The entire world, it would seem, is in the process of a collective crisis of confidence. Until just a few years ago, everything seemed to be so straight forward. Economic growth was based on free and fair trade between markets which were either rooted in or moving towards the principles of Western democracy. Words such as protectionism, state ownership and subsidy seemed to belong to an anomalous post-war era, corrected by a generation of politicians who believed in open markets, multilateralism and global commerce.
The first signs that this global paradigm was beginning to fracture became evident at the time of the Great Recession at the end of the 2000s. The self-destruction of ‘Big Finance’ sowed seeds of doubt in the minds of many that perhaps the Western economic model wasn’t all it was cracked up to be. The Chinese government’s political and economic alternative seemed very attractive to more authoritarian regimes in the emerging world, especially when it came with the offer of large, cheap loans to build infrastructure.
However, perhaps of most consequence to the fracturing of the Western social-democratic agenda has come from within. The rejection of the globalist policies which started in the UK (with Brexit) and in the USA (with the election of President Trump) has now spread throughout Europe. Populist political parties have risen to prominence in Italy, France and Germany, to name a few, causing an upheaval in the establishment. The discontent over the off-shoring of manufacturing jobs, the resulting destruction of communities and the impact of unfettered immigration has finally manifested itself at the ballot box as new or existing alternative parties have gained traction in the political process.
At the highest levels of the European Commission, it is finally being recognised that the European Project is at risk from being de-railed, at least from an economic perspective. A recent report authored by former Italian Prime Minister Mario Draghi, asserted that, ‘Europe is stuck in a static industrial structure with few new companies rising up to disrupt existing industries or develop new growth engines.’ He also recognised that those global structures which had seemed until recently so favourable to future European prosperity, are in fact, the region’s Achilles Heel. ‘In a world of stable geopolitics, we had no reason to be concerned about rising dependencies on countries we expected to remain our friends.…[but now] our dependencies have turned out to be vulnerabilities’.
To address the ‘existential challenge’, as he describes it, he has called for the adoption of many of the policies which have gained popularity in the US and have underpinned China’s growth over the past two decades. These include industrial strategies, fiscal policies to encourage domestic production, more assertive trade policies and foreign economic policies to secure supply chains. He believes more power must be centralised in Brussels in order to pool resources and make legislative decisions more quickly, a policy which seems ironically at odds with the groundswell of popular political sentiment.
In the US it is only a matter of weeks before a new president is elected. Whilst we know that it will not President Biden, it is too close to call between Kamala Harris and Donald Trump. But does it really matter? Neither of the candidates is standing on a platform of free trade, an issue which only the most ardent of libertarians these days would dare to espouse. Trump has promised to impose tariffs of between 10 and 20% on all imports with the exception of goods from China which would attract a rate of 60% and 100% for electric vehicles. Tariffs would be used for geo-political as well as economic leverage, for example to impel NATO allies to increase defence spending or punishing countries for not using the dollar. The EU should expect to be targeted. Quoted in the Financial Times, Trump said ‘The EU uses [trade] rules to help their companies and hurt American companies.’ The EU has countered that retaliatory measures are already in place should they be needed. Harris, meanwhile, although not so bellicose as Trump, is following a similar policy agenda. In September, the Biden administration, of which she is a key figure, piled on $18 billion of duties on Chinese imports including 100% on electric vehicles, 50% on solar cells and 25% of steel and aluminium and maintained the $300 billion of tariffs already imposed under the previous Trump administration. It is very unlikely, given what Harris has said during the campaign, that these will be revoked.
And then there is China. Its economy has slowed; consumer confidence is weak; its real estate market is facing challenges and local government debt is eye-watering. On top of this, its largest export markets, Europe and the USA, are attempting to de-couple/de-risk their economies in a move which will provide inevitable headwinds to future growth, not least by limiting transfers of advanced technologies. China is now regarded with mistrust, perceived as having hijacked the world’s economic and political multilateral structures to project its own soft power globally.
At the same time as this, it is also losing the competitive advantage which led to its ‘economic miracle’ in the first place. A victim of its own success, the ‘middle income’ trap has resulted in higher wages compared to many of its competitors in Asia, Latin America and Africa. To achieve its economic transition, it will need to pivot to higher value added production to justify the higher labour costs. It is already on this path, but has a long way to go.
Where does this leave globalisation? Europe and the USA are both pursuing policies which are likely to result in more fragmentation and higher trade barriers, whether to protect their economies, societies or the environment. China, although projecting an image of strength and political stability, has its own economic worries. It is deeply dependent on global trade to fuel its growth rates and maintain employment. However, its trade partners are increasingly unwilling to sustain a model which makes them strategically dependent on an adversary whilst fuelling the rival’s political, economic and military power.
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