The Failure of Globalization & the Return to De-Globalization
For the longest time, globalization has yielded a thriving economy for all participating countries. Importation, offshoring, and outsourcing became common tools of the trade in terms of optimizing supply chain systems, ensuring availability of resources, and producing affordable retail products. Globalization harbored inter-dependency despite the political tensions brewing underneath the global scene. Globalization was also packaged as a tool for political stability, citing mutual dependence as a fulcrum for different socio-political ideologies. However, we would learn that these political tensions won’t be resolved solely through economic ties, and by the end of the 20th century, advanced economies are facing the ushering of a new economic order.
Major events that disrupted the economy highlighted globalization’s pitfalls. As early as the 2008 recession, world leaders have reevaluated foreign investments to reduce the impact of volatility from overseas markets and economies. More than a decade later, COVID-19 struck down a great number of the rails of globalization like tourism, labor markets, offshore manufacturing, and most importantly the importation of goods. The pandemic surfaced the fragility of complex supply chain systems that was devised under the premise of globalization. Today, the Russian-Ukraine war and US-China trade war have only exacerbated the issue. Free trade has broken ground for major infrastructures that facilitated economic growth; however, the lack of oversight has resulted in brittle international ties driven only by the easiest, most cost effective access to the means of production. In short, there was little to no regard towards the uncertainty of the economic structure even in the presence of apparent political and social turmoil across international borders. More than likely, the future calls for a less dependent economic model because of the risks inherent in the globalized structure.
Globalization’s Faultline
Many economists have already pointed out the economic moonwalking towards de-globalization. Researchers have coined the term slowbalization which pertains to the retracement of globalization metrics. These benchmarks are often interpreted as a simple pullback from hyper-globalization and not a full-scale regression to deglobalization. A more concrete example is the diversification of production networks. Taiwan Semiconductor Manufacturing Corporation, a major key player in the chip manufacturing industry, has reignited their pursuit to bring chip fabrication onto US soil. This onshoring move was supported by their clients who also happen to be among the largest companies trading on the Nasdaq Exchange – Apple and Nvidia. This event may be viewed as a shift towards local sourcing. The other side of the coin tells us that this was also a response to the overreliance on offshore manufacturing which did not play well during the pandemic.
At the height of the pandemic, many countries experienced the scarcity of essential and non-essential goods. This supply chain failure is mostly attributed to the fact that these goods are imported from China who had enforced stricter containment measures such as lockdowns. This affected the manufacturing hubs that are responsible for most of the world’s production of goods and immediately prompted a change in strategy for businesses who are offshoring their productions. Enterprises now often hold more supply of their goods rather than relying on just-in-time supply chain systems; but, more importantly, the scarcity sparked significant interest in reviewing the resiliency of the systems that were built over the years. Initiatives such as the Supply Chain Resiliency Initiative, by the Export-Import Bank of the US, financed US companies to access minerals from other partner countries. The project is aimed to reduce the reliance on China for minerals and grow the market share of the US in the global economy diversify and strengthen U.S. supply. Many other similar incentives and initiatives were placed during the pandemic but more importantly, the pandemic helped to put onshoring and nearshoring back into the limelight.
The recent wave of Trump tariffs shook the global markets as major securities and assets plunged to percentiles akin to pandemic recession levels. These tariffs may seem to be a drastic move by the administration, as evidenced by the market’s abrupt movement. However, a closer look at the global events in the last five years shows us that a separatist sentiment has already been sprouting, even prior to Trump’s 2024 comeback.
In 2020, while the US was crossing swords with China, the European Union and the United Kingdom successfully signed the termination of the UK’s membership from the EU. Known as “Brexit”, this event signified a decoupling of the UK’s economy from other European nation-states. Although supporters of this exodus were also advocates of free market, the shift is primarily viewed as a fight for the independence of the United Kingdom. This move can be seen as one of the primary fissures in the deglobalization faultline. Brexit disconnected the UK’s economy from its neighboring countries and required the parliament to reconstruct international trade ties that were made during its membership to the EU. Additionally, the EU’s lenient border policies further detached the UK, not only financially but also socio-culturally.
