After Globalisation

14 mins. to read
After Globalisation

Mercator’s projection

The unassuming German industrial but historic city of Duisburg sits on the confluence of the rivers Ruhr and Rhine in the federal state of North Rhine Westphalia. The city was a member of the Hanseatic League in the middle ages – a loose confederation of north German, Scandinavian and Baltic municipalities which anticipated the single market of the European Union. Increasing foreign trade in early modern Europe necessitated the development of better maps. And it is notable that Duisburg was the home of Gerardus Mercator (1512-94) who lent his name to the first map of the entire world, published in 1569, which still hangs in school classrooms across the globe today.

Just over a decade ago, China identified Duisburg as an important hub for its ambitious Belt and Road Initiative, a programme of co-financed and inter-related infrastructure projects which has spread Chinese finance, technology and personnel across the world. It chose Duisburg because the city boasts the largest inland container port in the world. The first freight train of the China-Europe Railway Express set off from Chongqing in southwestern China and arrived in Duisburg in 2011. Until the outbreak of Russia’s war against Ukraine in February last year, 10,000 such trains chugged through central Asia, across southern Russia and through Belarus heading for Duisburg.

China-Europe freight trains terminate in Duisburg no longer. Since the war began, sanctions against Russia complicate the transport of goods through the country and, in any case, insurance costs make the transit unviable. But there is something else in play. China has evidently re-assessed its future trading relationship with Europe and with the west in general. Evidence for this is that Cosco, the Chinese port operator and owner, has sold its stake in the port of Duisburg. Conversely, China’s European partners, partly as a result of pressure from the USA, have re-assessed their trading relations with China. Italy, which signed up in 2019 under the Five Star led coalition, is now planning to leave the Belt and Road Initiative. The Italian foreign minister, Antonio Tajani, visiting Beijing this week, said that “The New Silk Road did not bring the results we expected”.

The Belt and Road Initiative epitomised the age of globalisation. We can roughly date the globalisation era from 01 January 1995 when the General Agreement on Tariffs and Trade (GATT – a set of regulations governing international trade) was superseded by the World Trade Organization (WTO), based in Geneva. Significantly, 1995 was also the year that the internet arrived in people’s offices and homes across the developed world.

GATT had its roots in the Bretton Woods Conference of 1944 but had grown like Topsy through endless negotiations (the Uruguay Round) between 1996 and 1994. The fall of communism in Eastern Europe (1989-90) and the dissolution of the Soviet Union on Christmas Day 1991, effectively ending the Cold War overnight, provided the stimulus to reshape – and liberalise – the way international trade was conducted.

China acceded to the WTO on 11 December 2001. By this time the European Single Market had become reality across the European Union, which would welcome seven formerly communist countries into its embrace on 01 May 2004. Many western leaders, from President Bill Clinton in the USA to prime minister Tony Blair in the UK, waxed lyrical about the benefits of free trade and de-regulation, especially of financial services.

The expansion of international trade was further accelerated by international payment and settlement platforms. In the US, the Glass-Steagall Act of 1933, introduced by President Roosevelt during the Great Depression to separate commercial and investment banks, was repealed in 1999 by the Clinton administration. In the UK, the watchword of the Blair government was “light-touch” regulation of the financial sector.

What China and others brought to the table was, in the first instance, cheap labour. Manufacturers who had previously made products in Europe and America could widen their margins by outsourcing production to their Chinese partners. Suddenly, clothes and shoes in Europe became surprisingly inexpensive as garments flooded in from China, Vietnam, Indonesia and elsewhere. I’ve written previously in these pages about what I call the “Primark effect”. That retailer’s business model in the first and even the second decade of this century was to buy cheap and sell cheap. And it worked. A long period of cost deflation, combined with robust economic growth, meant that living standards in countries like the UK rose smoothly.

