Two new books on the future of globalisation

Globalisation has always had ups and downs, and has never had clear public support. But trade finds a way.

Stephen Grenville

17 December 20255 min read

President Trump’s America First agenda, plus his vigorous rivalry with China, is discombobulating globalisation. Where will this settle? Two new books offer some ideas.

The inertia of well-established production channels and the overwhelming economies of integration mean that deglobalisation, friend-shoring, and fragmentation will remain minor deviations.

Between 1990 and 2008, the ratio of international trade to world GDP rose from 10% to 15%. This burst of globalisation (or “hyper-globalisation”) was just one more cycle in an historically uneven trajectory. Since 2010, the ratio has flattened. But it would be wrong to say globalisation is in retreat.

Ben Chu’s Exile Economics explains why. Scale and complexity has brought subdivision and specialisation to every facet of the production process. Taiwan may have the overwhelming lead in silicon chip production, but it depends on Dutch etching machinery which in turn depends on the full range of European technology, supplemented by Japanese specialisation and US know-how. Once-standard products such as steel now come in so many varieties that no country is self-sufficient.

This technologically driven specialisation is layered on top of the long-standing imperative to exploit comparative advantage. Four countries produce most of the world’s wheat. Two countries produce 90% of the world’s soybeans. Australia supplies 34% of the world’s iron ore.

China aims to increase self-sufficiency, but the task is herculean. As living standards rise, meat consumption increases. But pigs have to be fed and China has no spare suitable land. So, China is dependent on America and Brazil for soybeans. It has prodigious domestic sources of energy (especially coal) and iron ore, but not enough for its ambitions. China’s import-dependency is surprising — nearly 20% of GDP.

What about America, which might seem rich and diverse enough to allow self-sufficiency without huge loss — with abundant energy, fertile agriculture, dynamic technology, innovative finance, peerless universities, and creative culture. But its high living standards are the very reason it imports. Most serious manufacturing (notably, motor vehicles) is commercially viable only because much of the labour is done elsewhere. No matter how high the tariffs on footwear, clothing, toys and computers, these will be produced in a country with lower labour costs. With difficulty and distortion, America will produce more silicon chips, aluminium and steel. But at an unnecessarily high cost.

The Smoot-Hawley tariffs of 1930 triggered a downward trade spiral as others responded. Not this time. Instead, the rest of the world continues squeezing more out of the core lesson of economics — the gains from exchange. ASEAN is showing the way. As Richard Baldwin argues, China now so dominates global manufacturing that it can’t be undone.

But trade-inhibiting tariffs are not the only element of America First. The security rivalry between America and China is creating pressures to channel trade into exclusive blocks, distorting globalisation. China would trade much as before, but only with its trusted friends. America, similarly, would import from countries with unquestionable loyalty, demonstrated by not trading with China.

This is the theme of Neil Shearing’s The Fractured Age. As relations between the world’s two economic superpowers fracture, other countries are pressured to pick sides. China would trade with Russia, Iran and Venezuela plus a small group of countries which manage to avoid being sucked into partisanship. The rest of us would trade with America, bound by our security dependence.

Globalisation has waxed and waned. Its first great flowering was in the three decades before World War I. It was in abeyance for the next three decades, before America asserted its hegemony following World War II.

This is not a realistic hypothesis if interpreted too literally, requiring massive production shifts. And it is not as if America wants to cut itself off from the rest of the world: Trump is a mercantilist (“exports good, imports bad”) eager to sell soybeans and energy to China.

However, as a foretaste of future diplomatic pressures, it may be relevant. China has long sought to assure supply by developing exclusive production in countries it can dominate. Laos and Cambodia risk becoming China’s client states. Trump’s recent trade deals with Malaysia and Cambodia show the same fracturing tendencies.

Needless to say, this is unwelcome to Australia. In a fractured world, where would our iron ore exports go? As Simandou’s high-grade ore in Equatorial Guinea develops substantial capacity (still some years away), China becomes less dependent on Australian iron ore. As China’s renewables continue their spectacular expansion, the markets for Australian coal and gas diminish.

Australia is not without leverage. China still needs our minerals and agricultural products. Presenting ourselves as a reliable long-term trading partner seems a good strategy. Our success in enduring China’s trade embargoes sets the tone. China will understand if we restrict foreign investment because they do the same. Australia should demonstrate its multilateral credentials by avoiding security-based exclusivity such as the proposal to incorporate the rare-earths measures into AUKUS to supply the “free world”.

Globalisation has waxed and waned. Its first great flowering was in the three decades before the First World War. It was in abeyance for the next three decades, before America asserted its hegemony following the Second World War. Bretton Woods helped by reducing tariffs, but technological progress was the main driver. Containerisation and communications technology allowed integration and complex supply chains, squeezing out trade frictions and providing efficiencies of scale and specialisation. China’s arrival as “manufacturer to the world” pushed globalisation along — to the discomfort of some, but who can ignore the larger benefit?

Globalisation has never had unambiguous public support (recall the 1999 anti-WTO riots in Seattle), with the US Democrats congenitally suspicious. Nor has China been the only recalcitrant in America’s eyes: Japan’s 1970s rivalry to US manufacturing dominance triggered Ronald Reagan’s 100% tariffs, “voluntary” export restraints and the 1985 Plaza Accords which produced an overvalued yen, contributing to Japan’s lost decades. But the inertia of well-established production channels and the overwhelming economies of integration mean that deglobalisation, friend-shoring, and fragmentation will remain minor deviations.

Provided no one gets in the way, trade, like water, finds a way.

About the author

Stephen Grenville

Dr Grenville is a Nonresident Fellow at the Lowy Institute.

Topics

Economy