Larry Fink had proclaimed the end of globalization, some critics of the international division of labor reported jubilantly at the end of March, after the head of the investment house Blackrock had published his annual letter to investors.
In fact, Fink wrote of the “end of globalization”, albeit with the addition “as we have experienced it over the past three decades”. The global pandemic and, most recently, Russia’s invasion of Ukraine have disrupted connections between nations, companies and people around the world.
The future of globalization has long been discussed by large investors on Wall Street because governments and companies are reassessing risks. In Germany and Europe we have to clarify how we envisage the international division of labor in the future and who will shape it. Anyone who keeps an eye on the prosperity of the people – here in our country as well as worldwide – should ensure economic openness, but avoid geopolitical naivety.
General criticism of globalization should be said: The international exchange of goods, capital, labour, knowledge, etc. has created prosperity in an impressive way since the end of the Second World War; this has been scientifically proven many times.
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And it is reaching large parts of the population. Germany is a prime example of this – but so is China with its rapid globalization-driven growth.
If trade relations are disrupted – be it involuntarily due to pandemics or natural disasters or voluntarily due to sanctions or tariff wars – this dampens prosperity in the affected countries and also among their trading partners.
We must be aware that less international division of labor also costs prosperity here in Germany and thus potentially exacerbates distribution conflicts.
With a diversified network of suppliers, companies spread the risk
However, in the past two years we have learned painfully what it means to be “dependent” on a trading partner. First during the corona crisis, when individual goods became scarce due to lockdowns all over the world. Well, much more recently, in the Ukraine war, where dependence on Russian oil and gas is slowing down EU punitive measures against Russia.
Dependencies have always existed, but the awareness of how problematic they can be has recently grown significantly. Also because governments are increasingly using trade policy to build up pressure and achieve other foreign policy goals.
China recently punished Lithuania with import bans because Taiwan is allowed to have a “Taiwanese representation” there. Trump’s similarly motivated trade maneuvers against China and Europe are neither forgotten nor fully reversed.
However, reducing dependencies or avoiding them entirely does not have to mean the end of globalization – rather the opposite. A radical possible response to dependency would be to avoid trade and produce as much as possible yourself.
However, renouncing the advantages of the international division of labor would result in severe losses in prosperity. The better alternative would be to strive for international diversification – that is, to purchase a product from several suppliers that are as independent as possible. If deliveries from one country then fail, they are still possible from other countries.
If you spread your risks, you don’t have to forego the advantages of globalization. A diversified network of suppliers can be more expensive than relying on a single low-cost supplier.
But this is offset by the potential costs of a delivery failure or the possibility of being blackmailed. And these have recently become more visible.
>>Read here: “A new world order is emerging”: Merkel’s economic adviser on the consequences of the Ukraine war
However, in a market economy, companies and consumers choose their suppliers independently and in an uncoordinated manner. Critical dependencies in the overall supply of goods often only become apparent when shortages arise. Not every dependency is as obvious as Germany’s on Russian gas.
Here are five recommendations for action on how we can use the advantages of globalization and avoid dependencies:
First: Let the price signals take effect on the market, which are already changing a lot. Statements like Fink’s letter show that investors are reassessing risks in supply relationships.
The economic, social and, last but not least, political situation and development prospects in the trading partner country are becoming more important for purchasing and investment decisions. Companies that fail to do this will find it more difficult to raise capital because their risk profile deteriorates.
Secondly: The state should keep an eye on supply relationships for strategic goods. Determining these is not trivial, and they change dynamically.
But it is possible to define products in the areas of energy supply, certain high technologies or medicine that are irreplaceable in the short term and are necessary for the functioning of an economy and society. Customs data can show how diversified the sources of supply are for these products.
The state would have to send warning signals if there were obvious dependencies, point out risks for companies and the economy as a whole and work out solutions with everyone involved.
The more national economic independence, the more expensive it becomes
Third: strengthen the European internal market. This large economic area offers enormous potential to take advantage of the division of labor and to diversify supply relationships.
The more nationally we define economic independence, the more expensive it becomes. However, during the corona crisis, there were suddenly export bans within Europe too – Germany was ingloriously involved.
A relapse into nationalism in times of crisis can blow up the entire EU. The best way to protect against this is to have as many mutual economic “dependencies” within the EU as possible – i.e. the greatest possible division of labor and integration. This discourages the raising of trade borders.
Fourth: Promote trade agreements with friendly countries. The elimination of trade barriers makes it easier to diversify supply chains.
The fact that the Ceta agreement with a liberal country like Canada is hanging in the air is counterproductive. Plans for further agreements should gain priority.
Fifth: Promote technical innovation. It reduces dependency on fossil fuels if we can use innovations to save energy or make more use of renewable energies.
The ability to innovate helps when dependencies threaten and we need alternatives. Tesla is said to have alleviated the chip shortage by reprogramming existing semiconductors in-house. Necessity is the mother of invention, but the necessary skills must be nurtured.
Dependencies always apply in both directions. The western countries only have leverage at the moment because Russia is also economically dependent on the west.
In a more geostrategically dominated world order, strategic, geoeconomic thinking is regaining importance. It has become alien to us in Germany.
However, the much-cited turning point means that such thought patterns also have to be questioned. Globalization is not over, but new rules are emerging.
The author: Holger Görg is Professor of Foreign Trade and President of the Kiel Institute for the World Economy as well as Head of the Research Center for International Trade and Investments there.
More: How China and Russia want to make the rest of the world dependent on their raw materials