COVID-19 | Is deglobalization helping or hindering the global economy during the coronavirus crisis? by Peter A.G. van Bergeijk

COVID-19 | Is deglobalization helping or hindering the global economy during the coronavirus crisis? by Peter A.G. van Bergeijk

We are only starting to see the economic impact of the COVID-19, but it is likely to have far-reaching effects and will result in unprecedented economic transformation. We are currently ...

To fight or to embrace? Divergent responses to the expansion of Southern China’s industrial tree plantation sector by Yunan Xu

To fight or to embrace? Divergent responses to the expansion of Southern China’s industrial tree plantation sector by Yunan Xu

The industrial tree plantation sector has been expanding rapidly and massively in Southern China, affecting the livelihoods of the local population residing in the region. But is change resisted or ...

Deglobalisation Series | China: ‘restarting’ globalisation? by Chenmei Li

After benefiting from international trade and investment for the past 30 years, China’s global position is starting to change. This is perhaps most evident when regarding its position at the centre of an ongoing ‘trade war’ with the United States. Given its role as leader in international trade, will China be able to ‘restart’ globalisation and offer an alternative to globalisation and deglobalisation as defined by the West?


As developed countries appear to step back from globalisation, China senses an opportunity to step forward and set new rules for globalisation. A major component of the Chinese strategy to lead changes in how globalisation is thought of and practiced is the One Belt and One Road Initiative (OBOR) of the Chinese government. Aimed at improving infrastructure and connectivity between China and the world, this initiative comprises more than physical connections. The Chinese government argues that this initiative includes not just economic, but also socio-cultural linkages, ultimately leading to mutual benefits for all countries involved. The OBOR defines China’s idea of globalisation in a new era in which emerging economies backed by rising economic power and strong alliances are seeking greater influence on global issues.

2000px-One-belt-one-road.svg.png
Figure 1. Map of China’s One Belt One Road Initiative, with China in red and the land (black) and sea (blue) routes indicated. Source: https://en.wikipedia.org/wiki/One_Belt_One_Road_Initiative

China’s push for globalisation has evoked mixed reactions across the world, and Beijing has had to deal with multiple obstructions to its vision. Moreover, logistical and bureaucratic issues are plaguing countries participating in the OBOR. For instance, although China has signed bilateral cooperation agreements with Pakistan, Hungary, Mongolia, Russia, Tajikistan, and Turkey, with a number of projects planned under those agreements, the proposed projects have not been implemented. Most such projects are infrastructure-related, for example a proposed train connection between eastern China and Iran, which eventually may be expanded to Europe. Powerful Western economies and neighbouring Asian giants have remained cautious in their assessments and acceptance of the initiative.

Sustaining the benefits of globalisation

An important motivation behind the OBOR is the endeavour to continue to benefit from globalisation. Since 1979, China has implemented an Opening and Reforming Strategy. However, its export in percentage of GDP (trade openness) in 1980 was only 5.9% and outward Foreign Direct Investment (FDI) was 1.7 billion US dollars. Only after the 1990s China’s globalisation process really began. Joining the WTO in 2001 pushed its trade openness to the highest point—higher than the world average and the levels of the UK and US (Figure 2).

openness
Figure 2. Trade openness from 1960 to 2016 for four of the world’s largest economies, with the world average also indicated. Source: World Development Indicators (2018).

China is said to have been the largest beneficiary of globalisation until the economic crisis hit in 2008. After the economic crisis, the international market became weak and the Chinese economy could no longer count on export as its most powerful economic ‘carrier’ (besides investment and consumption). Immediately following the crisis, the Chinese government injected 4 trillion renminbi (RMB) into the economy and boosted short-term investment and consumption. Its long-term plan, which was not clear until 2012, is to further stimulate trade openness and integration into the world economy. China thus seeks to leverage the global market and resources to boost its economic growth.

At the helm of rebuilding globalisation efforts?

China does not only want to continue to benefit from globalisation, but also wants to lead the rebuilding of a global system where it could assume a leading role. The current deglobalisation phenomenon does not mean that the general globalisation trend will cease, because the core driver of globalisation is technology, which is advancing faster than ever. However, it does suggest a splintering (if not collapse) of the current globalisation system created after World War II and shaped to its current state largely by developed economies.

Trumpism and Brexitism are both symbols of the deglobalisation phenomenon but are not evidence that the traditional leaders of globalisation are deglobalising their economies. Instead, such symbols show the recognition of the need for a new globalisation system by both ‘traditional’ world leaders like the US and UK as well as emerging powers who were largely excluded from the last global rulemaking process and now hold a share of the world GDP so significant that they cannot be ruled out again.

