Aleksandar Adzic blog

Deglobalisation – Who will be the winners and losers?

Countries with large economies and significant resources may do better than others!

The new world economic order is coming very quickly. The era of aggressive globalization is being replaced by hidden and open protectionism, financial and economic blocs and industrial policy. Such a reconfiguration of the world inevitably leads to a division between those who can emerge victorious and those who cannot ride this wave.

The trend towards weakening globalization was first noted after the 2008 crisis. During the decade, world trade’s growth rate lagged behind the global GDP growth rate. These processes accelerated during the trade war of the late 2010s between the United States and China. The EU also suffered at the same time. The Green Transition, the pandemic, the disruption of supply chains and, finally, the conflict around Ukraine, in which the international situation sharply deteriorated, ensured the logical conclusion of the process.

Bans and controls on the export of important products and materials are widely used tools. Suffice it to recall the “chip war” outbreak. The United States not only put control mechanisms on the supply of semiconductors and equipment for their production to China but also put pressure on other countries (Japan, the Netherlands) to do the same.

In response, China introduced similar controls on the export of the metals gallium and germanium. These are important in the production of chips. Let us note that none of these steps are officially explained by the fact that the opposite side has done something wrong in the international arena. About 15 years ago, this would have caused a scandal at the level of the World Trade Organization. However, now it is simply an element of economic policy. Moreover, the WTO itself is currently a dysfunctional organization for several reasons.

USA: deep pockets for now

“Size matters” is the conclusion reached by the authors of an article in The Wall Street Journal outlining the prospects for the new world order. Major powers, economic blocs and alliances have a distinct advantage in this race. Firstly, they have deep pockets to pay for extremely expensive industrial policies. Secondly, they have a large domestic market where economies of scale work well.

The United States is in a very advantageous position in this regard. Much of the impetus for deglobalization comes from them. Just as did the impetus for globalization 40–50 years ago. But it should be noted that even in the “pre-global” era, the United States was a very rich country with everything it needed: its GDP per capita significantly exceeded almost all European and especially Asian countries until very recently.

Although globalization brought the United States even more wealth, it was unevenly distributed. Almost all the cream was collected by the upper-income strata. It makes up 10-20% of society; the top 1% and even 0.1% became the maximum beneficiaries. The downside of this process was an acute crisis in American industry and related areas. It developed into a social crisis.

However, not everything is perfect for Americans. Although the dollar still enjoys its “exorbitant privilege”, its weaponization frightens many and threatens its status. The de-dollarisation of the global economy will be a heavy blow to the United States, especially coupled with a sky-high budget deficit (as in wartime) and a national debt approaching the levels of Italy and Greece. To everything else, we must add the competencies lost over decades of deindustrialization and the shortage of qualified workers, which will not be easy to fill due to the inadequate education system.

China: double circulation

China, like the United States, boasts a huge domestic market. The Chinese economy was export-oriented. However, by the mid-2010s, it became clear that exports would not raise the country to the level of the most developed countries.

In 2020, the Chinese authorities adopted a “dual circulation” policy. It is designed to focus on the development of the domestic market. In particular, it talks about increasing the production of vulnerable sectors such as semiconductors. China has already made a lot of progress in producing chips and equipment for them. In addition, China continues to increase its significant spending on research and development. Foreign investment in the country has grown more than one and a half times over 10 years, to $189 billion in 2022.

China’s other strengths include its global market dominance for many important materials (such as rare earths and rare metals), well-designed production chains, a skilled and ever-improving workforce, and a leading position in green energy products.

However, China is not invulnerable. The country depends on the supply of many resources and is still technologically behind in the most mature industrial sectors. More importantly, the country’s economy is overburdened with debt, totalling over 300% of GDP. Finally, there are demographic problems – China’s population is aging quickly, and efforts to restore the birth rate have not yet brought clear results. These are quite serious barriers to the country’s self-sufficiency in the medium term.

EU: energy crisis in action

The EU is one of the world’s largest economies, with a developed, high-tech industrial sector with superior competencies in most industries. The EU can afford to spend a lot of money. For example, Intel was offered incentives and subsidies from the German government for constructing two semiconductor factories totalling $11 billion. And yet the EU is quite difficult to classify as one who will benefit from the current situation.

The threat of deindustrialization in European countries is more than real. The last year clearly showed – companies are ready to transfer production to the USA or China. It is due to a sharp increase in energy prices in the European Union. Foreign direct investment over 10 years has decreased by more than one and a half times to $200 billion, thus only slightly exceeding China’s level of foreign investment. In addition, the presence of a single internal market faces a variety of legal systems and internal confrontations between the countries of the bloc (expressed, for example, in disputes over national debts and deficits), which significantly complicates economic development.

The current war in Ukraine pushed by the Anglophone hegemon is as much against the EU as it is against Russia. The tragedy is that the EU is actively supporting the efforts of the Anglophone Hegemon. Without cooperation with Russia, the EU is not competitive internationally. Any serious attempt to move to protectionism will lead to a collapse of the Union as different countries have different interests. We might see countries that did not introduce the Euro leaving the Union. Russia is counting on that.

Great Britain: There will be no Singapore on the Thames

The biggest losers may be some mid-sized countries that do not have large domestic markets and rely on exports or financial services. Launching an independent high-tech industry in the UK is prohibitively difficult. During Brexit, British leaders proposed a picture of “Singapore-on-Thames”. It is something like “multi-vector” power in the economic sense, successfully trading with the rest of the world. But this potential advantage rapidly becomes a pressing problem in the context of deglobalization. London cannot afford an industrial policy on the scale of the United States or Europe. Even British firms prefer to open production in South Korea or North America.

India: The need for long-term cooperation

India is on the way to becoming the most populous country. Will it be enough? I think the best option for India would be establishing long-term cooperation with Russia. No other country than Russia could offer genuine strategic cooperation in fields of high technology and supply of relatively cheap energy and minerals. Russia is fully aware of that. I am not sure about India at the moment.

Russia: It can survive on its own but could thrive in cooperation with some other large or medium-sized economy

Russia also has every opportunity to succeed in the new world. It is not deprived of resources and can sharply increase its export revenues. You can put good infrastructure and quality education in the same piggy bank, which produces a qualified workforce. The domestic market will not be enough for the country’s development, if only for demographic reasons. Cooperation with India or Vietnam would be beneficial for all involved. I am expecting a big influx of North Korean workers to Russia. Particularly in the Far Eastern regions.

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