- Jakub Knopp
Is the world closing its borders?
"We reject globalism and embrace the doctrine of patriotism" said Donald Trump at the UN in 2018. The American president's speech, like his term in office, was a signal. When the architect of the existing system of global economic governance says it is not working, it means the change is coming.
The last four decades, in which we have witnessed the second historic wave of globalisation, have been marked by the principles of neoliberalism that have underpinned the functioning of the global economic system. The technological revolution has enabled an unprecedented increase in the mobility not only of labour and capital in the traditional sense but also of finance, which has become an integral part of the global system. So globalisation has evolved even into hyper-globalisation, which many identify with the 2007-09 crisis, economic stagnation in the West, growing social inequalities, and ultimately, the recession of democracy.
Faced with new geopolitical challenges, the world is searching for a new economic model that preserves the benefits of globalisation while eliminating its negative social effects. Moreover, to gain legitimacy, the new system will have to reflect the new multilateral geopolitical order.
In short, the future of the neoliberal model of globalisation is in question, and its evolution will be one of the results of the intensifying rivalry between the superpowers.
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The neoliberal illusion. The triumph and decline of hyperglobalization.
According to the world's most popular encyclopedia, globalisation is the set of processes leading to increasing interdependence of countries, their economies, and societies. Contrary to appearances, this is not a phenomenon of the last few decades. Globalisation has been increasing rapidly for at least two hundred years.
The IMF, for example, proposes a division in which the era of industrialisation in the second half of the 19th century led to the first wave of globalisation, which lasted until the outbreak of the First World War. It was during this period that the so-called "race for Africa" took place, culminating in the Berlin Conference and the division of the continent by the European powers. Mass industrialisation and the revolution in transport are seen as the main factors that contributed to the emergence of complex colonial systems, with a division between centre and periphery.
The inter-war period, on the other hand, was characterised by a high degree of protectionism, especially after the Great Depression of 1929, which led to the radicalisation of European societies. But the biggest revolution came after the Second World War, when the US became the main architect of the world order. Author Gary Gerstle divides the last 80 years into the 'New Deal' era, based on the decisions of the Bretton Woods conference in 1944, and the period of neoliberalism, which began to gain popularity in the late 1970s.
The post-war years were characterised by high levels of state involvement in the economy and restrictions on capital flows. The main economist identified with this era is the Briton John Maynard Keynes. It was a period of fixed exchange rates of the dollar against gold, which became the de facto global reserve currency. But this conservative monetary model, along with rising US consumption, eventually came to an end under political pressure. In response to deteriorating public opinion, the Nixon administration abandoned the gold standard and switched to FIAT money, which is issued by central banks with no direct backing in existing assets.
The 1970s, marked by stagflation triggered by energy crises, forced a paradigm shift in monetary policy and shattered faith in the concepts of Keynesian economics. The wave of decolonisation was another impulse that forced a change in the system. Representatives of early neoliberalism wanted to find a way to suppress potentially dangerous nationalist sentiments through a system of global governance. The most famous intellectuals associated with this era were Ludwig von Mises of the Austrian School of Economics and Milton Friedman, as well as representatives of the Geneva School who were involved in the creation of the World Trade Organisation (WTO).
Friedman and other monetarists argued for a limited role for the state in the economy, a restrictive monetary policy and the control of the money supply, colloquially known as "printing money". They were opposed to trade unions, which they believed interfered with the market process and increased unemployment. They saw the welfare state policy model as the main reason for persistent budget deficits and the disappearance of entrepreneurship. However, the spread and implementation of neoliberal ideas required committed political leaders such as Ronald Reagan and Margaret Thatcher. The foundation of the new global governance model would be transnational institutions such as the IMF and the World Bank, while the culminating moment identified with the absolute triumph of neoliberalism was the collapse of the USSR and the acquisition of an ideological monopoly.
