced by a complicated trade topology rather different from the old days of competing blocs. For example, Europe has almost completely broken with Russia and that will process will continue, even with a ceasefire in Ukraine. None of the European firms that have been effectively expropriated will go back, and the continuing exports of LNG and uranium will be cut off. But Russia and Europe will both deal with China and India.
Where the US fits into this remains to be seen. Easy to imagine a cycle of tariff, tax and regulatory retaliation ending in something close to autarky.
It's pretty clear, for example, that any business that wants to operate in the US will have to engage in large-scale bribery which is a criminal offence in most OECD countries. Presumably this will be overlooked as long as possible, but that may not be long enough.
Mr. DeLong has once again delivered an excellent overview of some complex issues. As I have argued in the past, the American political establishment abandoned those areas most impacted by globalization and challenges brought about by climate change. Moving away from fossil fuels is a direct response to climate change, but not providing for those who have lost their well-paying jobs was very short-sighted. The same problems occurred in the moves toward cheaper consumer products, but there were no thoughts on replacing the lost jobs. The emphasis in America is always on making money. Still, this preoccupation won't be successful when we confront dictators who only want more power and need to divert their populations' thoughts away from a lack of consumer goods to thoughts of wars with their "enemies." Mr. Biden recognized the problem of jobs, but instead of creating programs that only created jobs, he tried to be all things to all people. Consequently, his objectives suffered from what the military calls "mission creep." Engineers have a solution to this type of thinking. They call it the "KISS" principle - keep it simple, stupid. We need to create well-paying jobs in green energy and other forms of technology, but first, we need to make changes to our educational systems. We need trade schools to teach people how to install and repair the products made possible by new technologies. We must revamp our tax codes to make taxation more fair and provide the government with the resources it needs to accomplish these goals. The nature of warfare is changing, with an emphasis on unmanned small machines versus large-scale armies with tanks and battleships. The success of the Houthi in Yemen against international shipping is a good example of modern warfare. A small group of people with little technological training is defeating our ability to prevent additional naval attacks. Judging by the results of our last election, the American public has been tricked into believing our enemies are illegal immigrants and people of a different sexually. The reality is the enemy is our collective inability to see how the world has changed and our lack of an adequate response to these new conditions.