Former US treasury secretary Lawrence Summers recently conceded: “In general, economic thinking has privileged efficiency over resilience, and it has been insufficiently concerned with the big downsides of efficiency.” Policy across the globe is therefore moving in a more overtly nationalistic direction to rectify this shortcoming.
Covid-19 has accelerated a process that was well under way before it, spreading beyond US-China-EU trade negotiations and into the world’s 50 largest economies. As much as many defenders of the old order lament this trend, it is as significant a shift as the dawn of the World Trade Organization (WTO) global trade era.
Economists, politicians, and leading pundits are often tempted to see new economic patterns through the prisms of the past; we are therefore likely to hear that we’re back in an era of 19th-century mercantilism, or 1970s-style stagflation. But that misses the moment – the motives are different, and so are the outcomes.
What we are experiencing is the realization by state planners of developed countries that new technologies enable a rapid ability to expand or initiate new and profitable production capacity closer to or inside their own markets.
The cost savings in transport, packaging and security and benefits to regional neighbors and these countries’ domestic workforces will increasingly compete with the price of goods produced through the current internationalized trade system. US national politicians from President Donald Trump to Senator Elizabeth Warren will be joined by a growing chorus who see the long-term domestic political benefit of supporting this transition.
The combination of high-speed communication, advances in automated manufacturing and computing combined with widespread access to the blueprints and information necessary to kickstart new production capacity increasingly makes the current international network of supply chains resemble a Rube Goldberg contraption, and it lightens the currency outflow challenge that many economies have had to deal with for the past seven decades.
Growing political will to restore manufacturing capacity in the national interest will have a shattering effect on countries that built up their economies through a labor price advantage over the past 40 years. No amount of currency depreciation or product dumping can overcome the reality of a country’s foreign customer base suddenly opting to produce and buy their own goods at competitive prices.
Taken in sum, the transformation under way isn’t just Donald Trump demanding less dependency on China’s production capacity – it’s a global process. It’s also India signaling it’s going to try to strike its own technological path away from China.
New patterns of production
The government of Japan’s newly defined restrictions on foreign investment as reported by the Financial Times of around a dozen sectors including “power generation, military equipment, [computer] software [and technology]” in effect prioritize the claims of domestic manufacturers on national security grounds.
Of course, the Japanese authorities have crafted these restrictions on the vague grounds of “national security,” which is likely to take on a substantially different meaning in the wake of the Covid-19 pandemic. Hence the country is unlikely to face any serious challenge from other WTO members. And it is through that rather simple justification that we can expect a general reshaping of international trade relations and the array of supply chains.
The government of Australia has likewise outlined new powers to scrutinize new overseas investment, as well as forcing foreign companies to sell their assets if they pose a national security threat.
The proposals come in the wake of an intensifying trade war between the governments of Beijing and Canberra, alongside “a dramatic increase in the number of foreign investment bids probed by Australia’s spy agency ASIO, over fears that China was spying on sensitive health data,” according to news.com.au.
This is happening at the same time that there has been an overhaul of thought with regard to manufacturing, something Australia hasn’t typically done much of.
Taiwan, “a net importer of surgical masks before the pandemic, [has] created an onshore mask-manufacturing industry in just a month after registering its first infections in January,” reports the Financial Times. “Taiwan’s President Tsai Ing-wen … said Taipei would repeat that approach to foster other new industries.”
And world economists have noted that Taiwan and Vietnam lead the world in growth of global market share in exports, at the expense of larger economies like China.
Economic nationalism and the new geopolitics
A shift like this will have a knock-on effect that will reverberate to the other parts of the world that for centuries have been forcibly limited – by arms and finance – to being sources of raw material export, refined if they were lucky. They will watch closely what happens with Australia, which for the majority of the past 150 years has been an exporter of food and minerals, but is now jumping on the project to establish a national manufacturing base.
As dozens of countries build their own manufacturing base – something only a handful of countries controlled for most of modern history – big questions will emerge about geopolitical stabilization and the classical tools of foreign influence.
The world today in some respects resembles the 19th century’s balance-of-power politics, even as the majority of countries understand that some minimal level of state collaboration is essential to combat shared challenges.
China is party to a growing number of global disputes, as emerging great powers typically experience: the US vs China, China vs India, Japan vs China, China vs Australia, and the European Union vs China. But hot wars are unlikely to feature as prominently as they did two centuries ago.
Expect to see Cold War-style conflict intensify, however, albeit in new forms. Instead of the old geopolitical arenas including access to vital commodities or stable petroleum markets, the new forms of the competition will put greater weight on access to advanced research and technologies, such as the collection, transfer and storage of data and the quantum computing power to process it.
The speed at which global supply chains can potentially shift to accommodate the rise in economic nationalism is considerable. The success with which we manage the transition will largely settle the debate as to whether it is in fact the better path to greater prosperity and global stability.
This article was produced by Economy for All, a project of the Independent Media Institute, which provided it to Asia Times.