So - the decade of the 1990s was marked by the global deregulation of economies, with the so-called Washington Consensus n. The main argument for exporting this model was the belief that a limited role for the state and deregulation of markets would allow for the most efficient allocation of wealth, thereby contributing to a reduction in global inequality. The idea of 'trickle-down economics' became popular at the time. Significantly, the belief in the validity of these theories was equally strong in both American political camps. Ronald Reagan is widely regarded as the architect of the new socio-economic model, but it was Bill Clinton, who signed the free trade agreement with Mexico and Canada - NAFTA - and pushed for China's entry into the WTO, who is seen by many as the main implementer of the neoliberal vision.
It was thus another phase in the historical development of political economy based on liberalism, this time on a global scale. One of the most important features of the second phase of globalisation was the opening up of emerging economies, which for years had maintained high tariffs to protect their domestic sectors. The lowering of trade barriers through successive rounds of negotiations and the growing influence of the WTO became the driving force behind the era of hyper-globalisation. From 1985 to 2007, the growth rate of world trade was twice that of GDP. Moreover, just before the financial crisis, international trade accounted for 60% of global GDP.
With the benefit of hindsight, it is clear that the most successful countries in the current era have been those in Asia that have opted for developmental state economic policies, where opening up to global export markets has been supported by active state intervention. Globalisation in its neo-liberal version has thus secured Asia's status as the economic centre of gravity of the 21st century. A watershed event was the PRC's joining the WTO in 2001, which Bill Clinton was particularly supportive of. Western leaders were convinced of the correlation between economic development and democratisation, which was seen as a universal model of governance.
In retrospect, these ideas seem dangerously naive, but they reflected the neoliberal zeitgeist of the time. The economic integration of the PRC became the driving force behind the era of hyper-globalisation. In less than a decade to 2010, China's exports grew by 460%. However, prosperity has contributed to rising levels of social inequality, corruption and the emergence of vested interests between business and the Party. The competitiveness of Chinese exports has also been helped by the devaluation of the yuan and restrictions on capital outflows. Dani Rodrik contrasts this with the traditional industrial policy of providing direct support to exporters in the form of subsidies or tax breaks. The author argues that China has effectively bent the rules of globalisation to its own needs. Martin Wolf, on the other hand, describes the Chinese model as "communist capitalism".
Let us go further down the rabbit hole. The period of Chinese expansion saw the emergence of what then Fed chief Ben Bernanke called the global savings glut. The result was an influx of Chinese capital into US financial markets, which to this day explains the imbalance of payments between the two superpowers. As a result of the instability in global financial markets and the search for safe havens, the dollar has once again become the reserve currency, despite the abandonment of the gold standard. Developing countries and commodity exporters with budget surpluses began to buy US bonds on a massive scale, contributing over time to the US current account deficit. This led to an appreciation of the US dollar and a decline in exports, which in subsequent years weakened the already uncompetitive US industry.
In addition, the influx of financial capital, both from Asia and Europe, increased demand in the housing market, driven by the growth of the financial sector in the US. To illustrate this phenomenon, it is worth presenting a handful of data. Before the crash in 2007, the share of portfolio investment in global GDP had risen to almost 10%. In the same year, the daily volume of foreign exchange transactions was USD 3.2 trillion, compared with USD 38 billion in trade, almost 100 times more.
The first decade of the 21st century thus saw both the peak and the decline of hyper-globalisation, whose main feature was uncontrolled cross-border financial flows on an unprecedented scale. Economists such as Joseph Stiglitz, who stood in the opposition, criticised this era as a 'regulatory race to the bottom' in which states competed to attract investment from transnational corporations.
And so we have witnessed the beginning of the end of the era of neoliberalism. Its collapse began with the transatlantic crisis of 2007-09. The crisis, which had its roots in the globalised financial system, led to massive intervention by central banks as lenders of last resort. Meanwhile, the wave of trade liberalisation in the 1990s, driven by the WTO and synchronised with similar IMF policies on capital flows, led over time to the so-called financialisation of the US economy as a result of the high demand for USD-denominated assets. Critics of neoliberalism such as Rana Foorahar and Joseph Stiglitz point out that the era of hyper-globalisation has contributed to a greater frequency of financial crises.