In one emblematic episode, Wedgwood, the iconic producer of fine porcelain founded in Stoke-on-Trent by Josiah Wedgwood in 1759, relocated production to Jakarta, Indonesia in 2006. But high-end, branded technology was not quite so easy to relocate to countries where labour costs were cheaper. None of the big German automotive companies – Volkswagen, Daimler-Benz and BMW – transferred manufacturing to China or elsewhere. And China continued to buy machine tools at scale from Germany. Germany, China and other Asian countries like Vietnam continued to run large and persistent trade surpluses, while the UK and the USA accumulated structural trade deficits.

But globalisation was not entirely about trade. Capital and labour also flowed more easily than ever before. Freedom of movement in Europe enabled millions of eastern Europeans to make their home in the UK – some of whom have now returned. Billions of pounds of UK pension funds were allocated to overseas equities.

What Went Wrong?

The beneficiaries of globalisation were essentially the skilled middle classes who worked in finance and tech. Their living standards surged. But for unskilled, low-wage workers it was a different story. They saw their jobs going to foreign immigrants who often tolerated lower wages because those wages compared well with what they could earn back home. Whole industries were transferred abroad. In the USA, much production capacity was moved south to Mexico.

Donald Trump’s America First campaign in 2016 was a reaction to this. It won him the White House on the back of massive popular support – he secured nearly 63 million votes (though Hillary Clinton actually polled 65.833 million but lost in the electoral college). Resentment about immigration was also undoubtedly a factor in the Brexit vote of the same year in which the British people voted narrowly (52-48 percent) to leave the European Union.

Widespread resentment against offshoring, immigration and indeed the entire political class which allowed it to happen is usually called populism. And new, breakout populist parties gained traction right across Europe – indeed, in Italy the Brothers of Italy under the leadership of Georgia Meloni actually took power last year. Right-wing parties have been in power in Poland and Hungary for years. In France, Marine Le Pen of the Rassemblement National will almost certainly be a contender in the presidential election scheduled for 2027. In Germany, the anti-immigrant Alternative für Deutschland (AfD) has been polling at around 20 percent this summer. It will be interesting to see how the European right performs in the elections for the European parliament in June next year.

But in many ways, Europe is behind the curve. In an important article in the summer edition of The New Statesman, the writer and economist Wolfgang Münchau considers what might happen if, as seems likely, the German automobile industry comes under threat from large-scale imports of cheap Chinese electric vehicles. For years, the global automobile industry was dominated by Japan, Germany and South Korea. Then, out of the blue in 2022, China became the world’s largest exporter of cars. No new petrol or diesel-powered cars will be sold within the EU from 2035 onwards (though the German car giants are lobbying Brussels to permit the sale of ethanol-powered vehicles). It’s not clear that the Germans will have a full product range of competitively priced EVs available by then. But the Chinese will. The Chinese also have the productive capacity to make the batteries those EVs will use – and they control much of the EV battery supply chain too, from lithium mines upwards.

At least the Americans under the Biden administration have been future-proofing their automobile industry, even if the Europeans haven’t. The mis-named Inflation Reduction Act which President Biden signed into law on 16 August last year incentivises Americans to buy electric cars – but only if they are manufactured in the United States. The Act also makes $500 billion of new subsidies available for the development of new clean energy on American soil. In this way, Biden and his supporters are pursuing a Trumpian America First agenda – only without the grating Trumpian rhetoric.

When did the era of globalisation finally come to an end? First there was the financial crisis of 2008-09 which devastated government finances across the west and ushered in the era of near-zero intertest rates and loose monetary policy which would ultimately precipitate inflation.

But it was the twin shocks of the coronavirus pandemic (2020-22) followed by the Russia-Ukraine war and the resulting shake-up in the international order which did for it. The pandemic disrupted supply chains worldwide and shipping rates surged – cheap shipping costs were one of the critical components of globalisation. The Ukraine war caused energy prices to explode.

