Beware the Misleading Narrative on Globalization’s Retreat

12/30/2022

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Simon Evenett | Institute for Management Development

Part of the fallout from today’s polycrisis – that catchy term encompassing the COVID-19 pandemic, supply chain disruption, growing geopolitical rivalry, food insecurity, energy price hikes, and the cost of living crisis – are assertions by prominent commentators and government officials that globalization has gone too far.

One example is a recent speech by Chrystia Freeland, Canada’s deputy prime minister, finance minister and former foreign minister, in which she re-examines the results of spending “three decades building an interconnected global economy” .

The view that flows from some of this thinking is that the international footprint of companies must be rethought because executives failed to take proper account of risks evident in today’s fraught world.

And the drum beat from certain key policymakers is relentless. Apparent “weaponization” of trade ties by China and Russia has put wind in their sails, as Mark Leonard shows in his 2021 book The Age of Unpeace. This has led to calls for supply chains to be designed with “just in case” considerations in mind rather than with “just in time”.

Senior national security officials from Germany, the US, and the UK are on record twisting the knife further – adding an “us versus them” angle to corporate deliberations on supply chain reconfiguration. In a speech in London in July, 2022, the Director of the Federal Bureau of Investigations (FBI), Christopher Wray, said that China posed a “far more complex and pervasive threat to businesses than even most sophisticated company leaders realize” .

Other policymakers are not content with leaving it to international business to adjust (or not) as they see fit; they have begun to take action. US Commerce and Treasury Secretaries now advocate a “friend-shoring” approach to recasting international supply chains. This has been backed up by controversial tax incentives in the recently enacted Inflation Reduction Act in the US.

For their part, the European Commission has adopted a policy of “Open Strategic Autonomy,” an approach that puts more emphasis on the last word rather than the first two. One of the first policymakers to call for action was late Japanese Prime Minister Shinzo Abe, whose government set up in April 2020 a $2 billion fund to encourage Japanese firms to shift factories out of China..

Russia’s invasion of Ukraine added fuel to the fire to those claiming that globalization has gone too far. Western businesses operating in Russia were urged to divest, lest they be accused of “trading with the enemy”. Yet the reality has been more complicated. Straight divestment has consequences. The chairman of one large pharmaceutical company told me that they should not leave Russia and punish their customers, the logic being: why should a sick Russian be denied Western medicines because of Putin’s war?

From the start, forward-looking analysts and executives saw Western government sanctions on Russia and the concomitant pressure exerted on business as a dress rehearsal for the disruption to corporate plans that would follow a future Chinese attempt to forcibly reunite with Taiwan.

The question is whether this drum beat of criticism is actually prompting widespread retreat from globalization in terms of corporate decisions and of government policy capable of shaping those decisions. At this point, there are good reasons for doubting that broad-based retreat is occurring or, perhaps more importantly, on the cards.

Adding to the rhetoric is the awkward fact that most trusted sources of information on business and policy developments publish facts long after key decisions were taken. It was notable that during the COVID-19 pandemic, many governments did not have up-to-date information on the where to source medical equipment.

When it comes to the data waymarkers of globalization, the US Department of Commerce publishes quite detailed statistics on the global footprint of American multinationals with a three-year lag. Global cross-border data on goods shipments is obtainable from the United Nations, for example, but comes with a minimum 12-month lag.

Moreover, only twice a year does the World Trade Organization publish reports on the policy steps taken by governments – and much of the policy relevant to business isn’t covered in those WTO reports. No international organization has a mandate to collect detailed information on policies affecting service sectors or the digital economy. In these circumstances, when credible information is either non-existent or delivered very late – and to paraphrase the oft-used maxim – a narrative can get halfway around the world before the truth can get its shoes on.

So, what do we know about the changes in the global footprint of companies and government policies towards foreign business and trade? The best advice here is to pierce the veil of rhetoric and demand hard facts on what is changing on the ground. As renowned US engineer and statistician W. Edwards Deming once said: “In God we trust. All others must bring data.”

  • Yes, foreign direct investment – a prominent manifestation of globalization – is growing more slowly than domestic capital expenditures. But this has been the tendency since 2005, well before the Global Financial Crisis, the US-China trade war, and the current polycrisis.
  • Beyond the tariffs imposed during the US-China trade war (where total trade affected amounts to less than 5% of world goods trade) and this year’s Western sanctions on Russia, calculations based on the Global Trade Alert database reveal that just 5.6% of world goods trade is affected by protectionist measures that single out another nation’s exports.
  • When it comes to government policies towards foreign business and trade, awarding corporate subsidies is the most common form of government favoritism around the world (not just in China). Some of that largesse is designed to shore up competitive positions in home markets, some in foreign markets. But few state incentives exist to repatriate factories from abroad.
  • When governments put money on the table to reconfigure supply chains, compared to the corporate stakes involved, the sums are trivial. Japan’s scheme mentioned earlier garnered a lot of headlines because of its budget envelope – but it turned out that, on average, Japanese firms that benefited received less than $15 million each. The recent CHIPS and Science Act in the US includes tens of billions of dollars of incentives to set up semiconductor fabs in the country, yet industry analysts are unanimous in saying that these sums are a fraction of the costs borne by business.
  • At least four studies of sourcing patterns of those medical goods scarce at the beginning of the COVID-19 pandemic – including a peer-reviewed examination of the issue by me in 2020, and another by European Centre for International Political Economy senior economist Oscar Guinea the same year –  revealed very few cases where most supplies came from China. Little remarked upon was the fact that mask shortages and the like quickly subsided once Chinese factories geared up production in mid-2020.
  • While some Western politicians and foreign policy analysts reckon that the world is on its way to a definitive split between rival democratic and autocratic blocks, the reality is that democratic nations crimp the exports of other democratic nations proportionally more than they do from autocracies. Yet, the reluctance of US and EU officials to contemplate new binding trade deals shuts off one-way democratic nations could form a block that could create meaningful gains for international business.
  • Many companies said after Russia’s invasion of Ukraine that they were exiting or planned to. Some large multinationals did, but a surprising number remain, and some of those that fully divested have even negotiated clauses to buy their assets back later.

What to make of this? Globalization and cross-border supply chains have been traduced. To the extent that trade and investment flows have been weaponized, this is localized and doesn’t merit a systemic rethink. Business executives would do well to recall Deming’s dictum: stakeholders that claim that the polycrisis changes everything should be asked to provide hard evidence. Officials have yet to follow through on their advocacy of decoupling, so there is a mismatch between rhetoric and actions taken. Furthermore, business isn’t retreating wholesale from emerging markets.

FBI Director Wray was right to encourage accurate risk assessments in his speech. But this applies to policy risks as well as to the loss of intellectual property in China. For international business nowadays those risks are just as likely to arise at home than from abroad. Risk assessment should be based on best available evidence. Executives should first identify which emergent geopolitical risks pose the greatest threat to their existing business models (not all do) and then seek out the experts prepared to piece together disparate information and insights on relevant policy dynamics.

From time-to-time, executives and board members should schedule discussions on how they would react to different contingencies and whether to adjust their global footprint to “known unknows” as the late Donald Rumsfeld would have put it.

Globalization will continue to evolve. But what executives must not do is allow narrative alone to induce a retreat from foreign markets.


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