A consensus is emerging that the world is divided into blocs, not only geopolitically but also economically. In 2020, economist Douglas Irwin wrote that “the COVID-19 pandemic is pushing the global economy out of global economic integration. “how to address this so-called deglobalization has been a recurring theme in World Economic Forum meetings; In May, the front page of The Economist showed a map of the global physical fracture into competitive economic blocs. The similar article assumes that deglobalization is a long-term certainty, arguing that it becomes “visible in economic data, as investors revalue assets and redirect capital in a less incorporated world. “Last week, a Bloomberg columnist added that “global industry and finance are fragmenting into rival and hostile blocs, one centered in China and spreading southward, and the other around the United States and other Western countries. “
But the assumption that deglobalization is a truth on the ground presents a challenge: knowledge does not completely help it. As evidence of continued deglobalization, observers cite phenomena such as the United States’ reluctance to enter into new loose industrial agreements, the weakening of the dispute settlement formula overseen through the World Trade Organization (WTO), the proliferation of new national measures that restrict the industry. and the decline in short- and long-term capital flows compared to their previous peaks. Indeed, the COVID-19 pandemic has revealed that economic interdependence carries risks, and Russia’s efforts since 2022 to use its pipelines to influence the G7 reaction to its invasion of Ukraine, as well as many sanctions imposed through the G-7. 7 imposed in an attempt to weaken the Russian economy – highlighted the vulnerabilities that can arise when countries operate across geopolitical divides. But a closer look at economic scholarship shows that even as governments have increasingly pursued policies aimed at strengthening their own resilience, the global economy continues to evolve to become more, not less, globalized in key spaces and more dependent on Chinese sources. in particular.
Global industry blew up the pandemic, and global industry with China accelerated instead of slowing down. The pandemic-era shift toward goods and the shift away from facilities partly explains this acceleration. But the industry’s expansion with China also reflects the fact that China simply produces things — high-tech exports like electric vehicles, wind turbines, solar panels, and major electronics and batteries — at a value few can match. Between 2019 and 2023, China’s production surplus increased by about one percentage point of global GDP; it is now much larger than the surpluses of Germany and Japan, the other global productive powers.
The decline in capital flows is also less significant than it seems. The decline in foreign direct investment (FDI) after 2016, for example, is largely the result of express adjustments in tax regulations that led to a sharp easing in the use of cars for special purposes in Luxembourg, the Netherlands and some other key European countries in terms of taxation. And this tax simplification has not mitigated one of the least tasty bureaucracies of globalization: industry and money flows that seem to serve only as a vehicle for tax evasion through multinationals.
The now widespread misperception of the global economy has consequences. Policymakers’ efforts to protect globalization by equating more global industrial flows with greater power tend to forget the fact that the truth is more complex: for example, even those seeking a healthy economic form of globalization will have to be portrayed to decrease tax evasion through multinational corporations. More fundamentally, if observers downplay the extent to which global economies are integrated, they will underestimate the burden of moves that can fracture the global economy, such as the outbreak of a standoff over Taiwan or a unilateral U. S. withdrawal from industry. World leaders want to take action to make their economies more resilient, but first they will have to perceive the true prices of those measures.
The concept that the global economy is deglobalizing took hold after the election of U. S. President Donald Trump in 2016. In his rhetoric, Trump rejected the post-World War II bipartisan consensus on the price of loose trade. And it has also made genuine changes to its policies. : taking flight from the Trans-Pacific Partnership (TPP), renegotiating the North American Free Trade Agreement to origin regulations for automobile trade, and introducing price lists in about three-fifths of the U. S. -China trade market.
But globalization is now deeply entrenched, and such bilateral industrial policies have done little to replace its basic trajectory. New industrial agreements and tariff systems are the subject of much discussion. In reality, adjustments to tariff rates in fashionable flexible industrial agreements tend to be small, as the maximum price lists are already low or even zero. Countries that don’t have preferential access to the U. S. market can still do incredibly well under the WTO’s popular trade terms. In fact, U. S. imports from Southeast Asia have skyrocketed in the afterlife. six years. Southeast Asian TPP members are increasing their exports to the United States much faster than before after Trump’s withdrawal from the TPP.
Any serious discussion about industry drivers will have to go beyond price lists and industry agreements. The price of coins is also factored into industry flows, as are global savings and investment trends. The dollar has remained strong since the U. S. withdrew from the TPP, and U. S. consumers have not hesitated to buy foreign passports, which has helped boost U. S. import growth.
Chinese exports to the United States have been declining since Trump’s price lists were unveiled in 2018, as have China’s reported holdings of U. S. Treasuries and government-guaranteed firm bonds. But those signals do not adequately measure the true interconnectedness of those two economies. When considering the effect of high-profile US bilateral price lists on Chinese goods, it is important to look beyond US data showing a decline in direct imports from China and pay more attention to data coming from China itself . Surprisingly, this knowledge shows a much smaller drop in direct industry with the United States and a gigantic increase in Chinese exports to countries that now export more to the United States. Careful studies of the effect of Trump’s price lists through the Bank for International Settlements and economist Caroline Freund showed that the most important effect of bilateral price lists was to expand chains of origin, not to diminish the global industry as a whole. or decrease basic production. position of the United States. dependence on critical inputs of Chinese origin. More and more Chinese portions are being sent to Malaysia, Thailand and Vietnam (and, to a lesser extent, Mexico) for final assembly. The underlying dependence on China is less visible, but no less vital.
