Globalisation, deglobalisation and european strategic autonomy

It has become fashionable in recent years to speak of “deglobalisation”. And yet, while it is true that
the weight of international trade as a percentage of global GDP has declined a little in recent years, it
remains historically high. So, globalisation is not over yet by a long shot. That said, we have seen in recent years some serious disruptions in supply chains and the emergence of serious tensions between great powers.

Published on 20 September 2023

The wave of globalisation that began in the 1980s was often called the “third wave of globalisation” and featured an uptick in international trade of goods. Many poor countries, which until then had not been economically integrated with the rest of the world, joined the global markets for goods and services. This phase of globalisation was extremely rapid, and international trade’s share of global GDP exceeded 60% in 2008, which was unprecedented. This third wave went through notable spurts, punctuated by two events in particular.

The first was the end of the Cold War, with the fall of the USSR. The second was China’s entry into the World Trade Organisation (WTO) in December 2001, officialising its return to the international trade system.

Many free trade agreements (bilateral or multilateral) have been signed with the goal of promoting international trade by reducing customs duties and inspections, but also by eliminating national rules likely to hinder the importing of foreign goods, services, labour and capital. One of these was the North American Free Trade Agreement (NAFTA), which eliminated most customs duties between Canada, the United States and Mexico, and became effective 1994. And it was from this date that average global customs duties began to decline steadily. In reaction to the difficulties of the World Trade Organization (WTO), which succeeded GATT in April 1994, in managing trade disputes, more and more international agreements were signed, rising from 28 in 1990 to more than 350 in 2022. The integration of emerging market economies in global trade, many of which were still very poor, was the defining feature of this third wave of globalisation, which began in the 1980s. Integrating those countries, China in particular, disrupted the trade landscape and global production chains.

Globalisation has thus acted as a “shock absorbers” in recent decades, as supply of work became so abundant and production capacities so broad-based, that even phases of steep rises in demand did not lead to persistent upward pressures on prices and wages¹ . Globalisation helped reduce economic volatility and thus, among other factors, made possible the phase of Great Moderation (generally regarded as the period between the mid-1980s until the 2008 financial crisis).

It is now well established that the “third wave of globalisation” has led to a widening in inequalities in developed economies. It has resulted in the transfer of a large portion of manufacturing from developed economies to emerging ones, which possess an abundant and low-cost labour force, in particular in Asia. This, in turn, has led to the rise of elevated unemployment in developed economies. The jobs situation has worsened in the parts of those countries that were the most heavily exposed to competition from Chinese imports (with fewer jobs, a lower participation rate, and downward pressure on wages). Western countries have deindustrialised to a great extent, due in particular to offshoring.

This phenomenon has been called the “China shock” by some researchers. According to Clément Malgouyres² , an economist, the increase in Chinese imports led to the destruction of 270,000 jobs in France between 2001 and 2007, including 90,000 in manufacturing. In the US, estimates range from 2.0 to 2.4 million job losses from 1999 to 2011³ . Deindustrialisation has also meant a longterm loss of skills, which has hindered the repatriating certain activities.

As Branko Milanovic, the World Bank’s former chief economist, explained, “The gains from globalisation are not evenly distributed.” And this has produced “winners” (those who possessed capital in multinationals and a large portion of emerging Asia) and “losers” (in particular the middle classes and the underprivileged persons in rich countries). This is been one cause for the widening inequalities within developed economies⁴ and has given rise to recurring criticisms of globalisation, at times taken on board by populist movement (see Trade Wars are Class Wars by Matthew Klein and Michael Pettis).

Meanwhile, the growing fragmentation of production within supply chains was a distinguishing feature of globalisation. As the World Bank noted⁵ : “Parts and components began to travel the world as companies sought savings where they could find them”. True, growing integration of trade and greater participation by low-cost countries in global production had a direct disinflationary impact. But the least one can say is that the Covid crisis laid bare the fragility of global value chains, including the closing of borders, restrictions of various types (such as temporarily halting movement by seasonal workers), the closing of factories and harbours, etc. This caused breakage in many links of the value chain of various durations. Bottlenecks and shortages of all types were the result (with demand up and supply down), and prices rose sharply.

The Covid crisis thus brought into relief the harmful consequences of breakneck deindustrialisation for developed economies. Their inability to produce masks, gloves and ventilators fast enough, not to mention vaccines to cope with the pandemic cast an unforgiving light on the dangers of excessive dependence on the international system. One might add the very great (excessive) dependence of European industry on semiconductors, with German auto production in 2022 26% below its level of 2019, the last full year before Covid.

In a speech given in April 2022, Christine Lagarde, the ECB president, explained that globalisation had changed in nature with the pandemic, mentioning three great transitions in global trade⁶ :

• The transition from dependence to diversification. Companies will seek to free themselves of dependence on their linear supply chains and to diversify their suppliers, while stockpiling essential inputs. As of the end of 2021, almost half of global companies had diversified their supplier base and fewer than 15% were still working on a “just in time” model⁷ .
• The transition from efficiency to security. Global companies will always have incentives to organise production where costs are the lowest, but geopolitical imperatives could restrict the perimeter in which they can do so. Some regions will increasingly have to deal with a smaller set of suppliers regarded as reliable and having the same alignment of strategic interests.
• The transition from globalisation to regionalisation. The price of greater security may be in the form of less trade activity with faraway actors and higher transaction costs. In a more uncertain geopolitical environment, international markets may no longer be as open and reliable. There may now be less scope for addressing an unexpected increase in demand by “leaning” on trade partners. In the event that order is not restored to global trade rules, regionalisation would allow countries to recreate some benefits of globalisation on a small scale, in order to cut costs.

To Christine Lagarde, while globalisation had acted as a shock absorber until the Covid crisis, the reverse may now be true: “There are signs that the global economy could increasingly be a source of shocks for Europe rather than a stabilizer against volatility.” […] Looking ahead, imported volatility might increase rather than decrease.” 

That’s why European countries must work together on the major strategic issues⁸ : “Insofar as geopolitics leads to a fragmentation of the global economy into competing blocs, this calls for greater policy cohesion. Not compromising independence, but recognising interdependence between policies, and how each can best achieve their objective if aligned behind a strategic goal. We could see the benefits of this in Europe especially, where the multiplier effect of common action in areas such as industrial policy, defence and investing in green and digital technologies is much higher than Member States acting alone.”

The Covid crisis appears to have profoundly altered the nature of globalisation. Until now globalisation had been a shock absorber, but that is much less the case today and the reverse may even be true. Amidst very broad trade imbalances (particularly with regard to China), tensions between major powers and competition for strategic resources, it is now essential for European countries to develop and strengthen their strategic autonomy.