Deglobalization is coming

The past 2 decades — the first 20 years of 2000s — were all about Globalization. There were a large number of newspaper articles, Harvard Business Review essays and of course, the bestselling book by Thomas Friedman — The World is Flat — explaining the phenomenon. I read it. Everybody I knew read it. The use of a flat world as a metaphor for globalization by Friedman was, quite simply, brilliant. In a separate article, Friedman defined globalization as “the inexorable integration of markets, transportation systems, and communication systems to a degree never witnessed before — in a way that is enabling corporations, countries, and individuals to reach around the world farther, faster, deeper, and cheaper than ever before, and in a way that is enabling the world to reach into corporations, countries, and individuals farther, faster, deeper, and cheaper than ever before.” As clear a definition as there ever were.

I was born in the 2nd half of the 1970s in India. In commerce terms, this was the pre-economic liberalization era of India, when India was primarily a closed economy and no FDI (foreign direct investment) was allowed. The goal of a closed economy is to provide domestic consumers with everything they need from within the country’s borders. Despite that, I used to see expensive stuff like Datsun (Japanese), Chevrolet (American) and Volkswagen Beetle (German) cars on the roads occasionally, medium-priced Emerson (American) and Panasonic (Japanese) transistor radios, and relatively inexpensive trinkets like Made in Korea nail clippers in most homes. American soft-drink behemoth Coca-Cola had been in, and out of India, between 1950–1977. So, international trade was on, even in a closed economy like India. Except, those imported goods used to be expensive. Imported cars and branded shoes & clothes were the prerogative of the rich. Imported alcohol, cigarettes and sporting goods were mostly for the elite few. Middle-class citizens would save up their earnings for a few months to buy imported transistor radios and cassette recorders. What the economic liberalization of 1991 did was to drastically slash the import duties, allowing the proliferation of imported goods across the masses in India. That was my first exposure to globalization.

The term globalization was coined by Theodore Levitt, a former professor at the Harvard Business School. His concept that business was becoming globalized, which Mr. Levitt defined as the changes in technology and social behaviors that allow multinational companies like Coca-Cola and McDonald’s to sell the same products worldwide, first appeared in a 1983 Harvard Business Review article “The Globalization of Markets.” Try explaining that to a 10 year old, which is what I was attempting to do with my daughter the other day. So I came up with a slightly simpler explanation: “Remember when we were in Paris and you and your brother had the urge to eat McDonald’s chicken nuggets; we just walked into a McDonald’s near our hotel. And we found a Subway in New Delhi the other time. And we could use our US dollars in Cancun. And when we order stuff from Amazon, sometimes it comes from China.” “And all of our Apple devices say Made in China,” added my 10 year old. She got it.

There is a school of thought that Globalization was essentially Chinafication, that is, only China benefited from the world becoming flat. This is simply not correct. While it is true that China radically upended the manufacturing side of the equation, many other nations reaped the benefits of the unsatiable appetite of consumer-driven capitalist economies like the US, South Korea and most of the EU countries, among others. For example, India became the dominant player in “services” — almost all of the credit card back-office transactions are handled in India and a majority of the retail outlets across the world have their IT services supported by TCS, Accenture, Wipro, Infosys, CTS, and several other medium and large IT companies headquartered in India. There is similarly a near dominance of manufacturers from Bangladesh, Vietnam and Pakistan on the lower end of clothing apparel, especially those round-neck T-shirts we all love to wear to beat the summer heat. Taiwan’s TSMC dominates the semiconductor chip manufacturing landscape while the Dutch behemoth ASML has a near monopoly in photo-lithography equipment fundamental for advanced chip production. German cars, Canadian paper products, Italian designer clothes, Brazilian coffee, Scottish whiskeys, Swiss chocolates are all examples of how prevalent ‘foreign goods’ have become all around us. Last but not the least, Middle-East oil has been the epitome of globalization for the longest we all can remember. So, it’s clear that China was not the only one who benefited from the world becoming flat, that is, the easing of across-nation trade policies, the rise of the internet, cheaper air transport, and well-connected road and waterways.

China did what every smart investor would do. The Chinese government recognized their strengths in manufacturing and capitalized on it. They first fortified their manufacturing sector, with both commerce and labor policies, to an extent that they became the de facto supplier of goods around the world. In addition to its low labor costs, strong business ecosystem, lack of regulatory compliance, low taxes and duties, and not-so-clear currency practices (China has been accused of artificially depressing the value of the yuan to provide an edge for its exports against similar goods produced by US competitors) helped propel China to become “the world’s factory”. What do smart investors do when they make truckloads of money in one portfolio? They reap the benefits and move some of their profits to invest in other asset classes. Exactly what China did and is doing.

Regardless the political system, China has a very stable government, which allows them to set long-term vision and execute on what could be considered impudent business plans in 9 out of 10 other countries in the world. Having become the manufacturing hub of the world, China took on more audacious goals like, “Made in China 2025”. Specifically, China has made no secret of its desire to become self-sufficient in technology. The nation is both the world’s largest importer and consumer of semiconductors (computer chips) and under Made in China 2025 vision, it has plans to produce 70% of all semiconductors it uses by 2025 (latest reports suggest though that exceeding 25–30% would be a more realistic goal). How China can do it, or if they would succeed in this mission or a few other such visionary goals — e.g., the $900B Belt & Road initiative or the indigenous space program — is not the topic of this essay. What these initiatives do highlight though is the fact that China is itself destroying the producer-consumer model that helped make it rich. China’s aggressive undertakings to become self-sufficient, rather than being contended with being the world’s factory has in fact, shaken the very tectonic plates on which the 20th century definition of globalization resided. China is itself accelerating deglobalization.

