The Retreat of Globalization

Project Syndicate, 28.06.2020


  • 1st wave: between the Industrial Revolution and WWI. Reduced the friction of moving people, capital and information across borders. (not so for goods due to the tariffs)

  • 2nd wave: 1980+ - accelerated by the growth of China and the collapse of the Soviet bloc. Driver: ICT. Not so moving of people, more outsourcing.

  • Financial globalization started retreating after Lehman Brothers’ collapse.

  • Transnational integrated supply chains started dismantling during COVID.

  • TNC (transnational corporations) used to exert huge political influence on labour markets, IP regimes and environmental regulations. Very good at paying low tax.

  • Concerns: a trilemma: democracy, national sovereignty and global economic integration are mutually incompatible. Even without democracy the trend is similar.

  • Loss of financial resilience: with overleveraging even small fluctuations in asset prices wipes out the firm. Pursuit of “efficiency” (maximizing every dollar while ignoring risks) leads to loss of stability. Too big to fail.

Lower capital under management —> lower fees —> no incentive for management

  • In 2019-2020 supply chains started having political components (US vs China)

  • Many things you move back will be technologically obsolete the moment you finish the move. Need to invest into technology of producing technology.

  • As countries become more self-aware (i.e. national assertiveness), they may not look well on the rent-seeking under the banner of free trade).

  • Deglobalization emphasizes cross-border tax arbitrage by TNCs. Shifting profits to lower tax jurisdictions starts being inconvenient to countries.

Impact of Covid

  • The real sector showed its lack of resilience, too.

  • Production and distribution of goods and services.

  • After the crisis – resilience (incl. financial) will be more important than efficiency.

  • Just in time and global supply chains will be shrank and reshored (localized approach)

  • This is especially true for hospitals, which for years tried to be “efficient” and “just right” —> impacted the society

  • Efficiency mutually dependent questions:

  • Is it measured prospectively or retroactively?

  • What is the time frame?

  • Prospective efficiency lowers the time frame as there’s great uncertainty the further you go

  • Still, in financial markets the resilience will be a burden to the high risk – high reward strategy and will be sacrificed for the immediate profits.

  • Lesson for Aviasales —> resist this.

  • Andrew Cuomo (NY): this crisis is a chance to rebuild more sustainably [i.e. low-carbon].

  • Past failures with Solyndra (2011) and A123 (2012) have undermined the credibility of this process. —> US lost this war to China

Government to the rescue

  • US missed on the learning from effective PPPs (public-private partnerships), while China invested heavily in them.

  • In the history of SV, the US govt was the #1 customer of the new tech innovations; now it’s not, but in China is. So restarting the cycle in the US will require govt intervention.

  • 1980+ (Reagan, Thatcher) – govt lost to TNCs, which started shaping domestic and intl public policies

  • Many things that go further than just tariffs (esp. investor-state disputes) and empowered TNCs, pharma and intl banks.