Back in the 1980s and 1990s, economic pundits raved about how new global supply chains and new companies were reshaping the Global Economy. Remember the BRICs (Brazil, Russia, India and China)? And the Four Tigers (South Korea, Taiwan, Hong Kong and Singapore)?
Everyone seemed to benefit from globalization. The West got cheaper goods, which increased the consumer’s buying power while keeping inflation very much under control. Emerging markets got good jobs, more income and the ability to buy America’s exports. If we happened to lose any jobs to Asia, well this just meant our workers could move up the skills ladder more quickly. What was not to like?
Fast forward 25 years and all has not worked out exactly as planned. Low cost countries – – and let us be frank, it boils down to China – took a lot more jobs and a lot more market share than we expected. Not as many laid off workers moved up the skills ladder, and many parts of our economy have been hollowed out. To add insult to injury, we opened our markets faster to them than they opened theirs to us.
Now we are mad and scared and we do not know exactly what to do. Some want to close our borders and keep immigrants out. Others want to move all production back to the U.S. and think solely of ourselves. Still others want to continue to encourage globalization but in a fairer way.
So, what do we think? First, although globalization has stalled over the last 15 years (see chart to the right) it is not going to go away anytime soon. The global supply chain – the parts suppliers, the foreign labor pool – are just too developed to be dismantled overnight. Apple is not going to move production of its iPhone out of China. It just cannot. There is no reasonable alternative.
Second, a different form of globalization is starting to develop, and it will not be pretty. The U.S. and other countries are insisting that some national security products (think PPE for COVID-19) must be produced domestically. Sensitive technology will also be defended. We are moving towards a two-standard world in tech. You are either in the China camp or the U.S. camp. If Huawei cannot buy from Western suppliers, it will develop its own technologies. Telecom buyers will have to decide, do they go with China’s producers or the West? It will make for a more divided and a more expensive world.
Finally, regardless of how globalization proceeds it is likely to lead to more income inequality. A hallmark of global competition is that the most talented workers win and win big. Whether you are talking about China or the U.S. or Europe, the most talented 20%-40% of workers are winning, and many others are losing (see charts above). Governments everywhere will have to deal with this.