Belt and Road is China’s version of globalization. Belt and Road came at the end of a distinct period in modern economic history – the age of hyper-globalisation, writes Wolfgang Münchau, a former co-editor of Financial Times Deutschland and director of Eurointelligence.
This period started with the cessation of the Cold War and ended with the pandemic. Its first decade was mostly about trade liberalisation: the World Trade Organisation became the new global trade authority. Countless trade deals followed. The 1990s were also the decade of the internet and of financial deregulation. In Europe, it saw the introduction of the single market, and set the stage for the enlargement of the EU in the subsequent decade.
But the most consequential change of all was the integration of China into the global economy. China supplied the world economy with cheap labour. Germany, China and other Asian countries were the workshops of that system. They ran large and persistent trade surpluses against the rest of the world. The US and the UK were the system’s bankers. Global imbalances were not a bug of the economic system, but a feature.
Globalisation was not primarily about the trade in goods. The share of goods trade increased rapidly in the 1990s and early 2000s, peaked around the time of the global financial crisis in 2008, and has stagnated since. What distinguished the period from 1989 onwards was the globalisation of other factors: capital and labour. Freedom of movement in the enlarged EU brought to western Europe the “Polish plumber” and the “Lithuanian waiter”. Trade is not what our modern era of globalisation is about. It is about people.
Globalisation was a win-win game for the world economy at an aggregate level. What the supporters of globalisation did not see, or did not want to see, were the rising numbers of losers: in the Rust Belt of the US, in northern England, northern Italy, northern France and eastern Germany. Donald Trump’s America First campaign in 2016 was a reaction against globalisation. So was Brexit. Each country has become unhappy in its own distinct way. But what they have in common is a fall in political support for the old system.
In the EU, which often follows global trends with a delay, the worst is still to come.
The US and the EU have imposed economic sanctions on Russia, so far with only modest success. The US and some European countries have excluded Huawei, the Chinese mobile telephone company, from building 5G mobile communication systems. The most far-reaching restriction of all is the US ban on the sale of high-performance semiconductors to China.
The US did this ostensibly to stop China developing high-precision missiles, but it was also to protect America’s own technological leadership in this sector.
The global political and economic consequences of this enormous policy reversal have not been fully understood. One of them is a new global division, with Russia and China once again on the other side of an Iron Curtain.
It’s not just Russia and China. The five countries known as the Brics – Brazil, Russia, India, China and South Africa – used to be seen as the emerging tiger economies of the 21st century. They were supposed to be on the side of the American-led West. But not one of them is complying with those expectations any more. One side effect of Western sanctions over Ukraine has been that China’s trade with Russia hit an all-time record last year.
The five Brics countries have set themselves the goal of becoming less dependent on the US, but they have not quite figured out how to achieve this. China and Russia have both worked on creating payment systems to make each other less reliant on the US and Europe for transactions. The world of crypto-currencies and blockchains has opened up still unexplored opportunities to bypass Western financial monopolies. The Brics have been discussing a joint reserve currency. That would be a big deal…
China would have to undertake a huge economic policy shift away from investment towards domestic consumption. That won’t be easy. It would mean depriving powerful provincial party chiefs from funds and diverting those funds to consumers. The upshot of such a policy shift, though, would be a reduced vulnerability to US sanctions.
The Brics are also working on strengthening the New Development Bank (NDB), which provides finance to its five founding states. Four other countries have since joined the NDB: Bangladesh, Egypt, the UAE and Uruguay. It could take a decade or two before the Brics develop a coherent economic union, a counterweight to the West. Until then, the US will continue to enjoy the exorbitant privilege that arises from the dollar’s global role. But I wouldn’t bet on this still being the case in 2040.
There are also signs of a revolt against the Biden administration’s China strategy from Europe: the pushback against the pushback. Olaf Scholz, the German chancellor, presents China both as a strategic competitor in some areas, such as car production, and a partner in others, such as climate protection. On 13 July, the German government announced its China strategy, which emphasised both competition and cooperation. The economic interdependence between the countries on the Eurasian continent is still strong. Should there ever be a military conflict between the US and China over Taiwan, I struggle to see Germany siding with the US. Germany wants to trade with both.
There are good reasons for the age of hyper-globalisation coming to an end. But we should be under no illusion about the economic costs of de-risking, such as chronic labour shortages and inflation. Hyper-globalisation pushed prices down. De-risking pushes them back up again. Climate change imposes huge costs on governments and the private sector. It is unclear whether voters are willing to pay the price for this.
The period of globalisation was an era of plenty – for some. During that time, central banks and governments were able to support their economies almost without limits. De-risking brings back old policy constraints, Wolfgang Münchau concludes.