Just as the era of stagflation and political powerlessness led to the end of the Bretton Woods order, the Great Recession of 2007-09 marked for many the bankruptcy of neoliberalism and the beginning of a difficult transition period. The years that followed were marked by declining productivity in the West and a slowdown in globalisation. Some economists refer to this period as 'secular stagnation', characterised by a lack of investment in the economy despite historically low-interest rates. The collapse of the transatlantic financial markets has intensified the debate about the negative social consequences of the economic policies of recent decades. Barack Obama attempted to revive the momentum for further trade liberalisation, basing his policy on new free trade agreements when he announced a pivot to Asia. Ultimately, Obama's vision, which relied on the expertise of members of Bill Clinton's former administration, faltered in the face of growing voter opposition.
It is worth remembering that the opening of the US to trade with China in the first decade of the 21st century caused the so-called 'China shock', which devastated the US manufacturing sector. Some 2.4 million jobs were lost between 1999 and 2011. The regions most affected by deindustrialisation were in the so-called Rust Belt. The tragedies of small communities in states such as Ohio, Pennsylvania and Michigan led to an increase in suicides, so-called deaths of despair, and a political radicalisation of society.
Many experts now debate the origins of the decline of US manufacturing, suggesting that the impact of technological development and trade liberalisation may have been the cause. Martin Wolf, using examples from other developed countries, argues that the loss of manufacturing jobs is a natural outcome of the business cycle. Currently, manufacturing accounts for less than 10% of US employment. Analysts at the C ato Institute come to a similar conclusion. Indeed, even countries with a high share of exports in their GDP, such as Japan and Germany, have seen a marked decline in industrial employment in recent decades. Human preferences also come into play. Simply put, many people, given the choice, prefer to work in an office rather than on a production line, which is stereotypically seen as inferior.
This simplified initial description shows the complexity of the whole economic structure. The instability resulting from hyper-globalisation developed a rise in the popularity of populist leaders, not only among the poorer sections of society but also among the middle classes. One example is Marine Le Pen, who accuses economic liberalism and globalisation of erasing the cultural identity of nations. Indeed, since the 1980s, we have witnessed the stagnation of middle-class incomes and the increasing capitalisation of the financial markets, which has increased the level of economic inequality between 'Wall Street and Main Street'.
Interesting in this context is the thesis of the authors of the book "Trade Wars Are Class Wars", who argue that the social inequalities that have created savings surpluses in the age of globalisation explain the turn towards protectionism, especially in the case of the US, which having high deficits facilitates others trade surpluses. In their view, the best solution to the problem of global imbalances would be far-reaching domestic reforms, both in exporting powers such as the PRC and Germany and in the US, which is not using deficits to finance public investment or strengthen the education sector. The authors therefore argue that the main problems of globalisation are related to inequality at the national level, which is translated into global imbalances through a liberalised financial system.
The neoliberal model of globalisation was finally abandoned in the US after Donald Trump's victory in 2016. This moment marked the symbolic end of the previous consensus. The Republicans proposed an alternative concept of 'America First', in which the interests of citizens were to play a primary role. In his inauguration speech, Trump promised that protectionism would bring prosperity to Americans. In another speech, the former president claimed that globalisation had led to 'the greatest theft of jobs in history'. However, the results of the Trump administration's policies have been mixed. Despite a decline in imports from China, the overall US trade deficit has increased, as have the prices of many consumer goods. Tax cuts, for example, have increased the budget deficit, which has had a negative impact on the current account deficit. The US is a textbook example of a country suffering from a so-called twin deficit. In this case, the problem is the high global demand for US financial assets, especially government bonds. The increase in government debt and the subsequent bond issues naturally lead to a deterioration in the balance of payments.
There has also been an erosion of the multilateral trading system during Trump's term in office. By blocking the appointment of judges to the WTO arbitration tribunal, the Americans have contributed to the collapse of the system they designed. Unlike Washington, Japan, and the EU prefer to base their new strategy on a strengthened WTO, one symptom of which was the creation of an alternative tribunal within a coalition of the willing.