This war has changed the economic landscape. Given the sanctions regime, Russia now sells its oil and gas to India and China; while the Germans buy liquified natural gas (LNG) from the USA. (I have pointed out here before the delicious irony that Europe, where fracking is banned, is being kept going by American shale gas). Russia was kicked out of the G-7 (or rather G-8), which is now a club of European and north American democracies. In retaliation, Russia and China are trying to turn the amorphous BRICS grouping into an alternative club of nations (as I discussed last week). At its recent conference in South Africa, the BRICS admitted six new “members” (if that is the right word) – Argentina, Egypt, Ethiopia, Iran, Saudi Arabia and the United Arab Emirates.

This heterogeneous grouping might even one day launch a joint reserve currency to by-pass the mighty US dollar. Such a currency might be based on the blockchain technology which enables cryptocurrencies to circulate. Certainly, Russia and China see de-dollarisation as a way of undermining American dominance. Though I’m not sure where Argentina fits in – since, if libertarian Javier Milei is elected in the forthcoming presidential election (22 October/ 19 November) he proposes to adopt the US dollar as Argentina’s national currency – and for good measure to abolish the central bank! No doubt reliance on the dollar will diminish over time – nothing lasts forever. But my best guess is that greenbacks will still be in high demand for some time to come.

The BRICS have already set up their own bank – the New Development Bank based in Shanghai – to fund infrastructure in participating states. The BRICS-11 account for about 37 percent of global output on a purchasing power parity (PPP) basis, compared with just 33 percent for the G-7 countries.

All this comes under the rubric of de-globalisation, friend-shoring, de-risking or, as I have called it, the great bifurcation. These will be themes of the at least the next two or three decades. The EU and the USA are about to start negotiating an agreement to shore up the supply chains of rare earth metals and other strategic minerals. (The UK will just have to watch from the sidelines, before getting its marching orders). Even as President Macron has called for European strategic independence, Europe and America have been drawn together by circumstance. The US and much of the EU has excluded the Chinese tech giant Huawei from participating in their 5-G telephony networks on security grounds. Now, the US is banning the sale of certain key semiconductors to China and the Europeans will have to fall in line. Consider how the US government pressured the Netherlands to get Eindhoven-based ASML to comply.

The world after globalisation will be one in which supply chain disruptions, labour shortages and bouts of inflation become more common. There will be periodic outbursts of populism, leading to greater political instability across the democratic west. The WTO is increasingly being eclipsed by the rise of regional trading blocs – including the Trans-Pacific Partnership (TPP), which Mr Sunak wants the UK to join – and a plethora of new bilateral trade deals. Some commentators now think the WTO is an irrelevance. When it is wound up we shall know that the age of globalisation is truly over.

What About The G-20?

Leaders of the G-20 countries will meet in New Delhi this weekend under a banner written in Sanskrit, the language of the ancient Hindu scriptures: vasudhaiva kutumbakam – meaning “the world is one family”. That a is noble sentiment. But as in many families, the member nations of the G-20 nurse deep grievances against one another.

President Putin will be absent – presumably because of the outstanding ICC arrest warrant against him. As will President Xi, suggesting that relations between India and China are even pricklier than we thought – or perhaps Xi does not want to be outshone by Indian prime minister Narendra Modi who is likely to get most of the limelight. President Biden will be there, as will prime minister Sunak and the rest.

The G-20 played a critical role in coordinating economic policy in the aftermath of the 2008-09 financial crisis but, since then, like the WTO, is has become less relevant. India, as G-20 host, will be pushing debt restructuring for developing countries, especially African ones, as well as policies that promote food security. In an article for The Times on Thursday (07 September) Mr Modi argued that advanced countries should not impose restrictive climate policies on developing ones. Action to prevent global warming should be “complementary” to economic development. Mr Modi wants to create “a global ecosystem for clean and green hydrogen” under India’s presidency.

India wants the African Union to have a permanent seat at the table. With Brazil and South Africa set to chair the G-20 in 2024 and 2025 respectively, the voice of the Global South is likely to grow louder. That makes it more likely that sometime soon the issue of reparations – for both the slave trade and for historic carbon emissions – will be formally placed on the agenda. That will not be welcomed by nations such as Britain whose public finances are already under stress and will further inflame “populist” opinion.