In fact, since Trump’s price lists were introduced, the Chinese economy has become even more central to global trade. The knowledge issues presented here are overlooked by American and European commentators, but they are unequivocal. In the five years from 2018 to the past 2023, China’s exports of manufactured goods increased by 40%, from $2. 5 trillion to $3. 5 trillion, far more than the roughly 15% that accumulated between 2013 and 2018.
Although China’s export-to-GDP ratio fell in the years following the global currency crisis, exports have once been a very important driving force of China’s expansion. After deducting imports of spare parts, China’s exports of manufactured goods rose from about 11% of GDP before the pandemic to 14% of GDP in 2022. Predictions that this buildup would turn into a one-time pandemic-related surge came to pass: although export expansion slowed in 2023 due to declining spending by global customers. , has now recovered, with export volumes expanding by more than ten percent in the first quarter of 2024. China’s production surplus has risen even more dramatically, from a low of around six percent of China’s GDP in 2018 to ten percent in 2023.
China’s post-pandemic export boom undermines the argument that the global economy is deglobalizing. For all its economic weaknesses, China can still produce goods on a scale that no other country can match. After the end of an asset boom that lasted more than a decade, China responded to weakening domestic demand by investing more in the production of manufactured goods for export. Consider the trajectory in a vital sector: automotive.
Historically, China was not a primary exporter of automobiles. But while domestic demand for cars has been on a downward trend, China has gone from being a net importer of cars to being the world’s largest exporter in just three years. This wave of exports is not about to weaken: China can produce at least twice as many internal combustion cars as needed to meet declining domestic demand, and the country’s top electric car maker, BYD, is doubling its production capacity to boost exports. It is hard to believe that a harsher situation symbolizes China’s growing integration into the global economy than the huge fleet of automakers that BYD has now ordered from Chinese shipyards.
U. S. policymakers are aware, rightly, that the world is too dependent on China for its supply, especially when it comes to electric power and green technologies. In a speech in mid-May, Lael Brainard, director of the U. S. National Economic Council, put it well. : “China’s trade capacity and exports in some sectors are now so gigantic that they may jeopardize the viability of investment in the United States and other countries. . . . Markets want reliable calls for fair signals and festivals for the most productive corporations and businesses. technologies so that they can innovate and invest in electric power and other sectors. The Chinese government has made it clear that China’s gigantic investments in electric vehicles, solar panels, and batteries are an intentional strategy to capture those sectors well.
Chinese policymakers also deserve to be aware that their country’s economy has become too dependent on global demand. But that doesn’t seem to be the case. Chinese leader Xi Jinping’s policy of supporting the “new productive forces,” as well as his perhaps unexpected resistance to “welfarism,” have resulted in an unbalanced national economy that will increasingly have to externalize its internal distortions. China’s production surplus has grown as much relative to global GDP in recent years as did China’s first surprise after the country’s accession to the WTO, when a sharp increase in Chinese exports and a sharp increase in China’s production surplus displaced personnel in the world’s complex economies. As a percentage of global GDP, China’s production surplus now far exceeds the surplus recorded by any other country since the end of World War II.
However, China’s desire to grow through its exports is not the only explanation for the unexpected resilience of globalization. Another challenge is corporate tax evasion. The changes in the habits of pharmaceutical corporations are telling: U. S. pharmaceutical corporations are now selling the rights to profit from promising new drugs to subsidiaries in low-tax jurisdictions. These drugs are made overseas and then sold at a premium price in the United States. As a result, large U. S. pharmaceutical corporations (and other multinationals) now report that they make almost all of their profits overseas. and they pay little or no corporate income tax nationally. This specific form of globalization extends beyond the pharmaceutical industry: U. S. multinationals now produce abroad for gigantic profits in offshore tax havens.
Ireland’s low-lying tax haven, not China or India, is now by far the largest exporter of prescription drugs to the U. S. U. S. Economy: In 2023, U. S. The U. S. imported twice as many pharmaceuticals from Ireland as it did from Canada, China, India, and Mexico. Combined. The trend extends far beyond the pharmaceutical sector. Ireland is also the world’s largest export market for studies and progression services from the U. S. U. S. The Cayman Islands and the British Virgin Islands are the largest export markets for U. S. money services. Bermuda is the largest foreign provider of U. S. insurance services. U. S. A 2017 International Monetary Fund study showed that the resilience of FDI flows following the global currency crisis of 2008-2009 can be largely attributed to a steady accumulation of FDI flows through corporate tax avoidance centers.