Robert Lighthizer, the former trade representative, became the face of the Trump administration's protectionism. Overall, the average level of tariffs on Chinese imports increased to 26% in 2018-19. Lighthizer believes that the US should use trade policy to strengthen domestic industry, which he sees as a source of innovation and prosperity for local communities, a key fabric of the American nation.
In his new book, entitled. ‘No Trade is Free', he argues that the free trade agreements of the 1990s destroyed the American social contract. One of Trump's more controversial plans is to impose a universal tariff barrier of 10% on all imported goods. The Economist estimates that such a decision could reduce the income of every household by up to $2,000. In the book, Lighthizer adds that tariffs should rise until a trade balance is achieved. In short - full protectionism, or perhaps mercantilism, which has contributed to the downfall of superpowers over hundreds of years, the most famous example being 16th-century Spain.
The final nail in the coffin of neoliberalism was the COVID-19 pandemic, which not only led to the collapse of global supply chains but also increased public will for interventionist state policies. The pandemic showed that the 'global village' had its limits and that 'economic nationalism' could be justified in times of heightened geopolitical risk.
Decoupling or de-risking? The search for a new paradigm
The evolution of the global exchange system described above is leading to a new consensus in Western countries, based on the belief that decades of trade liberalisation, coordinated by multilateral institutions such as the IMF, the WTO, or the World Bank, have created a model that could become a source of uncertainty and excessive risk in a changing geopolitical landscape. This is why terms such as decoupling and derisking have begun to appear in the public domain. Let us briefly characterise them.
The phenomenon of decoupling consists of a process of disconnecting a limited part of commercial sectors, which decision-makers consider to be related to national security, from related, adversarial state systems, e.g. China. Measures that fall under the concept of decoupling can include export or investment restrictions, as well as financial sanctions.
De-risking, on the other hand, which has displaced decoupling from the political discourse over the past year, refers to the broader dimension of economic relations and aims to diversify the risks associated with excessive economic dependence on states perceived as geopolitical competitors. The concept of derisking entered the political mainstream with Ursula von der Leyen's speech in March 2023. In the months that followed, it was adopted by other G7 leaders. The process is characterised by shortening supply chains, reshoring, i.e. moving production to other countries and supporting domestic sectors, or friendshoring, i.e. moving production to countries perceived as friendly. In all cases, in addition to implementing their own programs, political elites aim to send signals to the private sector about the need for change. It is worth noting that de-risking, an outcome of the interdependence resulting from decades of globalisation, contrasts with the restrictive export controls that characterised the Cold War period.
To better understand the dynamics of the changes taking place, it is worth looking closer at the policies of the Joe Biden administration, which represent both a continuation and an evolution of Donald Trump's approach. The key slogan of Biden's strategy is 'foreign policy for the middle class', which aims to improve the living standards of Americans by linking economic policy with foreign policy. The key differences with Trump's 'America First' era are the desire to engage allies in a common strategy and to support the domestic economy through an ambitious industrial policy. In practice, Biden wants to achieve a number of goals, such as improving the quality of jobs, energy transition, maintaining technological dominance while weakening China, investing in infrastructure, supporting innovation, and sustaining growth.
The goals are ambitious, but some experts question the legitimacy of the strategy, saying it faces a triple dilemma: competing with the PRC, supporting its own workers, and maintaining credibility in the eyes of its allies. One thing is certain - the focus on domestic industry and technology is expected to bring tangible political benefits. In one poll, as many as 83% of Americans agreed that the US needs a stronger industrial sector. The administration's biggest achievement was the signing of the Inflation Reduction Act, which is expected to provide $369 billion in subsidies and tax credits over 10 years to the renewable energy industry. Despite its name, the IRA is unlikely to reduce inflation and will contribute to higher prices by reducing imports. With new investment in renewable energy, the government expects to reduce CO2 emissions by 40% by 2032. Tax initiatives are expected to leverage private funds and increase investment in green technologies to USD 3.5 trillion over the next 10 years.
