During the Covid pandemic, we had to accept that certain medicines were no longer manufactured in Europe and that we experienced significant supply bottlenecks. It seemed that globalization, with its global supply chains, was hitting us hard. The war in Ukraine also called into question the model of development primarily based on comparative cost advantages. The slogan was: deglobalization instead of globalization.
However, this was probably not actually implemented: According to the World Trade Organization (WTO), international trade grew by 3.5 percent last year compared to 2021 and thus more strongly than predicted. For the current year, the WTO expects growth of only one percent, not least because of the subsidy dispute between the USA and the EU and the trade policy frictions between the USA and China. Recent political developments, however, suggest that important actors are once again reflecting on the importance of trade and globalization for prosperity and peace.
For example, last month the EU and the US moved closer to each other over green technology subsidies and want to negotiate an agreement on critical minerals for car batteries. Such an agreement should ensure that European companies are not discriminated against despite the American tax breaks for green technologies and remain in productive competition with companies from the USA.
Worried about declining prosperity
Statements by the new Chinese Prime Minister Li Qiang indicate that China intends to continue pursuing a pro-business and technology-friendly policy. In view of the shrinking population in the People’s Republic, the pragmatist Li in particular should be aware of the importance of global economic relations for growth and prosperity in his own country. In addition, there is growing concern, especially in countries with comparatively low per capita incomes such as Indonesia and Vietnam, that increased deglobalization would lower the level of prosperity achieved.
As a consequence, the people living there would have to feel like losers and interpret the deterioration in their economic opportunities as a termination of the “social contracts” with the respective governments. This, in turn, would call into question the often already difficult governability of the countries. The modern theory of social contracts emerged in the 20th century and goes back primarily to the American philosopher John Rawls: At its core, it is about the citizens of a country concluding a kind of implicit agreement with their government, according to which they Giving up rights to the state and in return, so to speak, receive external and internal security as well as good living conditions.
In the meantime, it is becoming increasingly clear that the viability of such social contracts, especially in times of crisis, depends above all on the existence of appropriate economic conditions. If large parts of the population have the impression that their economic resources are not sufficient to ensure an adequate standard of living, this leads to the drifting apart of the population groups and to the erosion of the social contract.
reducing social tensions
If, on the other hand, it is possible to stabilize the economic situation of the population, especially in times of crisis, to reduce the economic gap between different groups and to offer prospects for advancement, this makes a decisive contribution to the positive development of societies. This insight seems to be gaining ground among more and more policymakers after the Covid pandemic, which has put low-income groups in an even more vulnerable position.
This gives new impetus to globalization and the associated opportunity to increase the level of welfare in the countries – but with one important caveat: in the future it can no longer be about globalization “at any price”. Instead, we need a new form of globalization combined with a more conscious setting of priorities. For example, it would have to be decided which industries are important for a country and where one might be willing to pay higher prices for domestically produced goods.
In addition, a stronger focus on values such as sustainable ecological development, respect for human rights and acceptable working and living conditions is important. The Ukraine war shows how important international solidarity is. The phase of unconditional globalization should therefore be over. If we succeed in implementing a new form of value-oriented globalization, we should all benefit from it – not only in the form of higher incomes, but above all through the reduction of social tensions.
The author: Renate Schubert is Professor of Economics at the Swiss Federal Institute of Technology in Zurich and at the Singapore ETH-Centre.
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