Remaking the Future

Globalization has been at a crossroads for a while. The dynamics of freer circulation of goods, capital, and people has lost steam. Trade protectionism is on the rise. Multilateral institutions such as the International Monetary Fund, the World Bank, and the World Trade Organization provide slow and often insufficient responses to contemporary challenges. There are indeed various forces of ‘deglobalization’ operating around the world today.

Globalization as a concept should represent more than just the ever-expanding technological advances in transport and communications. It is instead about decreasing obstacles to international trade and investment, increasing global supply chains, and improving macroeconomic coordination among the world’s top economic players, especially those member countries of the G20. The globalization of common and shared ways of experiencing the world help interdependence and interconnectedness – the basis for productivity gains on a global scale and the sustained expansion of the world economy over time.

All of these different drivers of globalization seem to have been clearly in check for the past seven years, particularly the globalization of values – the notion of a normative compass found in the 1990s idea that the principles of market economy and representative democracy as a system of government were the best parameters for the organization of societies across the globe.

From ‘Deep Globalization’ to the ‘Risk of Deglobalization’

In the early 1990s, the interplay of different elements brought about an era of ‘deep globalization,’ during which the global economy expanded vigorously. The demise of the Soviet Union and the subsequent ‘End of History’ seemed to allow for renewed international cooperation based upon the pillars – and promise – of democracy and free markets.

The U.S. seemed destined to remain a ‘hyperpower’ in the decades to follow: a new hegemon shaping a ‘new American Century.’ With increased competition and cooperation with other economic powers notwithstanding, the U.S. would go on unchallenged as a geopolitical player and the country most vehemently embracing the principles of democracy and free markets.

The globe’s geoeconomic meridian, as far as manufacturing output was concerned, seemed to be shifting towards Asia – and this process was being led by Japan. Regional blocs appeared to be the up-and-coming economic actors – and the success of European integration was seen as paradigmatic. Both the rise of Asia – propelled by Japan and the so-called ‘Asian Tigers’ – and European integration were compatible with the interests of the United States as a hyperpower, since more democracy and free markets would only deepen globalization.

But, in short, over 20 years we have left a period of ‘deep globalization’. We have moved closer to the ‘risk of deglobalization.’ In this context, international relations (understood here as relations involving nation states) have resurfaced powerfully. It is not necessarily a world of renewed nationalisms, but rather a global juncture in which nation states are particularly selfish, individualistic, and act according to an ‘every-nation-for-itself’ mode.

As deglobalization gains ground, a strong trend is showing itself in the world economy. Against a backdrop of great uncertainty, countries increasingly adopt industrial and trade policies based on a ‘doctrine of local content’; a notion we could call ‘local-contentism.’

Many confuse local-contentism with defensive trade measures erected against artificial exchange-rate stratagems that boost the attractiveness of a country’s exports. There are clear differences, however, between local-contentism and old-school protectionism. While the latter is essentially about import quotas and tariff barriers set up to protect what is ‘national,’ the former idolizes foreign direct investment and makes extensive use of government procurements as bait. After all, by its very definition, local-contentism is all about being ‘local,’ not necessarily ‘national.’

Whether this or that country might have at one point been called ‘developed’ or ‘emerging,’ they will greatly gain by letting go of the certainty that either their ‘advanced status’ or their ‘rise’ are inevitable. In the global race for competitiveness and development, nothing is automatic or everlasting

From the U.S. to France, from Brazil to China, local-contentism can be easily identified in the way state-owned enterprises, official banks, municipalities, states, provinces, and central governments interpret and implement a country’s interests in the global economy. Today, local-contentism is one of the top parameters of how governments indirectly protect domestic companies from foreign competition, foster the creation of jobs and go about procurements.

The practice is becoming the most recurrent tool in bulking up a nation’s capacity to compete in world trade and attract investment – and this in spite of its heavy price tag. Starting in 2003 in Brazil, for example, the Federal Government has only allowed Petrobras (the state-owned oil company) to buy oil tankers that have been built with at least 65% of local content. As a consequence, Petrobras ends up paying a premium of 100% on top of the average international price for any large oil-transporting vessel.

