Pacific Money | Economy

The Age of Limited Globalization Is Upon Us

The pandemic has once again emphasized the winners (China) and losers (the Western lower and middle classes) of globalization.

Yuan Jiang
The Age of Limited Globalization Is Upon Us
Credit: Pixabay

As Warren Buffett once said, “Only when the tide goes out do you discover who’s been swimming naked.” This pandemic is just the wave to accelerate the revelation of grim truth. The global manufacturing shift from North America and Europe to Asia, especially China, has weakened the West’s industrial supply chain. If Brexit and Donald Trump’s election were not compelling enough, this virus may finally bury the illusion of free trade, heralding the official arrival of limited globalization. Post-COVID-19, education and tourism may return to some level of their former prosperity, but some other industries, particularly manufacturing, will become increasingly restrained.

The great winners of globalization have been the China-led Asian poor and middle classes, Western financiers and Asian industrialists. They respectively provide the low-priced labor, capital and entrepreneurship that have facilitated the global manufacturing shift. According to the World Bank, more than 850 million Chinese people have been lifted out of extreme poverty in the past 40 years.

In contrast, the great losers of this process have been the America-led lower middle classes of the Western world, who lost their jobs because of this shift. No wonder that their dissatisfaction has invigorated populism, aiding Brexit and Trump’s election. But why did they have to lose? Does globalization have to be a zero-sum game rather than leading to global prosperity?

The general story should begin with China’s economic rise, driven by investment and exports. This model certainly boosted China’s economic growth, thanks to rising productivity, high investment and urbanization. In its transformation, China overcame an existing shortage of infrastructure and manufacturing capacity. However, this model also has led to excess capacity in China. The disproportionately inexpensive outflows of goods from China have been mainly absorbed by the United States and other rich countries, resulting in their declining manufacturing industries and jobs.

Nevertheless, it is almost a publicly admitted consensus in Beijing and beyond that the former investment-stimulated growth model, with 10-plus percent growth a year, is unsustainable. Economists Matthew C. Klein and Michael Pettis have showed that by the late 1990s, China had hit a saturation point and had become increasingly unproductive with its investment boom. The lack of profits led to increased levels of domestic debt. In fact, China’s total debt reached 317 percent of GDP in the first quarter 2020, one of highest among Asian emerging economies, indicating the poor quality of previous investments, according to the Institute of International Finance. The Belt and Road Initiative is a quintessential example of China seeking new investment outlets overseas.

Enjoying this article? Click here to subscribe for full access. Just $5 a month.

Nowadays, it is well-acknowledged within and beyond China that consumption should become the main contributor of its future economic growth, and that the country’s economic model is shifting from extensive growth focused on scale and speed to intensive growth of quality and efficiency. This has been portrayed as the “new normal of China’s economy” in Beijing.  So far, despite the destructive impact of COVID-19, Beijing hasn’t issued any large-scale economic stimulus plans, as it did during the 2008 global financial crisis. However, the previous economic model has transferred purchasing power from Chinese workers and retirees to companies and the government, damaging the consumption capability of Chinese residents. Despite the rising real incomes for much of China’s population, China has moved from being a moderately unequal country in 1990 to being one of the world’s most unequal countries, according to the International Monetary Fund. Recently, Premier Li Keqiang made the shocking comment that China has 600 million people who live on a monthly income of $140.

However, Beijing has sincerely endeavored to boost domestic consumption by liberalizing interest rates, enhancing environmental protection and health insurance, and relaxing the one-child policy.  The latest pledge by President Xi Jinping to move China – by far the world’s largest carbon emitter – to carbon neutrality by 2060 is also a crucial move for domestic expenditure. Beijing has pushed its consumption model from extravagant waste and unreasonable consumption to green spending characterized by resource conservation, thus achieving sustainable consumption.

But the outlook is still gloomy. China’s ratio of household consumption to its GDP is still stuck around 40 percent, despite Beijing’s effort, far lower than the world average of 60 percent. Wang Xiaolu, deputy director of the National Economic Research Institute of China Reform Foundation, wrote recently that the rebound in consumption in the past few months is slowing down or stagnating. The impact of COVID-19 on the consumption of high-income residents is limited, while the effect on low-and middle-income citizens still shows a significant negative growth. This suggests that the shift toward a consumption-powered economic model may have a long way to go.

That said, it appears that consumption enhancement may just be a matter of time. When it improves, there is some hope that Chinese inhabitants may purchase more commodities that have been generated in the West, thus supporting the revitalization of manufacturing industries and job creation there. But the reality suggests otherwise. Currently, the swift progress of Chinese native manufacturers has made China less reliant on foreign imports. Notably, China is capable of not only developing labor-intensive industries, but also cultivating high-end industries, as encapsulated by influential global corporations such as Huawei and Lenovo.

Klein and Pettis observe that Chinese “imports of finished manufactured goods have dropped from 9 percent of Chinese GDP in 2004 to less than 5 percent today.” However, this is not enough. The “Made in China 2025” manufacturing strategy launched by Beijing in 2015 has essentially aimed to achieve industrialization by 2025 and transform China into a manufacturing powerhouse, signifying the imminent import substitution. This is not what the West has expected and has robustly impacted the previously Western-dominated global industrial supply chains.

Under these conditions, it’s no wonder there is no fundamental difference in trade policy between the two American presidential candidates. Trump has imposed tariffs on numerous countries and in particular initiated a trade war with China, while his rival, Joe Biden, has promised that if he is elected, he will enforce tax penalties on corporations that move their operations abroad and give a tax credit for those that generate jobs domestically. Even in Australia, a country that has benefited enormously from globalization, a new manufacturing strategy has been issued as the centerpiece of the five-year blueprint in Canberra, targeting employment creation and industrial revitalization. In this plan, securing a sovereign capability in crucial industries is the top priority, even though imports from Asian neighbors may be less costly.

Facing such policies and the detrimental influence on the global economy, China, the widely-recognized greatest beneficiary of globalization, has to focus on the internal circulation of the Chinese economy – even though Beijing would prefer not to. As former U.S. Treasury Secretary Lawrence Summers hinted, the challenge now is not to create more globalization, but to make sure globalization works for us. We are indeed writing a new chapter of human history: one of limited globalization. Are we really ready?