Beyond the climate aspect, Biden, wants to create jobs for blue-collar workers in swing states such as Michigan, Wisconsin, and Ohio, where local communities have lost the most from the era of globalisation. Interestingly, the FT estimates that 80% of the IRA-backed projects will be built in Republican-controlled states. Despite this, Trump has announced an end to investment in renewable energy in favour of increased fossil fuel extraction.
Another element of Washington's plan, which has received support from both parties is selective decoupling, focusing on sectors deemed strategic. Increased government involvement will be necessary, as private companies play a major role in 17 out of 19 such sectors. National Security Advisor Jake Sullivan, in a speech at the Brookings Institution in April 2023, indicated that the goal is to maintain the status quo in technological superiority and still not to break commercial ties with the PRC. The Economist describes these measures as part of the Sullivan Doctrine, which marks the historic end of the era of neoliberalism. Restrictions and controls on semiconductor exports or access to US scientists will affect several strategic PRC sectors such as semiconductors, AI, and green technology.
Coordinated enforcement of the new rules with the Netherlands and Japan has helped cut off the Chinese market from access to critical technology. A series of bans on investment by US funds in China's technology industry was also announced last August. The administration fears that developments in these areas could help the Chinese strengthen their military capabilities. The phenomenon of civil-military fusion that characterises Chinese industry is often cited in this context. According to some officials, the Chinese have interpreted the wave of restrictions as a declaration of technological war. So far, however, the response has been muted and has included export restrictions on certain minerals used in military technology, such as gallium and germanium, or sanctions against US semiconductor manufacturers such as Micron. It is worth noting that the chip market is worth more than US$570 billion and global demand is expected to double by the end of the decade. A number of fiscal incentives offered by a handful of countries facilities further steady expansion of a sector centred on technology giants such as ASML, TSMC, and Nvidia. The complex supply chain that has been anchored in East Asia for decades will increasingly leave China in the coming years.
The desire to strengthen ties with allies, on the other hand, is best reflected in the aforementioned concept of "friendshoring" introduced by US Treasury Secretary Janet Yellen. Indeed, the IRA, although controversial in Europe, contains clauses that allow for cooperation with selected countries, for example in the area of critical minerals. Biden's success is the establishment of trilateral cooperation with Korea and Japan, countries that are crucial to the success of de-risking. At the same time, despite the lofty rhetoric about the importance of alliances, experts criticise the excessive 'militarisation' of Washington's policy in the Indo-Pacific.
In theory, Biden's flagship economic project in the region is the IPEF, which will focus on non-tariff trade issues such as supply chain protection, environmental regulation, support for green energy sectors, and the development of new technology standards. However, the proposal has not been met with optimism by Asian partners hoping for free trade agreements. In contrast to the US initiative, other formats based on market access liberalisation, such as the RCEP or the CPTPP promoted by Japan, are gaining popularity. Importantly, China is interested in both initiatives, putting the US in an uncomfortable position in a region that is the epicentre of global trade. The lack of political will in the US to sign more trade deals is due to domestic politics and the fear of undermining less competitive industries at home.
The Democrats' cautious approach is the result of an accurate diagnosis of the fundamental changes in American society that led to Trump's triumph. At the same time, the wave of liberalisation in the 1990s led to a historic decline in tariff levels. In the early 1990s, for example, average tariffs in India and China were 56% (India) and 30% (China). Today they are only 7 and 4%, an eightfold reduction. At the same time, the renaissance of protectionism in the US, supported by both political options, has raised average trade barriers to their highest levels since the implementation of the Smoot-Hawley Act in 1930.
The protectionist tone of Bidenomics has confused European capitals seeking to maintain the competitiveness of their own industries. The EU's response to geopolitical challenges will be complicated by the diverse trade and economic structure of the bloc's members. Moreover, as in the past, the PRC will undoubtedly seek to divide European allies. The implementation of the Commission's ambitious proposals will depend on the will of the EU Council and Parliament, which remain intergovernmental bodies and therefore sensitive to differing definitions of national interest.