China is not alone in pulling at the hems of deglobalization. Governments around the world are increasingly espousing ‘nationalism’, which will inadvertently lead to closed economies around the world. Trump in the US, Putin in Russia, Modi in India, MBS in Saudi Arabia, Boris Johnson in the UK have all, in some form or fashion, started dissing globalization lately. In each of these countries, we are increasingly seeing criticisms from working-class individuals who feel they have been left behind by globalization and that they have been ‘screwed’ by their own employers and politicians in their mad rush to make the world flat. Specifically, the increase of multi-national corporations (MNCs) has led to the outsourcing of low-skilled manufacturing and services jobs, leading to high unemployment rates. This ‘left behind’ hypothesis has galvanized the notion that economic globalization is more harmful than helpful. The 2016 US presidential election (and Trump’s victory, ultimately), the 2016 Brexit referendum in the UK and the very recent public resentment towards all things China-related due to the double whammy of ongoing COVID-19 pandemic and Indo-China standoff in the Himalayas in India have a common underlying sentiment: “We’re better off taking care of our own interests,” which is the very definition of nationalism and deglobalization.

What goes up must come down — I get it. It’s nature’s law. The era of globalization must give way to the period of deglobalization. What concerns me though are the mindless right-wing ideologies that seem to be driving this transition around the world. “Just rip the band-aid off,” seems to be the cry. Let me start with an analogy here. A man went to a doctor for his annual physical. After the examination, the doctor said to the man: “Sir, you are almost 50 lbs over what your nominal weight should be. The man turned to the doctor and replied: “You know doctor, I used to weigh 150 lbs about 20 years back. I don’t know how I put on all this extra weight.” “You will need to do something about it, if you want to live a long life. Your body is like an old car, which was originally designed to carry about 150 lbs even after it gets rusted, like it is now. But it will crumble under these extra 50 lbs,” came back the doctor. “Can I do something quick and fast, like bariartic surgery, to slash all these extra pounds?” asked the man. “Sir, the only healthy way to get rid of your extra weight is to do it slowly, at a rate and pace your heart and the rest of your body can tolerate. You may otherwise experience unnatural and unpredictable side-effects, which might even include sudden cardiac failure, leading to death. After all, you did not put those extra 50 lbs overnight. I can only advise you to go on a strict diet and start exercising more,” responded the doctor.

Replace the 200 lbs man with a country that has aggressively adopted globalization over the past 2 decades or longer. Just like the patient, the country probably got spoiled by ‘good food’. Globalization did provide a string of benefits to the masses — cheaper goods, affordable world tourism, lower barriers to start inter-continental small businesses, etc. What do you think would happen if we were to try and rip the band-aid off suddenly (bariartic surgery?) Wouldn’t it be more prudent to get on a strict diet and start exercising more? After all, globalization didn’t happen overnight. It took decades.

Being in the semiconductor industry myself, I distinctly remember when China launched the Made in China 2025 initiative in May 2015. Semiconductor equipment manufacturers like KLA, ASML, AMAT, TEL and LAM could not wait to dive head-first into this once-in-a-lifetime-opportunity. It takes billions of dollars to start each Fab and the Chinese government had just set aside $300B towards the initiative. There were going to be over 50 Fabs built across China in less than a decade, with the government providing significant subsidies (almost 90% in some cases). Construction companies specializing in Fabs were licking their chops. Every major corporation, even those remotely connected with semiconductors, was planning to open a Sales & Marketing branch office in China, if not a full-fledged manufacturing unit. They were all welcomed. It was party time officially. What was forgotten in this mad rush was all the arguments against Chinafication — unfair labor laws, biased taxation rules, artificially adjusted currency and the gamut. Everybody had to get in on the train. “China is the biggest market; we must not miss this opportunity,” was the rally. And they did not miss. Wall street got rich; there were fat bonuses; lots of execs and middle-management types piled on airline dividend miles. Marks of true capitalism. Another result: Corporations built major assets in China; a major portion of their revenues are now tied to and dependent on their businesses in China.

What happens when US-China trade impasse is brought onto the world scene without any forewarning, completely out of the blue? Or for that matter, what effect does UK’s departure from the EU, or the scrapping of multi-nation trade pacts have on other industries shaped into a form over the past several years? It will upend the business models many corporations have built their empires on. Most of them will struggle and some might even go bankrupt but it is almost guaranteed that the common-man stands to suffer the most with sharply increased prices at the local stores.

Deglobalization must be given as much gestation period as globalization got; at least half the time — 15 years, give or take. And there should be a strong motivation for doing it. Globalization had 2 motivated sides: (1) Manufacturing and Services hubs like China and India, respectively interested in growing their economies, and (2) Developed/Capitalistic nations who wanted to get cheap goods and easy access to developing markets to expand their business outreach. It was an awesome give and take opportunity. What are the 2 sides for deglobalization? Nationalism is the first one, for sure. Increased domestic employment, increased sense of nationalistic pride and the preservation of indigenous traditions and culture are the obvious benefits. What’s the other side? Weren’t imperialism, the 2 World Wars and the Cold War a result of increasing public resentment within the confines of closed economies? Would be interesting to see where the next 2 decades take us…