However, globalisation in China has always been selective, well-managed, and restricted mainly to economic and trade-related activities. Besides its achievement regarding global trade, China shows little achievement or/and willingness to be globalised in terms of, for example, finance, human resources, and culture. The exchange rate is under careful control. English education in China is mandatory since middle school, but the real usage of English is still quite limited. China is known to be the most difficult country for foreigners to attain residence permits, and to date it blocks direct access to the global internet. These are all signs that Beijing is not too eager to participate in all forms of globalisation.

China needs to tread carefully

And thus its attitude may jeopardise China’s idea of globalisation through the OBOR initiative. The explanation often used by Chinese government for the selectivity related to the initiative is its desire to minimise the negative effect of Western-Defined Globalisation and to respect China’s special country situation. However, China’s attitude towards the OBOR must be open-minded and holistic, both tolerable of and acceptable to a wide range of ideologies.

The Chinese government seems to realise that and is promoting the OBOR as ‘the most inclusive globalisation system’. Formally, the OBOR emphasises five key areas of cooperation, including economic, financial and social exchanges, and the private sector is encouraged and expected to be the main driver of the initiative. Unfortunately, the current situation suggests that OBOR has been largely driven by state-owned enterprises and government-level trade agreements, and is limited to global trade. The areas that are not engaged by the plan, such as culture, education, data sharing and immigration, are likely to hinder China’s efforts towards globalisation, especially in a digital world where technology is developed at such a high speed.

In conclusion, China will continue to seek leadership in restoring the globalisation system, with the OBOR initiative as its core measure. However, both traditional leaders and other emerging powers still have a say in how and whether the globalisation system is re-established. Consensus may not have been reached between countries, but the globalisation trend is likely to continue—and at a faster pace due to new technologies. If China truly wants to become a major global leader in the quest to ‘restart’ globalisation, private sector involvement in areas other than trade need to be encouraged through a more open-minded attitude.


Also see: Deglobalisation 2.0: Trump and Brexit are but symptoms by Peter. A.G. van Bergeijk and Challenges to the liberal peace by Syed Mansoob Murshed


untitled.pngAbout the author:

Chenmei Li is a Project Analyst at Institute of New Structural Economics, Peking University—one of the top 25 think tanks in China. She is working on economic transformation of developing countries (especially in Africa) and China’s engagement with LDCs. She received a Master’s degree from the ISS in 2016.

 

 

The imperial intentions of Trump’s trade war babble by Andrew M. Fischer

The imperial intentions of Trump’s trade war babble by Andrew M. Fischer

In defence of his trade war with China, Trump claims that ‘when you’re $500bn down you can’t lose.’ The problem with this stance is that persistent US trade deficits with ...

Deglobalisation Series | Challenges to the liberal peace by Syed Mansoob Murshed

Deglobalisation Series | Challenges to the liberal peace by Syed Mansoob Murshed

We may have reached a stage where economic interactions have become so internationalised that further increases in globalisation cannot deliver greater prospects of peace. But the logic of the capitalist ...

Deglobalisation Series | Backtracking from globalisation by Evan Hillebrand

While globalisation still enjoys strong support in the Global South, major economies in the Global North now seem less enthusiastic about its purported benefits. This article explores how the United States through its previous policies came to backtrack from globalisation, showing that it is an altogether unsurprising development.


From the perspective of the United States (US), embodied in US president Donald Trump’s recent discourses, the liberal international trading system faces at least three major economic and socio-political challenges going forward: (1) income redistribution, (2) the rise of Asia and a potential shift in comparative advantage, and (3) the rise of China and the national security argument. Given the growing domestic unease with free trade and the fact that these exacerbating issues are worsening, I suggest that US policies will become less supportive of globalisation.

US withdrawal: surprising or expected?

In our 2011 article, “Backtracking from Globalization” (1), my coauthors and I discussed the declining support for globalisation in the United States and elsewhere. Since then the trend has gotten worse.

But why shouldn’t it? The US, after all, has only had a liberal trade policy for 60 or so years. In its early years, US policy focused on high tariffs, large subsidies to key industries, and infrastructure investment designed to create an industrial economy for the sake of military and economic power (sounds not too dissimilar to China today). The US moved to a freer-trade stance when the US was economically dominant and an expansion of global markets seemed as if it would be economically beneficial.

The US free trade strategy was also based on political theories and grand strategy. After World War II, trade expansion was seen as a good way to bolster Europe economically, tie it to the West, and strengthen the West against the Soviet Union. The US spurred the creation of the GATT/WTO in an effort to bring all countries into a democratic rule-based system under the assumption that trade would help all countries prosper under US leadership. Since 1980 or so, the US has tried to lure China into the world market system to foster interdependence and peace. In many respects, that policy can be considered a great success—ushering in a vast improvement in the material standard of living almost everywhere and many decades of great-power peace. China also did turn away from its Maoist phase of development.

