Time for a tweak on globalization

Would you pay double for smartphones and heating in order to deny leverage to the despots of the world?

Would you pay double for smartphones and heating in order to deny despots leverage in the world? Some version of that question may be on the table when the dust settles in Ukraine.

That’s because Vladimir Putin’s war is imperiling more than just the future of Ukraine or the balance of power in Europe. It could spark a rethink on globalization, which was once widely seen as a boon for humanity but has bred resentments over deindustrialization in the West and an awkward dependence on problematic regimes.

At its core, globalization said widgets should be assembled wherever the labor is most affordable, with savings far exceeding the cost of transporting them home. Thus did the United States and Europe see whole industrial sectors uproot to Asia and elsewhere. Along with the liberalization of currency markets and trade, it was to yield an efficient planetary economy where all would share in growth.

Concerns that this would put masses of people in the West out of work were largely swept aside with promises to retrain workers for the knowledge economy, where the true value lied.

There is no question that this indeed brought efficiencies to industries and played a part in easing poverty and encouraging economic development around the world, such that developing countries now account for over half the global GDP. But the  approach courted a series of problems that are now coming home to roost.

First, it projected arrogance about manual versus knowledge jobs, suggesting the former were lesser yet fine for certain countries.

Second, it largely ignored the dark side of creating employment in developing countries in a way that could encourage something akin to slave and even child labor in sweatshops.

Moreover, it ignored that as those countries develop, which in some cases indeed occurred, wages would rise, undermining the argument for the transfer of jobs and ultimately, in due course, wiping out the logic altogether.

Devastatingly, it proved overoptimistic about retraining. It is not so simple to turn auto workers into computer programmers; making up for the losses may take generations. Meanwhile, huge swaths of the once-industrial American heartland have been economically devastated and cities like Detroit and Gary, Indiana partly depopulated. It is a human tragedy which begat opioid addiction, societal unrest and political extremism.

The final concern with globalization involved, well, globalization: the idea that interconnected also means interdependent; no nation would anymore be self-sufficient.

This means varying degrees of dependence on regimes that oppress their own people and threaten others. Such regimes have tended to adopt liberalism of the economy (capitalism) but not society (democracy). There was hope that exposing closed societies to the wonders of their Western trading partners would compel democratization. Instead, in many cases such countries act like they have leverage to keep the West off their case.

The ultimate case in point is China. In the past 40 years of intense globalization – accompanied by liberalization of the Chinese economy – it became an industrial colossus.

China’s GDP has grown from about 191 billion dollars in 1980 ($650m in today’s terms) to $14.7 trillion in 2020 – a twentyfold expansion while the population has grown by only about 50%.

China now accounts for 29% of global manufacturing, more than 50% higher than the US. The leading supplier of 5G equipment is Huawei. The US makes only a tiny amount of its own microchips – most come from China and from Taiwan, which China wants to take over. It is reported that 80 percent of the basic ingredients in US drugs come from China, which is also the  prime source of medical devices. Chinese firms are estimated to supply more than 90 percent of US antibiotics and 70 percent of the material that makes Tylenol. Even drugs that come from India are often originally sources in China.

The Chinese at all levels have gained vast experience with the liberal democracies of the West. But the country has not liberalized its politics or its view of world affairs in any perceptible way.

China remains a closed society where media is tightly controlled and the courts are devices of the communist party, which enjoys one-party rule and stamps out opposition. Human Rights Watch says China “has constructed an Orwellian high-tech surveillance state.” Its oppression of minorities like the Uighurs is epic (about a million are reported incarcerated without legal process).

What if China should invade, occupy and annex Taiwan? This would be a tragedy for the Taiwanese people, who since their 1940s split from mainland China have built a vibrant and prosperous democracy. But the West is, obviously, quite hobbled in much about it.

Which brings us to Russia, an interesting case which the West would like to compel to rethink its decision to invade another country (and which provides China with raw materials for plastic goods to sell to the West).

After the Cold War the West had hoped  that as Russia was no longer a communist country with a closed economy,  it might become a democracy in line with the logic of globalization.

So great was the West’s self-confidence that the International Monetary Fund, backed by respected economists like Jeffrey Sachs, urge shock therapy in the transition to capitalism, even though it was predictable that this would wipe out the savings of a generation and create a gold rush for state assets that would breed spectacular corruption. We figured liberal democracy was such a natural state that Russian society would survive all this and even say thanks. Those who advocated a slower route were widely ridiculed as “neo-communist.”

Like China, Russia has not exactly liberalized. It is a fake democracy with rigged elections, an intimidated (or jailed) opposition, captive courts, and mostly domesticated media, and it features cartoon evil like poisoning plots against those who run afoul of the regime.  Its ruling class is a kleptocratic mafia widely reputed to have looted the country’s coffers to the tune of hundreds of billions of dollars. It continues to mess with its neighbors; the invasion of Ukraine violates an explicit 1994 promise.

But Russia clearly believed it has some leverage, mainly from energy but also from its integration into the world economy. Europe gets much of its natural gas from Russia, which is critical especially in winter. It is a major part of the global financial system and its trade is valuable.

In invading Ukraine, Russia has almost certainly assumed that this leverage would prevent the West from taking very strong punitive action – that the West would prove unwilling to itself pay a price to exact a price from Russia.

Yet the response has been stronger than many people thought.

Condemnations of Putin are pouring in from all over, as is financial, humanitarian and military aid to Ukraine. Western nations froze Russia’s hard currency reserves and began the process of cutting its banks from the SWIFT system. The ruble has tumbled and Russia’s central bank reacted by jacking up interest rates in dangerous ways to stem a run on cash.

The US, EU, Britain, Australia, Canada and Japan announced plans to target wealthy Russians stashing assets abroad. Britain will stop Russia from selling sovereign debt in London. Apple, ExxonMobil and Boeing are among many companies that announced steps to withdraw or freeze business in Russia, and many countries are banning Russian planes from their airspace. Most critically, Germany has signaled it is ready to cancel the Nord Stream 2 pipeline which is the source of much or Russia’s perceived leverage. FIFA has suspended Russia’s national team from international play, and Putin himself can expect to be never again welcome at international events.

This is far from nothing, and should not come as a surprise. We are living in an era in which, in the West, companies are expected to display a social conscience (and even a “double bottom line” in which the second addresses a greater good.  They have sustainability and diversity campaigns and “officers” whose purpose extends beyond immediate profitability and comes from a demand by the younger generation especially for a social conscience.

The implications are complex for globalization. Its goals were once lofty – but possibly naïve. A central outcome has been to move low-paying jobs to despotic countries and to make the West somewhat addicted to cheap labor from those places. “Constructive engagement” has generally not made them mend their ways.

It is more than possible that Western society cannot much longer accept this, and is ready to pay a certain price to reverse course. Walking back globalization will not be simple or happen wholesale. But if the current trends continue, then ironic as it may seem, America and Europe may be forced to move in the direction of making themselves self-sufficient again. China will certainly be watching.

(A version of this article appeared in newsweek.com)