Prime minister Modi will devoutly wish to conclude the summit with a leaders’ declaration, even if on close reading it will ring hollow.

The Way Things Were

When Tony Blair left office on 27 June 2007, handing over the keys of Number Ten to Gordon Brown, Britain was enjoying a golden economic summer. Interest rates, inflation and unemployment were low and property prices were rising, as was home ownership. The UK had recorded 40 consecutive quarters of growth. Government spending had increased under Blair, but the nation’s debt-to-GDP ratio was an entirely manageable 33 percent. The City continued to generate money for the government and for its own: London had become the world’s leading financial centre and was flush with cash. Consumer spending was rising, buoyed by increased borrowing – for the first time everyone had at least one credit card. What could possibly go wrong?

In September 2007, mortgage provider Northern Rock collapsed after an old-fashioned bank run, with people queuing up outside its branches desperate to get their money out. (The first time that happened in the UK since early Victorian times). What has followed is a long, sustained polycrisis – austerity, the agonies of Brexit, the pandemic, geopolitical upheaval – in which we are still ensnared. The entire world in which Blairite policies were developed and implemented has now passed into history.

But, according to the former Tory politician and universal man, Rory Stewart, politicians such as Sir Keir Starmer are proceeding as if it is business as usual and that the Blairite world of globalisation still obtains. In his new book, Politics on the Edge, out next week, Mr Stewart, who has returned to the UK after another period in exile abroad, argues that Britain has become a dysfunctional country, and yet its political class of all hues is still banging the same drum.

As I pointed out a few weeks ago, no political party can countenance structural reform of the National Health Service for fear of an electoral backlash. Therefore, they will just continue to shovel more money at it. But spending on healthcare, welfare and state pensions cannot continue to rise faster than GDP indefinitely. As I have said before, there will be a reckoning.

The question is how soon and how unpleasant that will be.


Scientists at the EU’s Copernicus group announced on Wednesday (06 September) that this year will be the hottest ever since the human race first emerged. No doubt the challenges of climate change will require a high degree of international cooperation. But if the UK were to return to the stone age tomorrow, that would cut global emissions by just one percent. The total concentration of CO2 in the atmosphere would continue to accumulate.

Essentially, unless the three largest global emitters of CO2 – China, India and the USA, which combined produce about half the global total – manage to cut their emissions drastically, then whatever the rest of the world does will be ineffectual. It’s that simple.

Meanwhile – enjoy the glorious Indian summer weather that still prevails across the UK this weekend. It’s 30 Celsius outside in Norfolk as I write this – time to abandon the keyboard.

Listed companies cited in this article which merit analysis:

  • COSCO Shipping Ports Limited (HKG:1199)
  • ASML Holdings (NASDAQ:ASML)

Comments (4)

  • Clive AUSTIN says:

    Victor Hill, that was some lesson. I am sir, that much the wiser now on globalisation.
    Well done

  • Anthony M says:

    According to Spiked, the Germans are actively looking at banning AfD outright. Das ist richtig.

    And the reckoning will come for GBP – reaching parity with the dollar and continuing its slide until the Americans step in. Then it will be “in conservatorship”. As for Gilts…

  • roger says:

    Germans are seeking to ban AFD, US Democrats attempt to put Republican opponents in jail. Democracy democracy wherefore art though democracy.

  • Bob Mackintosh says:

    Changing the subject (but I would echo Clive’s words on the quality of this week’s blog), I still feel that the inventive approach to new financial products in 2007/8 was absolutely crucial for what has happened since – it wasn’t just a case of inadequate assessment of risk. The multi-layered derivative structures were very difficult to assess, and their creators should have realised that. This was an ugly side to capitalism, and created a weakened financial system that was not strong enough to withstand Covid etc. Another interesting point, that was brought up in an article in MoneyWeek magazine several years ago now, is that the business cycle seems to correlate to an 18-year cycle in the price of land. I am afraid I do not recall the analysis behind this (I think the author was Australian, but I could be wrong).

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