 Ebbing enthusiasm for globalisation

Support for globalisation, however, is clearly headed in a negative direction and the ebbing of enthusiasm has been particularly dramatic in the United States. Recent polling data from the Pew Foundation and the Council on Foreign Relations (2) show that there is still support for international trade, but a majority worry that trade generates labor market costs in terms of job destruction and lower wages. This worry helped elect the current US president and his administration talks more about fair trade than free trade: ‘Nothing about the theory of comparative advantage would lend itself to a defense of a status quo that imposes higher barriers to exports on American producers than on foreign producers’ (Economic Report of the President 2018: 219) (3).

It is important to understand that it is not ignorance that has led US policy in this direction.

Many voters were lured to Donald Trump’s “America First” pitch because of a perception that wages were stagnant and communities were hurt because of globalisation. In reality it is more than just a hunch: income distribution in America has worsened and academic research by Paul Krugman (4) and others attributes some of that worsening to trade, although the magnitude of trade’s contribution is (and always will be) in dispute.

Support for globalisation has to some extent rested on the theory of comparative advantage, but that theory has never been the “slam dunk” argument that enthusiasts have made it out to be. It depends on so many assumptions that do not fit the current world economy, so the theory should only be relied upon as a general principle, not the decider of every policy dispute. Paul Samuelson (5) claimed in 1972 that the aggregate gains from trade are not necessarily positive. He expanded on this idea in his (2004) paper, ‘Where Ricardo and Mill Rebut and Confirm Arguments of Mainstream Economists Supporting Globalization’, saying that growth in the rest of the world can hurt a country if it takes place in sectors that compete with its native exports—where it has comparative advantage.

The rise of China

Relative, and even absolute, per capita GDP can fall in such a situation (6). Whether China’s rise can actually diminish the US is not clear, but the current Chinese government continues to employ active trade policies to push its industries up the value chain, aiming explicitly at sectors that have been the mainstay of US industrial pre-eminence. Samuelson says that ‘economic history is replete with examples like this, first insidiously, and later decisively’, pointing explicitly to British manufacturing being overtaken by US industry after 1850.

In addition to the economic threat posed by China, the US government has long worried about the security threat posed by China’s rise. The US-China Economic and Security Review Commission is an organisation chartered and funded by the US Congress and dedicated to the proposition that China poses a multifaceted threat to the US. It yearly issues a massive report that cites declines in the US defense industrial base, insecurity of defense supply lines, financial threats, Chinese ownership of critical US facilities, cyber threats, and other problems—all related to China. In the most recent report (7), it lists 26 recommendations for congressional action, many of which would amount to new trade restrictions.

Trade policies, while often rooted in interest groups scrambling for distributional gains, are also related to national economic and security concerns. In the past, pragmatic national interests have pushed trade policy in varying directions. There is no reason now to believe that the US is giving up on international trade, but there is every reason to believe that for a variety of national interests it will be much less enthusiastic about globalisation in the future.


References:
(1) Hillebrand, E.E., J. Lewer and J. Zagardo (2011) ‘Backtracking from Globalization’, Global Economy Journal 10(4).
(2) Poushter (2016) American Public, Foreign Policy Experts Sharply Disagree over Involvement in Global Economy. Pew Research Center, http://www.pewresearch.org/author/jpoushter.
(3) Council of Economic Advisors (2018) Economic Report of the President. Washington, D.C. https://www.whitehouse.gov/wp-content/uploads/2018/02/ERP_2018_Final-FINAL.pdf
(4) Krugman, P.R. (2008) ‘Trade and Wages, Reconsidered’, Proceedings of the Brookings Panel on Economic Activity. Spring conference. Available at: (http://www.princeton.edu/~pkrugman/pk-bpea-draft.pdf).
(5) Samuelson, P.A. (1972) ‘Heretical Doubts About the International Mechanism’, Journal of International Economics, 2(4): 443-453.
(6) Samuelson, P. (2004) ‘Where Ricardo and Mill Rebut and Confirm Arguments of Mainstream Economists Supporting Globalization’, Journal of Economic Perspectives 18(3): 135-146.
(7) U.S.-China Economic and Security Review Commission (2017) 2017 Report to Congress. Washington, D.C. Available at https://www.uscc.gov/sites/default/files/annual_reports/2017_Annual_Report_to_Congress.pdf

Also see: Deglobalisation Series | Is anti-globalisation only a preoccupation in the Global North? by Rory Horner, Seth Schindler, Daniel Haberly and Yuko Aoyama


UntitledAbout the author:

Professor Evan Hillebrand taught international economics at the Patterson School of Diplomacy and International Commerce at the University of Kentucky. His most recent book is Energy, Economic Growth, and Geopolitical Futures (MIT Press, 2015).