AMNC - Where Is Globalization Headed?

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Adam Tooze: I'm at Columbia University when I'm not here and it's my pleasure to be talking to you this afternoon. Perhaps if I put my teacher's hat on I would be saying something like "leading a discussion about the future of globalization," where globalization is headed and it's always fascinating, fun engaging to ask this question at WEF Davos events because probably there is nowhere else in the world, no other group of people to whom this matters more, this question.

We are, you are, we are, collectively, what is known as the globalization elite, whether we like it or not. And this question haunts us all. I think it haunts us in a little bit the way, I'm looking around the room, I think this is a problem we probably all share that mortality begins to haunt you in midlife. A lot of your life, you've gone through it imagining that it's inevitable that you will live forever. And I think many of us and certainly Davos, stake quite a lot on the claim that globalization was that kind of phenomenon.

Tony Blair, the prime minister of my country, in the 2000s, had this amazing line where he said, you know, in India and China, they don't argue about globalization. Arguing about globalization is a little bit like arguing about whether the autumn follows the summer.

And a little bit like people in middle age when they discover that mortality – once you do, it's very difficult to think about anything else, at least for a couple of weeks, after you have that sudden shock, you just think you're going to die very soon and you constantly checking your body about which bit of it is going to fail first. And I kind of think that's the situation that we're in with globalization right now.

Where does the essential sense of fragility come from? Well, I think the basic sense of fragility comes from the fact that deep down, even if we were committed to the idea, it was a natural process like spring and summer; we actually knew it had a political framing. And we would, on a good day, point to key moments in global history and said, then why has men and women got together and organize the world.

I heard it done yesterday. In 1945 in 19 – pick your moment in the early 90s – China's WTO accession. Wise people agreed to do something. And of course, at that moment, you expose yourself to the risks that maybe we will change our minds or some sort of craziness will take over and if you look at the trajectory of trade treaties, we all know that the big global deals have gotten scarcer and scarcer and scarcer.

And insofar as we're making any progress at all, it's at the regional level. WTO, as a global organization, failed already in 2008, not with Donald Trump. The Doha Round was the last one that really, really collapsed. The good news. And this is the kind of realization that I want to bring us back to is that for all of that, what we actually, as people engaged in the economy and business, know is that what has driven this trade process is perhaps political permission and political framing and legal codification.

But above all, what has driven globalization has been the inherent vitality of the global economy, the discovery around the world of more and more places, more and more dots that are capable of trading with each other. The extraordinary development of the division of labour, the other side, which a conference like this tells so well when it mobilizes all of the extraordinary technologists and business people and entrepreneurs from both China and around the world to talk about new centres of growth.

So we have this sort of duality, I think in our minds, on the one hand, the fragility and on the other hand, this sense of robustness and so much more, that could happen so much more that could happen. We freak ourselves out periodically with graphs like this. This is trade as a share of GDP. And you can see two things about it. It was increasing for many decades. These were the heyday of globalization, if you like, then it has stabilized.

And in the case of China remarkably, for many people, it's actually regressed. Right, so you get stories about China's deglobalization because trade as a share of Chinese GDP has reduced but what to make of this in this therapeutic session that we're going to be doing this afternoon. I think the crucial thing to focus on here is that this is the ratio between the movement of two very large aggregates and neither of them actually is declining.

It's just that in certain periods, one of those aggregates is growing more fast than the other. So what's happening in the Chinese case is that the big 2008 stimulus kicks in, China has its last great surge of infrastructure-driven investment-driven growth between 2009 and 2015. And the rest of the world is growing much less rapidly because of the aftermath of 2008 and the Eurozone crisis. So, Chinese exports are not rising as rapidly as they once was. And so you get this process, which looks like globalization but really, is no, there's no such thing.

And in a forum like this, when we're talking about the World Economic Forum, of course, what we try and do is open our minds to broader possibilities, the future where globalization might come from and you can look at a graph like this and see either dismal failure or vast opportunity. So this is the same sort of numbers trade as a share of GDP for the world. And you see the plateauing here, this is what people call slobilization or no globalization right?

