Globalization Is Dead. Long Live — Whatever

Globalization is dead. Long live localization. The proclamation is being heard from some unexpected quarters. “The Russian invasion of Ukraine has put an end to the globalization we have experienced over the last three decades, “ BlackRock Chairman Larry Fink wrote in his Mar. 24 annual letter to shareholders — BlackRock being the world’s largest asset manager. Companies and governments are not just pulling back from Russia, they are “looking more broadly at their dependencies on other nations. This may lead companies to onshore or nearshore more of their operations.”

Howard Marks, co-founder of Los Angeles-based Oaktree Capital Management, specialists in “distressed debt,” wrote in the Financial Times at this same historic moment that less offshoring, a.k.a. the death of globalization, will stunt global GDP growth and hurt countries and companies that benefitted from low-cost imports. However, “choosing to rely on a hostile neighbor for essential goods is like building a bank vault and contracting the mob to supply it with guards,” and recognition of this “is causing the pendulum of companies’ and countries’ behavior to swing back toward local sourcing.”

The “second great age of globalization” is dead. Long live globalization of the “free world,” is a variant on the theme proclaimed by editor-in chief of Bloomberg News John Micklethwait. He co-authored a piece that compared the current moment to the collapse of “the first great age of globalization,” underpinned by the British Empire and ended by the First World War. He suggested: “The answer to globalization’s [current] woes isn’t to abandon economic liberalism, but to redesign … the global economic order.”

What is needed is that “the free world comes together and creates another, more united, more interconnected and more sustainable one [liberal order] than ever before.” Not exactly global, since it wouldn’t include the “autocrats” in Russia and China, the real boogieman of the piece. But this coalition of “free” countries will perform so impressively that it can “pull them [the autocratic states] toward freedom.” How idyllically 1950s is that? Or is it 1980s?

Micklethwait doesn’t mention the energy transition or climate change, about which Bloomberg New Energy writes so much.

Western sanctions adopted in response to Russia’s invasion of Ukraine may have dealt the final blow, but the first big signs of splintering in the globalization that helped shape the world in the 25 years after the fall of the “iron curtain” were the near-simultaneous 2016 UK vote to leave the EU (Brexit) and the US election of Donald Trump as president on an anti-free-trade, anti-China platform, promising to Make American Great Again.

Four years later, Covid snapped fragile supply chains and inflamed already festering China-US relations. Now Russia’s invasion of Ukraine and its subsequent expulsion from the Western-run financial system have created an enormous fracture that threatens to spread and split China from the US and Europe.

The New World that Struggles

What does all this piling on of the capitalist elite to the theme of the demise of globalization imply for you, me and the transition to renewables, electrification and efficiency? Nobody really knows. There’s a reason why previously obscure early 20th Century Italian communist Antonio Gramsci has become famous of late for saying “The old world is dying, and the new struggles to be born.” But some directional pointers can be seen.

One possible attribute of the new world being prominently discussed in financial and economic circles is the demise — or at least downgrading — of the dollar as the world’s chief reserve currency. That sounds technical and of dubious importance to you, me and the energy transition, but it’s not. Should China and others join Russia in efforts to line up alternatives to the dollar as the instrument in which they hold foreign reserves and the favored currency for cross-border payments, demand for US Treasury bonds would fall.

By purchasing US Treasuries, other countries effectively lend money to the US, and for decades they have done so in copious quantities at advantageous interest rates with no questions asked. This has allowed the US to run huge, persistent trade and current-account deficits because the dollar was considered safe. We became the world’s consumers. We bought more than we sold and lived off the fat of other lands.

Over recent years, we risked the dollar’s “safe haven” reputation by increasingly wielding its central role in international trade as a weapon in the form of financial sanctions — often imposed unilaterally — against any number of offending countries. Now, in an unprecedented move, we have frozen the dollars Russia held as foreign reserves. That sounds like a fine thing to do, given Russia’s behavior in Ukraine. But stealing their money, as many countries tend to see the move, undermines the notion that the dollar is a safe place to stash assets.

If China decides it doesn’t want to hold so many dollars, many other countries are likely to follow suit. One result could be higher interest rates on US credit cards, mortgages and all other debt for the likes of you and me. It also implies an end to the era in which we live off the fat of other lands, no questions asked.

Making Stuff, for Better and Worse

We may start making more of our own stuff. Isn’t that what we want? More factory jobs is something everybody sees as good, because factory jobs pay more than service jobs at McDonald’s and Amazon. There are drawbacks, though. The stuff we make will cost a lot more than the stuff we now buy from China and even-lower-wage countries such as Bangladesh and Indonesia.

Unless we are very careful, more manufacturing close to home could also mean more pollution close to home, and rising energy consumption that could translate into higher greenhouse gas emissions. Probably not as high as the emissions in China to make the same things, given China’s heavy reliance on coal, so arguably not a negative for the global climate. But a problem for those who count national and state emission numbers.

There are things that can and should be done to mitigate this, including 3-D printing, also known as “additive manufacturing,” which builds things layer by layer, thus using fewer resources and less energy than traditional “subtractive” manufacturing. But the key point remains: making more stuff close to home will mean higher prices, and holding down pollution will raise the prices further. That and a diminished international role for the dollar would mean we would need to make do with less stuff.

That could be exactly the boon to the environment that “degrowthers” want, and it could enhance rather than diminish the real quality of our lives if the stuff we do buy is what we really need to be healthy and happy, rather than filler for self-storage units. But it will require enormous changes not just in the way we live, but in the way we think and the values we hold — starting with the belief that economic growth is always good.

That, however, is a topic for another day…