‘Local-Contentism’ on the Rise

But the recent move towards local-contentism is also visible on radar screens in the U.S. and Europe. Past presidential campaigns in America and France were not centered on free markets or enhanced regional economic integration. They focused instead on the job creation side of local-contentism. We are therefore experiencing far more than just ‘currency wars.’ Exchange-rate tactics make for ancillary rather than decisive battles. The world has set the stage for the waging of ‘clashes for competitiveness.’

In recent years, the criticism against China’s hyper-competitiveness has been a good example of how countries have overlooked the importance of local-contentism. Throughout the past two decades, ever-louder American and European voices were raised against the way China managed its exchange rate. They aimed at spreading the notion that an undervalued currency was the key to China’s capacity to compete. But other factors have been more important in strengthening China’s sophisticated policies of local-contentism, which since 1978 have included:

• public-private partnerships (PPPs) as a springboard for exports and attracting foreign direct investment;
  
• the (still) low cost of China’s domestic factors of production;
  
• privileged access to the world’s most important buying markets (such as the United States granting China ‘Most Favored Nation’ status in 1980, with Europe following suit in 1985); and
  
• a vigorous business diplomacy, which reportedly results in two separate Chinese trade and investment missions visiting the U.S. and Europe every day.

If, on the one hand, local-contentism is a pillar upon which China built its current economic might, it is also one of the concepts countries are now implementing to fight China’s hyper-competitiveness. As a consequence, we may see fewer ‘Made in the World’ goods coming from ‘network corporations’ that in the heyday of globalization combined worldwide logistics, supply chains, and talent pools to achieve productivity gains, and more of these processes taking place simultaneously in a single country.

Even China, which based its prosperity on a ‘trading nation’ strategy, has to model its local-contentism not so much on the way it sells to the world, but rather on how it buys from the world. Major contracts by China’s government, corporations, and consumers as buyers will have to support activities carried out locally, generating local jobs and taxes. On a broader scope, we can essentially argue that the original idea of the BRICs (Brazil, Russia, India, and China) that emerged over the past dozen years is one that pertains to how these four nations succeeded in both globalization and deglobalization. They have been able to adapt successfully to the changing contours of the global economy, especially by becoming local content hubs. That is to say, in a world where the generation of jobs is key to economic success, they have been able to pursue alternative strategies so that their economies were always busy in providing local content.

And if local content remains an essential part of BRICS’s industrial policies only up to the point where their corporations are able to compete on a level playing field, then the BRICS’s vocation as global growth engines can definitely be confirmed. If the BRICS are indeed able to translate their local content policies into springboards for knowledge and innovation, they will certainly become one of the world’s most dynamic, prosperous, and influential group of nations.

But it is equally important to observe that although local-contentism can benefit one nation or another for a number of years, the global economy will pay a heavy price for the loss of efficiency it entails. That is why many governments today are trying to build a road back to ‘reglobalization’ either through the launch of ambitious initiatives such as that of the Transatlantic Trade and Investment Partnership (TTIP), involving the U.S. and the European Union, or the Trans-Pacific Partnership (TPP) negotiated by Australia, Brunei, Canada, Chile, Malaysia, Mexico, New Zealand, Peru, Singapore, the U.S., and Vietnam. A successful outcome of the Doha Round of the World Trade Organization (WTO) would also help industrial and trade policies around the world move away from local-contentism and closer to interdependence. But such a positive scenario for the WTO, which depends on harmonizing the interests of more than 150 nations, seems highly improbable.

More broadly, if instead of playing a part in a country’s catching up strategy, local-contentism becomes an across-the-board philosophy for our times, it could easily be transformed into protectionism pure and simple – and as a consequence we can only expect ever-growing economic imbalances. Local-contentism would thus become the very ‘air du temps’ of a lengthy, unwelcome era of deglobalization.

End of the affair?