The plateauing at the top, which is largely driven by the fact that some are still going up and China is going down really fast. But then this is Sub-Saharan Africa, which you can see is a huge, well, it's either a great failure of development since the 1970s, which is the story if you like of Afro pessimism, or it is a giant gap waiting to be closed. So, giant gap waiting to be closed by various types of breaching investment by infrastructure investment.

Certainly, in the face of this, it's an extraordinarily political act to declare globalization over before the most rapidly growing population on earth has even joined to a considerable extent, right because this is the centre of demographic growth, a huge percentage of the young labour force of the world will be in Africa by 2050. And if we are already saying that the phase of globalization is over, we should be, at the very least realizing the implication of what we are signing up for the very least and the likely fallout from it.

I say that with a European accent with particular feeling because nowhere will that matter more than in Europe, which for a long time has seemed like a backwater of globalization. But in this next phase, where Africa's demographic growth is going to be the decisive driver is the critical, you could say, frontline between the rich and the poor world, to put it in rather unfortunate military terms.

What we know about this globalization process, it's not just that it's unsteady but that it's unplanned, it's haphazard and so one of its persistent features, which is another source of sort of anxiety. My aim here really today is to take a longer list of anxieties and address each one and see whether we can find a different way of relating to it so that we can carry on right, rather than continuously obsessing about the imminent mortality of globalization are its imbalances.

The blue dots are surpluses, the red dots are deficits. You see the great imbalance in the world between the manufacturing hubs of East Asia, notably China, the giant blue dot, and the great deficit gaping on the other side. Now, you can think of that as natural complementarity. You can think of that as the division of labour in action. You can think of that as a highly efficient manufacturing centre, complementing the vast excess demand of an extremely rich and affluent society on the other side of the world.

But as we all know, this is also the source of repeated predictions of the disaster of the crisis of deficits that must unwind, of double deficits in the American case, trade deficit and government's deficit, as sort of a big imbalance that has to resolve itself and other kind of cliche, I think which living in the modern world is hard to sustain.

And yet we can't really rid ourselves of it, which is the tensions in the end have to resolve themselves. We're always waiting for narratives to somehow resolve the tension in the phrase that I'm just going to carry on maintaining until my breath runs out, right, but we want that sentence to end in a calm place. And there is a narrative about the global economy that wants this deficit to go away because how could it possibly be the case that we could sustain this kind of gap? The huge deficits of the Anglosphere down here and the piled up surpluses on this side and prophecy after prophecy of prophecy.

If you remember back to before 2000 today, there was this big story of the dollar unwinding that hinged on this. But the astonishing thing about this system over the last, in fact, really for most of modern economic history, is it's very difficult to think of a single advanced economy crisis that was actually driven by trade imbalances. It's really quite difficult to think of one that was its primary logic was trade imbalances.

Trade suffers shocks, as you can see here in the early 1990s or you can see here in the unwinding of deficits. Down here, you can see major shifts at various places over the course. Here, we have the unwinding of deficits, in around 2008. But it isn't so much trade imbalance that drives crisis so much as crisis that drives trade imbalance. So, the 2008 crisis was classically an instance of massive bank failure that disrupted global trade and 2020 was an instance of a natural catastrophe that disrupted trade.

Trade, in fact, itself proved remarkably resilient. But one of the things that these imbalances do is to repeatedly produce, repeatedly charge up tension trade produces winners and losers and that's one of the things I think that makes it for the winners, of course, incredibly compelling but those on the losing side, continuously a cause to question it. We have two graphs which summarize, in really dramatic form, the way that logic has played out and for many of us, this really summarizes the experience of globalization in recent years in recent decades.

It's a tricky graph and it changes over time. The one that you may be more familiar with is the red graph. And what this shows you is all 8 billion people in the world distributed over their income level. And then what you've got along the left-hand side there is the pace at which their income has grown over this period.

So what the red line is showing you is that up to about the 70th percentile of the global income distribution, the period from the 1990s through 2008 was great. But if you were in this percentile, so the top 20% of the global income distribution, which is working class and lower-middle-class people in the advanced economies, in other words, United States and Europe, your growth rate in income collapsed in this period. So you take the world's population, not country by country put all 8 million of us in a pot. What this graph is telling you is that the bottom searched, this is the China convergence story.