However, the EU is also trying to find its way into the new reality. In 2023, it announced a formal strategy for economic security. The main proposals include an Anti-Coercion Instrument (ACI) to strengthen deterrence against economic extortion or the Green Deal Industrial Plan.
Sources of funding range from national funds released following the approval of increased domestic subsidies to joint financial instruments such as the €800 billion 'Next Generation EU' Reconstruction Fund, which is expected to provide funds in the form of loans and grants. This is likely to be a one-off initiative, as evidenced by the higher-than-expected interest rates demanded by investors. Fundamental barriers to public funding remain a problem for the EU, which, unlike the US, does not have a fiscal union with a common tax and budget system. Sceptics point out that the lack of a permanent source of funding could be a major obstacle to a European response to the US industrial strategy.
Other initiatives include the Critical Raw Materials Act and the €43 billion EU Chips Act, which supports the construction of semiconductor factories. Improved investment conditions and an influx of public funds have prompted TSMC and Intel to launch new projects in Germany. The Commission's goal is to concentrate production of 20% of Europe's semiconductor needs in EU countries.
The Commission will also have to reconcile the conflicting objectives of decarbonising the economy and trying to protect domestic industry from the influx of competitive products from China. A particularly interesting case is the automotive sector, where Chinese companies such as BYD have gained a significant price advantage by choosing to vertically integrate and control the entire production chain. Between 2019 and 2023, the PRC increased its share of global exports of electric vehicles from 1% to as much as 24%. Brussels believes that Chinese manufacturers receiving state support are violating the rules of healthy competition. As a result, an investigation into Chinese subsidies was launched last year. The US think-tank CSIS estimates that cumulative government support for the Chinese EV sector from 2009 to 2021 could be as high as US$125 billion. Since Trump's inauguration, tariffs on Chinese cars have consistently been as high as 27.5%. In addition, the US has announced tax breaks of US$7,500 for every electric car produced in the country.
Taking a broader view, it is clear that a consensus has emerged among the G7 countries in recent months on the legitimacy of de-risking and the need for coordination between governments and business. The next few years will be characterised by attempts to reconcile the differences arising from individual countries' interests. The key challenge will be to coordinate trade policies and create competitive and more secure supply chains.
Industrial policy. The new domain of competing powers
A phenomenon of fundamental importance for the future of globalisation is the renaissance of 'green' industrial policy, justified by the need to prevent climate change, make supply chains more resilient, and create new jobs. Given the high financial demands of this strategy, we are likely to see the emergence of a new domain of economic rivalry between the superpowers. In addition to the US and EU plans mentioned above, there have also been national initiatives in Korea, Japan, the UK, and Australia.
For example, the Labour Party, which is likely to take power in this year's UK elections, has announced a 'Green Prosperity Plan', modeled on the US IRA, which will provide £28 billion a year in support. This would represent a 60% increase in public investment compared to the previous 45 years. An interesting case is India, which still has highly competitive labour costs and favourable demographics that should benefit from global diversification of production. Nevertheless, Prime Minister Narendra Modi has announced a 'Made in India' programme to establish the country as a global hub for advanced manufacturing. Competitive subsidies, a key part of an industrial support strategy, can boost innovation and technological discovery, but often contribute to inflation. In the absence of a coordinated strategy, they can be a source of tension between countries. The lessons of history suggest that subsidies distort the global allocation of wealth and, when massively distributed, can have a negative impact on healthy competition.
In Latin America, pro-industry policies combined with protectionism led to lower growth rates and a wasted decade. But there are smaller success stories. South Korea increased its GDP by 349% in the 20 years after 1973, thanks to the emergence of competitive and state-backed conglomerates known as cheboles. This leads us to conclude that in the coming years, as larger countries become more competitive, developing markets will seek other methods, such as devaluing their currency or attempting closer integration with an economic superpower. In general, however, their position will deteriorate, especially in the area of green technology.
