Is the period of deglobalization over?

Clyde Kull.
Clyde Kull. Source: Anette Parksepp/ERR

The worsening global economic outlook and climate challenges have made it clear that deglobalization is a threat. But it remains to be seen whether this will be followed by the necessary measures to change course, Clyde Kull writes.

The worsening global economic outlook and climate challenges have made it clear that deglobalization is a threat. But it remains to be seen whether this will be followed by the necessary measures to change course.

November was an exceptional month. World leaders gathered for four key meetings: The ASEAN meeting in Cambodia, the G20 summit in Indonesia, the Asia-Pacific Economic Cooperation (APEC) forum in Thailand and the UN climate change conference (COP27) in Egypt. What was striking was not the timing of the meetings, but rather the signs they gave that confrontation has its limits and renewed cooperation is not impossible.

In recent years, the global economy has leaned towards individual competition, putting national interests first. Some – notably emerging economies – have tried to buck this trend, for example, by refusing to support Western sanctions against Russia. But such efforts seemed to have minimal impact.

As many observers have pointed out, a complete reversal of globalization would be virtually impossible. According to research by the McKinsey Global Institute, no region, let alone country, is close to being self-sufficient. But this has not stopped some countries and leaders – notably the United States – from striving for it. And even the partial deglobalization they have brought about has far-reaching consequences, some of which – such as increased inflation and increased debt risk – are already evident.

Resistance to the deglobalization trend

The growing damage caused by deglobalization has recently intensified resistance to economic fragmentation and polarization. Europe is a case in point. Russia's aggression against Ukraine strengthened the transatlantic alliance, which translated into both a common sanctions policy against Russia and coordinated arms supplies to Ukraine. But European leaders have begun to express discomfort with America's policy towards China, which, as French President Emmanuel Macron has pointed out, threatens to divide the world into competing blocs.

American efforts to block China's technological development are being watched with concern. It is feared that new sweeping restrictions on exports of high- tech, software and equipment to China could replace constructive strategic competition with a zero-sum outcome.

This has been the reason why French and German leaders have in recent weeks expressed the need for a clear European position which is, distinct from that of the U.S. Dutch Prime Minister Mark Rutte, whose country is home to ASML, the only manufacturer of the most advanced ultraviolet lithography machines for semiconductors and chips, is also seeking independence from the U.S. in this area. German Chancellor Olaf Scholz visited China this month to try to find a middle ground.

The harmful effects of fragmentation

Emerging economies strongly defended global interdependence at major international meetings this month. A fragmented global economy, shaped mainly by competition from the major powers, is harmful to them, because the energy and technology leapfrogging that is essential for development requires global solutions. As University of Chicago lecturer Raghuram G. Rajan recently explained, economic fragmentation and mutual suspicion are serious obstacles to effective climate cooperation.

Emerging economies are not alone. The World Trade Organization and international financial institutions stress that maintaining openness in trade, financial and technological flows is essential to supporting global economic recovery. Already, the recovery is facing severe headwinds from inflation, war-related shocks, climate change, the COVID-19 pandemic, ageing populations, labor supply problems, falling productivity, high debt ratios and spikes in financial instability.

Growing fragmentation negatively affects the operations of multinational companies, which have to navigate a maze of conflicting rules and standards and heightened regulatory requirements. Increasing operational complexity and rising costs weaken incentives for companies to invest. Given that multinationals play an important role in the diffusion of technology, a negative impact on global productivity and growth can be expected.

Watching the next moves of U.S. and China

Mitigating the risks and reversing the current course will depend above all on the two main players in the global economy – the U.S. and China. The recent meeting between Presidents Biden and Xi offers hope.

President Xi Jinping is well aware that China's "economic miracle" would not have happened without globalization. Hence his calls for openness and inclusiveness. But they lack credibility if they are accompanied by solidarity with a country like Russia, whose actions and rhetoric foment division.

As far as the U.S. is concerned, the Biden administration increasingly seems to realize that it is not possible to isolate China completely. While a complete lifting of trade restrictions is unlikely, especially for sensitive technological goods with national security or strategic economic implications, Biden's latest meeting with Xi showed that both sides are ready to engage in a more constructive dialogue on critical issues. Biden also reiterated support for the "one China" policy, which shows continued tacit acceptance of China's diplomatic "red line" towards Taiwan.

Perhaps one day we will look back on November 2022 as a turning point in the saga of deglobalization. But today, the obstacles have not gone away. Calls for cooperation and better competition are no substitute for a lack of trust.

Unless the U.S. and China find ways to build trust and goodwill, the aspirations for cooperation will remain on shaky ground.

A rethink of the global model

Another new development is the building of economic resilience through supply chain diversification that favors reliable or likeminded trading partners where economic policy is shaped by national security considerations. This new economic reality calls for the development of a new, more complex cycle of multilateralism.

Finally, for this new multilateralism to work, international organizations need to be strengthened through governance reforms and greater capitalization. Perhaps most importantly, countries must commit to respecting the authority of these organizations – and not just when it is convenient.

The worsening outlook for the global economy, combined with the scale of the climate challenge, has made it clear that deglobalization poses a threat. It remains to be seen whether this realization will be followed by the necessary action to change course.


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Editor: Marcus Turovski

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