And the top that's us in this room did fantastically well and that there is the employees of the vast majority of big corporations in the advanced economic world, right and their economic experience in this period between the 1990s and 2000. Today was absolutely miserable, both in absolute and in relative terms; their incomes are not going up and they've been caught by other people in the world.

But we've seen since then is some readjustment in that story. But if you want to understand I think the roots of populist politics in the advanced economic world, which are going to play out, for instance, in the French elections at the weekend, this is where to look because if you want to know who votes for the far right in France, it's unemployed working-class people who are the people who have been caught in this squeeze here.

And if you look across nationally, you can see why globalization has become polarized in the way it has. This isn't a staggeringly star graph, which I came upon while I was researching this slide deck for you, but it shows relative to the baseline of 1990 the percentage gain of GDP attributable by a reasonably credible model, two different countries. And you can see the spectacular winners all down this end, right. The Eastern Europeans, China, South Korea down this end and all the way down here, the United States.

If you want to ask why right now, there isn't a single live political party in the United States that stands for free trade and globalization, this graph gives you some idea of why that might be the case but just wasn't very much in it for the vast majority of Americans. Again, for folks like us in the room, it's easy to think of exceptions. It's pretty hard to imagine how many of America's biggest corporations could have produced the outsized returns they have without their global engagement. But that pertains to a very small part of the American income distribution.

For the vast majority of Americans, globalization has not been a winning story. So we want to know why this feels fragile. It's not just as it were the exhaustion of a natural paradigm of globalization but hidden within that, deeply political questions about who wins and who loses, who wins domestically within countries and which countries win globally as opposed to others. And we all know the explosive tensions that this is unleashed in the global economy in the current moment so far and now we come back to reality.

And we're doing our pat down. We're discovering we're all still here. Right? I'm not actually dead yet. You're not dead yet unless you're a European bank. If you're a European bank and you suffer the impact of 2008 you might very well actually be dead or at least your business model is totally different now from what it was in 2008. The idea of the globalized European bank as the platform for a rivalry with the big Wall Street banks, for instance, is a bit above 08-09. And it really barely comes back. Apologies to anyone in the room who represents any one of those banks.

But viewed at the global level. The single biggest process of deglobalization that we've seen is the retreat of European banking across the North Atlantic divide and it was a deliberate push by both corporate management to escape entanglements that almost killed them by American regulators to take bad actors out of the American financial system that they were whose risks they weren't able to manage but ended up on the hook for in 08-09 Deutsche Bank, Barclays were called out by the American regulators and their American operations were dramatically shrunk deliberately.

This is the first really dramatic deglobalization that's actually happened. The question going forward is whether it can happen anywhere else. And I think the story here at this moment is really tense. So now we're in the phase of this coming to terms with ourselves in which we've discovered a) our mortality and b) the fact that we're still alive. And the next question is, okay, what do I do next to keep it that way for as long as possible?

And what we're seeing right now is an extraordinarily tense standoff between the rhetoric of politics, which says we need to do decoupling and de-risking and we need to rethink and quite fundamentally change the way in which the world economy operates right now and this graph here, because what this graph here shows you is that China's manufacturing growth export growth is just growing relentlessly, year after year after year.

In fact, from a Western point of view, the staggering quality of this is, look how late it starts getting big. In other words, the realization that we're coming to is that China's move, as they call it here, up the value chain into high-quality productive forces, is just beginning. We haven't actually seen it yet. What we saw so far was a relative subordinate incorporation of China into dragon chains dominated by the West.

What we're on the cusp of seeing is China inverting that and that's the drama of the next stage or from the point of view of Western politics, the nightmare and that is, as it were, the situation that we're on the edge of. Now, my basic view of this a little bit like our discovery of mortality, is that you could just shrug and say, you know what, I'm just gonna forget about it. I don't really need to sign up to the gym membership or I could give up smoking or any other of my dangerous lifestyle. I'm just gonna go back to like, not caring.

And I think there's a possibility in Western politics that just simply, at some level, abandons the decoupling narrative, abandons the de-risking we all know where this is going as long as the American bilateral deficit with China shrinks. This can divert for any number of other countries, it'll still end up as American imports but it won't have a China label on it and we could all move on.

