Globalization – the interaction and integration among people, companies, and governments worldwide – ensures that countries can use whatever strengths they possess to their fullest advantage. Countries that are rich in natural resources can export them. Countries lacking natural resources, but with a productive work force, can build an industrial base and export whatever surpluses they produce.
Globalization also helps keep inflation in check. Borrowers who find interest rates too high in one country can borrow money in another country. A company that believes it’s overpaying for products or labor in the country where it’s based can shift those sources overseas. This policy is often politically unpopular, but it helps control inflation. Even displaced workers benefit from lower prices for the goods and services they consume.
Over the last eighty years, globalization appeared irreversible. After World War II ended in 1945, the United States and its allies in the struggle against Germany and Japan sought to create institutions and practices that would prevent another world war. One of the most important was globalization.
In 1950, France proposed the European Coal and Steel Community (ECSC). The resulting agreement created a “common market” in Western Europe for coal and steel. These commodities would be traded in the signatory countries without customs duties, taxes, subsidies, or restrictive practices. The aim of the ECSC was to make another war between France and Germany “not merely unthinkable, but materially impossible.” The ECSC treaty was the first of a series of agreements that eventually led to the creation of the European Union.
Many other countries began their own globalization efforts. Japan reindustrialized itself quickly after its defeat in World War II. By the 1960s, it was exporting automobiles, consumer electronics, and many other manufactured products.
But the biggest beneficiary of globalization was China. Beginning in the 1970s, Chinese leaders embraced a capitalist economic model. In a direct repudiation of Communist philosophy, they legalized private ownership of land and businesses. The initiatives brought back entrepreneurship to China and led to a huge economic boom. Hundreds of millions of Chinese citizens emerged from poverty to a middle-class lifestyle. Deng Xiaoping, China’s supreme leader from 1978 to 1992, famously declared “to get rich is glorious.”
As China rebuilt its economy, the United States gradually became its largest trading partner. The trade was mostly one-way; US companies imported vast quantities of low-cost Chinese goods. This arrangement helped to reduce inflation, but it also led to an addiction to cheap imported products and the gradual erosion of America’s industrial base.
And while globalization was originally “sold” as a way to preserve peace, in the United States, the growing dependence on imported goods led some analysts to view it as a threat to national security. Thanks to the Russian invasion of Ukraine, that threat is especially stark. But it’s in Western Europe where the weaponization of globalization has become most evident.
By using energy exports as a weapon, Russia has shown that the supply chains globalization relies on can be cut almost instantly, with potentially catastrophic results. Without cheap imported Russian energy, tens of thousands of European businesses will be forced to close, and millions of European residents may be greatly affected this winter.
Indeed, deglobalization has been underway for more than a decade. According to the World Bank, the share of global GDP accounted for in global trade fell from 61% in 2008 to 52% in 2020. And the United Nations’ World Investment Report for 2022 shows that investments requiring the construction of new foreign manufacturing facilities – so-called “greenfield investments” – in the first three months of 2022 were down 21% compared to the same period in 2021.
We’re also experiencing what amounts to financial deglobalization in the form of tariffs, export controls, and the inability to obtain insurance coverage for operations in jurisdictions viewed as high-risk:
- Tariffs. The amount of trade subject to tariffs has risen more than tenfold since 2010 to $1.5 trillion per year, according to the World Trade Organization.
- Export controls. An increasing array of so-called “dual use technologies” – tech developed by the military with non-military applications, or vice versa – has become subject to export controls.
- Lack of insurance coverage. Global businesses require many types of insurance for their cross-border operations. A little-known type of coverage is especially important for operations in less stable countries; political-risk insurance. This coverage protects multinational businesses against risks such as confiscation of their facilities or their financial assets. Interest in political risk insurance has skyrocketed in recent years, but it’s almost entirely unavailable in countries subject to global sanctions, such as Iran and North Korea. Since Russia’s invasion of Ukraine, it’s also become difficult to underwrite in those two countries, along with Belarus.
Even before Russia’s invasion of Ukraine, the supply chain havoc caused by COVID-related shutdowns forced companies and governments worldwide to reconsider their commitment to globalization. For instance, most manufacturing companies use a concept originating in Japan called “just-in-time manufacturing” (JITM), also referred to as “lean manufacturing.” JITM permits manufacturers to reduce inventories, reduce labor costs involved in managing those inventories, and more quickly adapt production to meet market demands.
But JITM makes reliable supply chains even more critical than with more traditional manufacturing methods. When COVID-related shortages began, many companies decided they needed a Plan B for supply chains to obtain the raw materials they required. They also rediscovered the virtues of inventories, in effect converting from “just-in-time” to “just-in-case.”
The United States is likely to adapt to deglobalization more easily than many other countries. Its geographical isolation, natural resources, and demographics all give it key advantages.
- Geography. Surrounded on both its eastern and western boundaries by oceans, the United States is thousands of miles away from geopolitical hotspots in Europe and Asia. In addition, the Mississippi River basin bisects the United States, making it relatively easy to move goods by water. We also have robust rail and highway networks.
- Natural resources. The United States is richly endowed with ample sources of energy in the form of coal, oil, natural gas, and renewable wind and solar energy. In the last decade, we’ve become virtually energy self-sufficient. America also has some of the world’s most productive soil, making us virtually self-sufficient in food.
- Demographics. Unlike Russia, Japan, and most European countries, the United States isn’t losing population. Immigration is one reason why; while millions of people have come to America – legally or otherwise – to live and work, Russia, China, and Japan have a much smaller proportion of foreign-born residents. In addition, the fertility rate of American women is higher than in many other industrialized countries.
Still, it will take a long time, along with the infusion of trillions of dollars, to reinvigorate America’s industrial base to the point where it’s self-sufficient (or nearly so) in critical industries like semiconductors and pharmaceuticals.
As well, deglobalization poses challenges not just for businesses and governments, but for individuals as well. Shortages like the one we experienced earlier this year for baby formula will become increasingly common.
Look around you. What products do you have in your home that you could make for yourself or obtain some other way if they were no longer readily available at a supermarket or big-box store?
Our guess is that you would find most if not all of these items impossible to produce or substitute. That’s the reason we advocate accumulating real goods – food, fuel, ammunition, medicines, etc. – you know you’ll use, or that will be useful in a crisis. That strategy is also a powerful inflation hedge at a time when the real inflation rate is now approaching 20%.
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