It is worth noting that the actions of Western countries are largely a response to Chinese industrial policy, which has entered a new phase with the Made in China 2025 plan. The West has concluded that by restricting access to its own market and supporting its own players, the Chinese are gaining an unfair advantage and bending the rules of free trade in their favor. With increasing regularity, Party documents refer to the need to achieve self-sufficiency, encourage innovation, and move away from an obsession with 'growth at any cost'. Some point out that Beijing was in fact the pioneer of de-risking. China's main successes are electric cars (EVs), renewable energy, and electronics.
The Americans, on the other hand, are trying to respond by intervening in semiconductor manufacturing and design. This amounts to an attempt to diversify the production of the most advanced chips, 92% of which was concentrated in Taiwan before the pandemic. The flagship initiative of the Biden administration is the CHIPS Act, which includes more than US$50 billion in assistance. In total, major industrialised countries have so far announced $400 billion worth of support programmes for the semiconductor sector over the next decade. In addition to the US and Europe, ambitious industrial plans have been announced by South Korea and Japan, which plans to build its strategy on a partnership with the US. On the other hand, China, which spends more on imported semiconductors than it does on oil, aims to reduce its chip imports from 85% to 30% of demand as part of its "Made in China 2025" plan.
Renewable energy is another strategic area receiving significant government support. As much as USD 1.3 trillion of public support has been earmarked for green investments since 2020. In this context, it is interesting to note the cases of developing countries such as Indonesia and Chile, which have significant reserves of nickel, lithium, or copper, which are essential raw materials for the success of the energy transition. Through protectionist policies and the concentration of the entire value chain at the national level, governments want natural resources to contribute to the economic development of the whole economy. However, the return of industrial policy and the global shift towards reshoring is likely to concentrate the production of most green technologies in industrialised countries anyway, creating new sources of dependency and weakening developing countries.
It should be noted that China is currently in the best position to dominate the green energy sectors. Despite the decline in exports to the US, China's share of global battery exports increased from 48% to 61% between 2019 and 2023. In the case of photovoltaic panels, this is an increase of up to 18 percentage points to 62%. Overall, exports related to renewable energy grew by 30% year-on-year to nearly US$140 billion last year. Battery production in the PRC has increased nearly 50 times since 2015. For electric vehicles, the increase was almost 30 times. Dominance in the renewable energy sectors is seen by analysts as one of China's key opportunities to generate momentum for further growth, after decades of unproductive infrastructure investment.
The balance of derisking
Given the pace of change in the global economy, it is worth presenting the balance of derisking so far. The United States and its changing trade structure can serve as an indicator. The share of exports in US GDP rose from 12% to 34% between 1970 and 2012 and has remained at a similar level in the last decade. We are therefore talking about stagnation rather than a marked decline. The IMF's term "slowbalisation" aptly describes the phenomenon of recent years. But a closer look reveals that the process of import diversification will continue. Since the beginning of Trump's presidency, trade with the PRC has fallen by 5.8%. In the case of manufactured goods, where the deficit has been particularly severe, it is already 8.8%. At the same time, there have been gains in trade with Vietnam, which is closely linked to Chinese supply chains, Mexico, an example of nearshoring, and Europe, mainly through energy exports. In general, de-risking is more of an adjustment than a revolution in international trade.
The Economist, on the other hand, describes the current situation as 'false decoupling', which essentially amounts to the US diversifying its trading partners while increasing trade with China. While this may improve the US bilateral trade balance with Beijing, it will not have a particularly negative impact on Chinese exports and, to make matters worse, will worsen the situation for US consumers. The phenomenon described by The Economist also points to the persistence and complexity of China's supply chains, which represent a dense network of economic interdependencies in Asia, a continent based on free trade.
Whereas analysts at the McKinsey Global Institute decided to measure the true extent of friendshoring by combining the geographic distance of trade between selected countries and the degree of geopolitical convergence with the US, based on voting trends at the UN. They found that over the past six years, the US has managed to reduce its 'geopolitical trade distance' by 10% by strengthening ties with allies. Over the same period, Europe's share of imports has risen by 2 percentage points to more than 20%, largely due to a rise in German imports of electronics. In 2022. The EU recorded a historic trade deficit of €400 billion with the PRC. It is worth noting that the level of European investment in the PRC has fallen by almost 50% compared to the pre-COVID pandemic period.