And this is a thoroughly reasonable and quite realistic outcome of this current moment of panic. But there is another version. There is another version in which Western governments actually get real about this challenge and double down. And that really, I think, is the substance of the current moment is we're at a moment where we could simply say we tried decoupling and derisking at least for a couple of years. And really, in the end, we couldn't break through the attachment to Chinese manufactured goods; they're too cheap and they're too good. And the Chinese are changing the envelope. So you know what, we're going to find ways and the Democratic politics offers many ways of doing this. So just burying the story. Or we could double down.

And I think that's the issue that we really have to worry about. And there are certain areas, I think, where we can't escape the doubling down because the doubling down is driven by geopolitical logics that Graham Allison understands better than anyone else in the world. The geopolitical logic that says America must preserve primacy in key areas of technology and it will define how small that yard is and how high the walls are.

And he has said that he's going to dominate or it's going to substantially shift within the envelope of its alliances with South Korea and Japan, the balance of and Taiwan, the balance of microchip production. It's incredibly expensive to do because as we all know, in this room, microchip production is usually cyclical, and usually capital intensive. And so you're pitting a democratic budget against one of the toughest industries to actually do industrial policy in and God help you. But they will keep trying.

I think it's a reasonable wager to say that they will keep trying. There are other productive systems in which we, for instance, could imagine regionalization, which will be a soft way of dealing with this. You could, for instance, the automotive supply chain has always been fundamentally regional. Right. It's always been a North American bloc, a largely European bloc, a largely East Asian bloc.

One could imagine a segmentation of the electric vehicle space that was essentially along those lines. And one could imagine compromises and I don't think we should discount what the Europeans are saying, what Harbeck was saying on his visit to China this week, which is there is a grand bargain available for China in this space on EVs with the Europeans because the Europeans are actually kind of serious about the energy transition that they need 10 million vehicles by 2030. And there's no way on Earth they're going to be able to make them at affordable prices themselves and China can. And so there is a bargain to be had there if it's played right.

But I think the broader issue of whether we go to an even larger struggle at this point really is down to politics. And there's no way of getting around this. This is not something that's a comfortable topic for a forum like Davos but fundamentally, it comes down in many ways to the outcome of the American election on the 5th of November. And right now if you just take the simple polling, it's 49 to 49. If you do complex modelling in the swing states, The Economist model, for instance, gives Trump a two-to-one kind of, no, it's a two-thirds additive. So it's yet it's a two to one advantage over Biden in terms of the probability of victory.

And the consequence of that which is not a natural process but the complex, arbitrary contingent operation of democratic politics, which for a group of folks like ourselves in a forum like this and the location we're in, is really about as alien as you could really get to. It's really a dramatic gap. The speech that we heard from Premier Li the other day and you just can't imagine a Western politician giving it, was the speech of a highly competent industrial policy CEO.

It spells out actually wanting to demonstrate to us that he fully understood his brief, fully understood it and has a historical theory explaining why China needs to do what he does. Imagine any Western politician attempting to do that. I mean, it's, well, Robert Harbeck maybe of the Greens could do it, but I wouldn't really, Macron a very good day, if he let his speech writers go but like, that isn't the way they roll. So as Graham said the other day, they may cite, we're in silly season. We literally have to admit from the Western point of view that we are in silly season, insofar as the major axis of globalization is concerned. And I'll leave you with that. And then we have 10 minutes for questions.

Do we have any questions? I believe I'm managing myself up here, which is a weird position to be in but. Yes, please. Thank you.

Audience member 1: Just following up on your last point – by the way, I'm a part of Global Shapers – following up on your mentioning of the Premier Li's speech, what kind of real policies do you think from his speech will be materializing? Like maybe he talked about you know, the ageing society, right, where there'll be some like a real policy, maybe in the sign regarding that space?

Adam Tooze: Well, I'm not going to be presumptuous enough to read the implications of a speech like that by a senior Chinese politician in a forum like this for actual Chinese politics, you know.