In 2015, members of the Organization for Economic Co-operation and Development agreed to amend their tax regulations in an attempt to make it harder for companies to locate their profits in zero-tax jurisdictions. But those changes, implemented in late 2020, have not slowed down a globalization fueled by tax evasion. As a result of a tax strategy introduced through Apple, several giant U. S. corporations have ordered their Irish subsidiaries to buy their corresponding subsidiaries in tax-free jurisdictions, “thereby relocating their intellectuals to Ireland” while also generating gigantic depreciation provisions that reduce their effective tax rates.
These measures have made corporate tax avoidance more visible, as Ireland is the only tax avoidance hub that meets Europe’s rigorous economic knowledge disclosure and balance of payments standards. It is therefore easy to see how the profits of foreign multinationals in Ireland have increased. from about $40 billion a year a decade ago to more than $180 billion a year today and now account for about 70% of Ireland’s true domestic economy. More importantly, those gains represent more than 1% of the eurozone’s GDP and barely about three-quarters of a percent of U. S. GDP. The resulting loss of tax benefits in the United States is much greater than the maximum analyses suggest, since corporations have no incentive to point out how little tax they pay in the United States.
Why does it matter that many people, including political leaders and influential commentators, misunderstand the trajectory of the new globalization and overestimate the effect of decreased political support for greater economic integration? First, if policymakers focus the debate on the prices of deglobalization, they threaten to neglect the many bad bureaucracies of globalization that still exist and persist relatively quietly. China’s role in the deindustrialization of Central America is now widely recognized. But the role that the US corporate tax code plays in this deindustrialization is not. Allowing U. S. corporations to continue employing tax avoidance methods to shift profits and production out of the United States is bad for the global economy, even as it boosts U. S. industry and foreign investment. If, on the other hand, the United States Congress were to replace tax legislation to increase the global minimum tax and make it more difficult to move intellectual assets created in the United States to low-tax jurisdictions, American pharmaceutical corporations would most likely move the production of their products. most successful medicines to other countries. from places like Ireland and Singapore and back to the United States.
Those involved in deglobalization also assume that the entire bureaucracy of economic integration is healthy. But this is not the case: the buildup of cross-border bank flows before the global currency crisis, for example, reflected a negative point of debt and threat. in the main banks of the world. Even today, an excessive percentage of international FDI flows simply reflects tax evasion rather than productive economic activity.
There is also the opposite risk: if policymakers fail to recognize the extent to which globalization persists, they will vastly underestimate the shocks that would result from further decoupling of Chinese and U. S. industry. Even with the emerging US price lists on China, the global economy remains deeply integrated. If anything, China has become more central to the global industry since Trump imposed his price lists, and the relationship between the United States and China has darkened, rather than broken. For example, China may simply not have achieved its existing industrial surplus of $800 billion in goods if the United States had not had a gigantic industrial deficit. This deficit is no longer financed by directly purchasing US bonds through the Chinese central bank. But it continues to finance largely through China, in the form of gigantic stocks of dollars that Chinese exporters now keep abroad. The way China’s surplus continues to mirror the U. S. deficit is just one of many complex ways in which the U. S. and Chinese economies continue to count on each other, even as the connections become harder to understand. in the main economic data.
In fact, some deglobalization can also be healthy. If China were less dependent on global demand to compensate for its domestic weaknesses, it would put less pressure on the production sectors of its trading partners and reduce over-dependence on the United States. But now, the strong pressure on China to resolve its domestic economic turmoil through export expansion will likely continue to push the world toward deeper and more unbalanced economic integration. The U. S. is trying to resist this strain in the EV space, to the detriment of U. S. consumers. However, as China’s EV makers go global, it’s unclear whether the U. S. can effectively isolate its own EV industry simply by imposing price lists in bilateral agreements. Avoiding interdependence with China will most likely require greater policy adjustments and a greater willingness to pay prices for regionally incorporated rather than globally incorporated chains of origin.
Historically, the automotive industry has been more regional than global; Preserving this style of business in the face of the development of Chinese sources will require more industrial restrictions. But these sectoral restrictions can only restrict the advance of a new integration bureaucracy; they cannot oppose globalization as a whole. The biggest economic challenge China now poses to G7 policymakers is how to curtail the turmoil arising from a Chinese economy that is increasingly reliant on exports and manufacturing. Discussions about deglobalization lose their meaning.
For the United States, in the near future, any genuine decoupling from the Chinese economy would be costly, far more expensive than the superficial decoupling of recent years. An undeniable and affordable way for the U. S. to avoid bilateral price lists is to import portions from Vietnam that China has shipped there for final assembly. It would be much more complicated to manufacture Chinese portions entirely from U. S. -origin chains. And it would be equally difficult for China to restructure its economy to become more dependent on domestic demand.
Deglobalization offers analysts an undeniable story to tell about the adjustments that have taken place in the global economy. But the truth is more complex: in transparent terms, it is highly unlikely for a global economy characterized by a gigantic US deficit on the one hand and a giant Chinese surplus on the other to fragment in fact. The world wants to have a healthy debate about the benefits and disadvantages of economic integration. But this debate will have to be based on a transparent popularity that many features of the new global economy economy continue to push for greater integration, not less, and that taking those points into account will have real costs.