The concept of ‘emerging markets’ came up years ago as a driver of the future of the world. Demographics, territorial scale, low production costs, and easy access to commodities were all signs of impending change in the geo-economic axis. Countries such as the BRICS became the world’s ‘engines of growth.’ Export-driven growth in China, a ‘transition economy’ for Russia’s market, outsourcing and technological innovation in India, and ‘import substitution 2.0’ in Brazil kept these economies booming – and social tensions quelled.

Globalization as a concept should represent more than just the ever-expanding technological advances in transport and communications. It is instead about decreasing obstacles to international trade and investment, increasing global supply chains, and improving macroeconomic coordination among the world’s top economic players, especially those member countries of the G20

These economies successfully adapted both to ‘deep globalization,’ which gained steam with the end of the Cold War, and to the ‘deglobalization’ logic of ‘every-nation-for-itself’ that has influenced international behavior since the 2008 crisis. This context brought about a naïve expectation: the BRICS were destined, slowly but surely, to lead a process of convergence between emerging economies and the development pattern of advanced economies. In the event of cyclical crises, however, we would see a much desired ‘decoupling’ – the inflexibility of developed markets would make it tougher for them to weather crises, whereas emerging markets would dynamically overcome them.

But in the past few years, those pro-convergence drivers seem to have changed course. The honeymoon with emerging markets has apparently come to an end. Emerging economies have been slowing down. In contrast, the U.S. is recovering. Although sluggishly, Europe is coming out of its recession. This, of course, has had an impact on the outlook for the direction of international capital flows. The supposed ‘end of the affair’ with emerging markets has led many to jump to superficial conclusions: no more talk of convergence or decoupling, but instead a return to the old ‘north-south’ economic hierarchy. In reality, performance in the coming years will be judged less by what we today label either ‘advanced’ or ‘emerging’ economies and more by a country’s ability to competitively shape up to a ‘reglobalization’ now in the making.

Reglobalization, the new age in world affairs we are entering, does not promote the verticalization of cross-border dynamics of regional economic, political, and legal integration. Regional entities will not take precedence over nations as the main actors in global affairs. It will not bring about a far-reaching communion of different worldviews. It will not come under a new global compact stitched together at the United Nations or the WTO.

Reglobalization will be more ‘superficial’ than the idealized ‘End of History’ world order we might have experienced at some point since the Cold War. It will be mostly focused on trade, investment, and the strengthening of global production networks. It will also be more selective – and therefore emerge as the result of the proliferation of multiple free trade agreements at bilateral levels and between some of the most powerful economic regions of the world. This is what may come out of the current negotiations involving the U.S. and Europe – the TTIP – and the similar dynamics observed in the TPP.

China’s success or failure in turning itself into a consumption-led economy producing high value-added goods will be central to how reglobalization takes shape. There will be little room for the kind of Asian ‘neomercantilism’ practiced by China since Deng Xiaoping stipulated that the color of the cat doesn’t matter, so long as it catches the mouse. China will also contribute a great deal to reglobalization by both leading a family of new global governance institutions, such as the Asian Infrastructure Development Bank (AIIB) and the New Development Bank (NDB), in partnership with other BRICS countries.

Thus, those we once called ‘emerging markets’ may very well stagnate. But the same is also true of ‘advanced economies’ that set aside the imperatives of hard work and constant reinvention – and revel in expensive, ill-budgeted welfare states. Opportunities will decline for those countries that, having integrated themselves into a trade bloc or regional economic and political community, flirt with the luxury of fiscal irresponsibility and the granting of unsustainable labor and social security benefits without gains in productivity to support their economies. Mediterranean Europe – with the severe adjustment that it has been undergoing for a few years now – obviously comes to mind.

Whether this or that country might have at one point been called ‘developed’ or ‘emerging,’ they will greatly gain by letting go of the certainty that either their ‘advanced status’ or their ‘rise’ are inevitable. In the global race for competitiveness and development, nothing is automatic or everlasting.

Reglobalization will belong to those countries that create business-friendly ecosystems, well established and transparent market rules, and steadfast connections to transnational economic networks. Those countries, regardless of their past on one side or the other of the old north-south economic geography, will be the true ‘re-emerging markets’ of the years to come.