But I think what was really interesting about that and maybe that's an interesting way to expand the rather tightly focused remarks I've made is the insofar as we are moving towards a real reckoning with an ageing society, I think is a potential avenue to escape some of the hard zeros some industrial policy clashing logic, that this picture of the future of the world economy would suggest because ageing societies insofar as they are centred on care economies are not going to be purely service sector because caring for elderly people involves quite a lot of really high tech machinery.

That's where all of the really big bucks are spent in the medical industrial complex – is on keeping relatively affluent people alive for those last couple of years. Right. When it really gets serious. You can spend 17% of GDP doing that, as the Americans do, that it's a huge business. But it's at the point of delivery, not directly competitive, least not on a large scale.

And I actually think for a more realistic view of the future of the economy for high income countries, it's actually imperative I was saying this last night that the discussion we had about the American economy that we back away from this at some level anachronistic old fashioned view, that the future of the vast majority of working people in our countries belongs in a factory which produces goods which are shipped to China and shipped to somewhere else in competition with goods produced in factories in China. It's ridiculous.

It doesn't, 13 million Americans work in manufacturing out of a workforce of 170 million people. It's just slightly less than 10%. If you look at the value added in an affordable piece of consumer goods delivered to an American consumer by a big box store like Walmart, 80% plus of the value added is on the American side in the logistics in the retail, a very small fraction of it is actually in the factory production on the Chinese side.

It's really a mistake to understand the future of our economies in terms of growth in a head to head using chip factories as the model. Chip factories may or may not be important for geopolitical reasons. May or may not I think is an open question. But what they certainly don't do is address the broad socio-economic structure of any country because they employ far too few people.

And they even less address the sort of malaise, the sense of crisis that affects the United States today, which has much more to do with ill health, the lack of basic social services, and so you stacking the wall together and saying we're going to fix the problems of American society, by means of relocating chip factories in Ohio is a disaster from the point of view of global economics and American politics because it can't deliver.

That is as it were the third element of possible futures, should cynicism escalation and an incoherence which, in the end, bites you back, over promises you can't deliver. You can't actually change the world with these kinds of policies. And that kills you in the end. Question at the back.

Audience member 2: Thank you for a very engaging presentation, Adam. You mentioned China is at the cusp of going full blown in terms of you know upscaling their military capabilities. So what chance the rest of the world has given what we've already seen China do what they've done in the last 20 years.

Adam Tooze: Depends which bit of the rest of the world you're talking about. So Bangladesh, for instance, has slotted in very neatly underneath the Chinese value chain as the Chinese value stack has moved up. Right and Bangladesh has become a key player in the global textiles and garment sector, in part through collaboration with Chinese firms which were previously in that space. It's not a road to global dominance or industrial parity but it's a road to broadly based development in Bangladesh, which saw incredible overtaking in India and GDP per capita terms really remarkable story. But I think it has to be a niche strategy like that.

And it also depends what sectors are in what the overall volume of demand is and how far tradable goods are really the answer and how far China will locate. I'm liberal enough to believe that there's a limit to what China will be able to do and there will be niches. But yes, you're absolutely right. China's historic growth from the 90s onwards, there will never be another development path like it because there's never been one like it in history. And the idea that we will be able to repeat that anywhere else, India, for instance, I think has zero chance of being able to follow up that same path.

It's also a very unusual, heavy industrial, very industrial-centred strategy that isn't necessarily suitable for very many countries. So I think that would be the way I would think about it is niches complementarity and a realism that says that wasting money on strategies that can't really deliver is very bad politics and very bad economics at the same time. The question of the wisdom of the lady at the front.

Audience member 3: So what next for us in Europe and US. What we are seeing so far is that basically we are copying a little bit of the politics and the industrial policies of China. Is this the way forward?

Adam Tooze: On the American side, I guess I've said that I really think a lot depends on the outcome of this election, not in the basic orientation of American policy towards China. We've seen huge consistency between the Trump and the Biden administration. But in the possible escalation towards anyone has to describe it, I think is quite a, well, it's a politics of trade that's driven by symbolism by a rather mercantilist understanding of economics.

Robert Lighthizer was mentioned last time in the panel yesterday. It's a very old crew of people who are taking charge of American policy. I mean, some of them are in jail right now. Other than other than that, I'm not talking about Trump, right? And they're not very long jail sentences, unfortunately. So they're going to come out of jail by the time they come into office and they won't be in a good mood on the European side. I really think the question is a resource mobilization question. It's always the European question, right.