On the other hand, Beijing increased its trade with developing countries. Declines in trade with the US and South Korea have been compensated by increases in trade with the Middle East and ASEAN countries. As a result, the share of developing countries in China's international trade has exceeded 50% in recent years. The report also shows that most of the trade between geopolitical competitors is in 'concentrated' products, i.e. products that are difficult to source from other exporters. Looking to the future, the authors draw 2 different visions: fragmentation and diversification. In both scenarios, the size of the 'trade passages' between the world's main economic regions changes. In the case of fragmentation, China could lose up to 6% of its GDP by reducing the geopolitical distance of trade and the importance of exports in the economy. Diversification would involve a broadening of the export mix and a potential loss of competitiveness in strategic sectors. The report concludes that Western countries, because of their economic size, would be able to adapt more easily to a fragmentation scenario by developing new internal markets.
Potential de-risking will bring both risks and opportunities for developing countries, depending on the speed of change. An IMF simulation showed that in a 'Cold War' scenario and a split into two trading blocs around Beijing and Washington, global GDP could fall by 7%. Interestingly, developing countries would lose more from a reduction in free trade liberalisation, experiencing a collapse of up to 5% of GDP. By comparison, the US would lose just 1%.
FT journalist Martin Wolf argues that technological developments will have a decisive impact on the evolution of globalisation towards trade in services. Rather than reshoring, he adds, we will see a complex process of supply chain diversification involving both business players and government agencies. A coordinated approach is advocated by Henry Farrell and Abraham Newman in an article for Foreign Affairs, who cite the example of Japan, which has created a wide range of technocratic institutions. They argue that this allows for a faster response to economic needs and better coordination of the various private and public actors. Another trend that has become popular recently is the so-called "China+1" strategy, in which corporations seek to diversify their production in the region around China.
As a result, in the short term, developing countries that share a supply chain with China will benefit from derisking. Examples include Vietnam, Mexico, and Thailand. Samsung, for example, has cut jobs in China by 70 percent since 2013 and shifted almost all its smartphone production to Vietnam and India. Apple, for whom the Chinese market is fundamental, is also starting to follow a similar strategy. Today, around 90 percent of iPhones are still produced in the PRC. The market also accounts for 20% of the US company's revenues.
In addition to export growth, there has been a significant increase in foreign investment in recent years, particularly in ASEAN countries. Once again, Vietnam comes to the fore, with a steady increase in foreign investment, which reached USD 23 billion in 2022. By comparison, the level of US greenfield investment in the PRC has fallen by 70 percent in the last two years compared with 2015-2019. Over the same period, the level of investment in ASEAN has doubled. Another interesting example is Mexico, which is experiencing a simultaneous increase in investment from both China and the US. It is a particularly important destination for Chinese electric car manufacturers hoping to expand into the US market.
The Summary
The whole picture shows the unimaginably complex structure of the modern world. We are moving through a web so complex that it is almost impossible to predict the far-reaching effects of any given policy, as the number of possible scenarios grows towards infinity.
In the end, the main question is how the geopolitical rivalry between the superpowers will affect the evolution of the neoliberal economic model that has been in place for the last 40 years. In the coming years, the logic of national security will likely determine the trajectory of the superpowers' trade policies. The current system is undergoing a transformation that could be rapidly accelerated by unexpected geopolitical changes or black swan events such as global pandemics.
Nevertheless, the era of growth at any cost appears to be a thing of the past. Climate and security priorities will dominate countries' economic strategies. Finally, it is worth returning to Norman Angell, who argued in The Grand Illusion, just before the outbreak of the First World War, that conflict between countries was unthinkable in a globalised world. As we know, the increased economic interdependence that characterised the first wave of globalisation did not save the world from the outbreak of the Great War, which brought 30 years of instability to Europe. The lesson for today's leaders is clear: peace can never be taken for granted. Looking ahead, Keynes's warning about the vulnerability of globalisation to unexpected geopolitical crises is more relevant than ever.