Meanwhile, the United States’ reevaluation of its trade ties with China evolves into an all out trade war as Trump cites the trade imbalance, intellectual property theft, and even national security concerns. This was the main motivation for the wave of tariffs that are resonating until Trump’s second term. The idea is that these exclusionary policies will result in a revival of industrial manufacturing and agriculture in the US and, consequently, a stronger economy.
The Russian-Ukraine war escalated in February 2022 when Russia initiated a special military operation in Ukraine. In the lens of international organizations, it was seen as an invasion of Ukraine’s sovereignty which resulted in a barrage of sanctions. The sanctions critically struck EU’s energy ties. Prior to the sanctions, almost half of the EU energy consumption was dependent on Russian gas imports. As a response, the EU now plans to be independent from Russian energy by 2027.
In light of these recent events, the global economic posture seems to have changed from non-intervention to a self-protectionist approach. This means that global trade lines will be a second option rather than a norm. This shift is a response to witnessing globalization’s structural damage when faced with a turbulent political and economic atmosphere. Brexit reflected the disadvantages of open borders and having a single market structure. The former is undesirable because permissive immigration policies resulted in lower wages due to manpower surplus, while public services are strained due to the influx of migrants. Global crises like the COVID pandemic and the Russian-Ukraine war revealed that overreliance to importation can get easily severed and create an abrupt snowball effect on the economy. Finally, the Trump tariffs signal that domestic production may be the most strategic way to protect and build a stronger economy.
A New Economic Order
Whether or not the tariffs will be a part of the long term setup or simply a negotiation tactic, the economic worldview has undoubtedly changed. While the changes may take some time to reflect, it is important to anticipate the apparent developments in global trade brought about by the current political scene and the growing closed-border sentiment around the world. The second wave of Trump tariffs hints at encouragement from the administration to rebuild US industrial roots as a manufacturing economy. This vision is inspired by the need to empower the middle class by providing more avenues for work and labor, as well as the necessity of having a strong domestic manufacturing base to ensure national security. China, the primary contender of the US in the trade war, is a heavy exporter of electronic and mechanical components to the US spanning from smartphones up to large machinery. As such, we may see the US roll out projects that incentivize onshoring of their manufacturing operations. Additionally, as China is a large source of rare earth minerals, it will also open opportunities to the mining industry in the US. Agriculture will also be deeply affected as imports of agricultural products have outpaced the number of exports. While the agriculture sector is seen as a well-developed facet, it is still questionable if the US is able to fulfill all of its agricultural needs solely by local production.
Beyond these profitable opportunities in the US market, there are also some drawbacks that await the broader economy. In general, a decrease in trade ties tends to devalue the currency of the host country. This poses a huge issue to the global markets as many assets and commodities are traded on the US dollar. Significant decline in the US dollar value means that its status as a preferred currency in international trade may wane over time. This paves the way for modern technologies such as blockchain and cryptocurrencies to even greater institutional adoption.
A naturally trustless system like blockchain makes it a viable form of exchange; in our technological age, we have seen how blockchain rose to relevance from a niche internet currency into a traditional trading instrument. Today, Bitcoin is already positioned in traditional finance as an Exchange Traded Fund (ETF) and, additionally, many large institutions are already including Bitcoin in their portfolio. Therefore, the idea of Bitcoin being a medium of exchange with major assets is closer to reality than a pipe dream. Furthermore, the use of blockchain technology as an infrastructure for international exchange may also be set in place. In the era of decoupling economies, nations will be inclined to put lesser trust on international systems like the SWIFT banking system. Bitcoin’s standing in traditional finance today is possible due to blockchain’s efficiency in key aspects such as speed of transaction and cost. The adoption of Bitcoin as a legitimate currency in global markets may springboard blockchain technology into utility as nations find better ways to execute trade transactions.
Deglobalization is still a widely debated topic in economics. The ingenious infrastructures and systems that propelled society to an era of prosperity are at risk of discontinuation under the deglobalization paradigm. Despite this, the innovation of a sustainable economic system comes with discretionary measures to ensure that the transition from dependence to self-sufficiency is tactful. The architecture built under globalization still has value to offer in the next generation of global trade, and therefore should not be made obsolete in the near future.
The 90 day pause on tariffs signals that despite the ever changing economic blueprint, discretion is always at the front seat in innovating a more resilient and sustainable financial and economic system.