There is huge potential. I think there's really credible commitment to the energy transition. Europe has everything it would need, basically, structures to be a sovereign issuer of essentially a sovereign reserve currency which would give it huge fiscal freedom that the Americans enjoy. And there are a series of very complex nested political obstacles which prevent that from happening.

Locally, individual countries may be able to break out and emergency might trigger – we'll see what happens after the French election – where the ECB lines up. It's an extraordinarily open field. I think. One more question. Yes, the woman at the back in black.

Audience member 4: Thank you so much for enlightening speech, really enjoyed. I'm [unidentified name], I'm in the new energy sector and I'm based in Beijing. Currently, I think the new energy players in China that either do the solar panels, the batteries, the EVs are suffering a lot from the barriers that already exist or to be replaced in the foreseeable future.

My question is, I mean, I understand the policymakers, they have their standpoint of view to make the manufacturing industry strong again in the long term but for the people, the companies that's actually going to pay for it for real dollars, was they actually pay for them, the stuff that's like twice expensive while using the technology that's five years behind China?

Adam Tooze: We were speaking about this yesterday as well with regard to America, there's this weird schizophrenia, in which the working class American is all of a sudden very present in American politics.

Everyone has a guilty conscience because of that elephant curve but the way in which they did very badly but there are votes in this fantastic form, which is an auto worker, the vast majority of working-class people I have to break it to Joe Biden, don't work in factories and do things with metal, right? They're largely women. They're largely diverse people of colour and they work in the service sector and their basic problem is the cost of living.

And so if you're actually interested in the standard of living of the American working class, starting by building a factory, with protectionism around it is a very bad way to go because what they really need is affordable, cheap mobility. And right now it's China. It's Korean and Japanese firms which allow them to buy those cars and if you close the market, your question bites.

If I may and since I'm on this grandstand, I am actually more concerned strategically about the Chinese government's relationship to the green energy sector in the next coming years because your sector is a world-transforming sector.

You're the first country to achieve something like escape velocity in the green energy transition. And that causes all sorts of dislocations as you do that, as you increase the share of intermitted power in a stress grid, it's hard to handle and we've seen in Europe as the share went up and you're still way below the levels in California at Europe how the conservative backlash kicked in in the 2010s and slow down the green energy transition.

And if you look at National Energy Agency planning for China for the coming year, it's way more pessimistic than what you've actually already achieved in the last two years. It's a third level right? The long-term plan is 100 gigawatts a year. If you listen to the head of the National Energy Agency. And why this is critical is that next year China has to commit to its Paris commitment which maps the trajectory over the next 10 years. And you have two options.

One is to go for kind of conservative stability, which may look appealing in the short run but come 2035 If you want to hit that net zero by 2060 target, your crash landing or you doubled down on the incredible dynamism of the sector in the last and it's really recent right, it's the last three or four years that it's totally exploded. You double down on that, you take the risk of double downing, I've doubled down on it. And you increase the momentum rather than slowing it down.

And I'm haunted by the story in Germany with which you will come from the Chinese solar sector No, because China, Germany was driving global solar through 2010 2011 and then it throttles it and kills it dead, which was the beginning of the Chinese domestic programme and we cannot afford China to do a Germany.

If we are at all serious about the global energy transition, your sector is the thing that will save the world. You are the most dramatic mover of the energy equation we've ever seen. And so I really it's like I think everyone should just be pushing on not just communicating the scale of the drama of this choice. And the European and the American markets are a pain.

I totally understand as an export-orientated business, this hurts but it's the domestic market, as far as the climate crisis is concerned, that's most pivotal. And we can only hope that Beijing has the courage and the historical vision to recognize what's actually happened in this country in the last three to four years, which has taken everyone in their world by such surprise, because we were all busy with COVID and Trump and God knows what and we didn't understand that the energy revolution that we'd all been asking for was actually arriving here.

And one hopes that that message is also really clear, the extraordinarily competent and clearly very technocratic reminded leadership level in China. So thank you for what you do.