A debate is raging about the future of globalisation. Concerns about supply-side shocks unleashed by the Covid pandemic and Russia’s invasion of Ukraine have led some to argue that globalisation has gone too far. The just-in-time mentality has become outdated, and resilient and robust supply chains are back in vogue. As geopolitical competition between the two largest economies in the world picks up, there is also a growing realization that economic dependencies can create geopolitical vulnerabilities. Governments around the world are taking a step back from openness and embracing reshoring and decoupling, and the gradual deglobalisation that comes with it.
On the opposite side of the argument are those that stress that cross-border trade flows have reached record levels, digital services trade is booming and multiple free-trade agreements are being negotiated leading to deeper integration among economies. Besides, today’s global value chains for advanced high-tech products are so complex that they could not be “deglobalised’ even if governments wanted it, except at prohibitively high costs.
There is ample evidence to support both arguments. But surely the global trade system cannot be fragmenting and integrating at the same time, or can it? Welcome to the next phase of globalisation, fragmentegration.
Decoupling is not deglobalisation
Today’s trading system exhibits elements of both fragmentation and integration. External supply shocks come in many different shapes and sizes. From the Trump-Xi tariff wars of the late 2010’s to the Suez Canal blockage, and from the global pandemic to today’s energy crisis, supply shocks are the new normal. The challenge is to create robust and resilient supply chains able to withstand various shocks. Added to this are geopolitical concerns about undesired dependencies, such as the import of raw materials or high-tech products from China or hydrocarbons and metals from Russia. National security considerations are increasingly informing approaches to trade and industrial policy and it is resonating across the G7 among politicians, policymakers and the public alike. But rather than pursue a degree of autarky, the policy priority is avoid being reliant on production centres on the other side of the globe and to bring production closer to home or to trusted allies. Near-shoring and friend-shoring deepen foreign trade, but they do not necessarily lead to a withdrawal from globalisation. After all, the sensible route to deal with supply-side shocks is diversification and spreading risk, rather than to centralize production in one place. And regional partners in Latin America, South-East Asia and Central Europe stand ready to pick the fruits.
One area where the desire for self-reliance is perhaps most pronounced is in semiconductors. Here, the United States and the EU have both announced ambitious, multi-billion euro plans to address supply risks and reduce their dependence on China. It remains to be seen how this will develop in practice, and whether it will lead to US- and EU-only semiconductor supply chains or non-Chinese ones. The latter would rely to a significant extent on countries like South Korea, Japan and Taiwan. It is clear that decoupling from China is not the same as deglobalisation, and neither, despite concerns from Western policymakers, do investors appear ready to pull out.
The war in Ukraine will further contribute to fragmentegration. Russia will be brought increasingly into China’s economic orbit – as it switches to the Chinese-led alternative to the SWIFT international payment system and it reorients its energy exports increasingly from West to East. At the same time, Europe is decoupling from Russian energy imports.
Chinese and Russian policymakers are also actively discussing the end of dollar dominance. But it is not so long ago that Europeans did the same in light of US president Donald Trump’s threat of placing extraterritorial sanctions on European companies trading with Iran following its nuclear deal with the EU. The desire to strengthen the international role of the euro is still there.
Trade becomes normative
Another feature of fragmentegration is its normative dimension. Friend-shoring is perhaps its most obvious expression. The desire to trade only with ‘friends’ means that trade policy is less focused on exploring economic efficiencies and more on political preferences. But how do governments determine their friends, and how important are shared values? US president Joe Biden has drawn a distinction between democracies and autocracies but this raises problems in the context of friend-shoring. Can only democracies be ‘friends’? And, with regards to a possible change in the White House in 2024, to what extent can friend-shoring be made election-proof?
There is an eroding consensus that openness is good, and it has been replaced by a normative approach to trade. There is an increased focus on how goods and services are produced and delivered. As trade negotiations focus more on services and reducing non-tariff barriers, norms on how these services are delivered and the social conditions that underpin them become more prominent. Today, trade agreements are connected to climate objectives, human rights considerations, gender equality objectives and other political benchmarks. It is contributing to a fragmentation in global trade relations between those that accept these conditionalities, and those that do not.
As reports about human rights conditions in Xinjiang or the Democratic Republic of Congo circulate, the limits of openness become apparent. While preventing human rights violations and child labour is necessary, the question for a fragmentegrating world is how far the pendulum will swing? How like-minded must one be to be a trading partner? And norms-based trade may also increasingly function as an excuse to implement trade restrictive measures.
US trade policy remains mired in Trump-era economic nationalism. In Europe, though not protectionist as such, policymakers seek to build European “strategic autonomy”, although they hasten to add the prefix “open” to their proposals. But one man’s legitimate interest to be strategically autonomous is another man’s protectionist trade wall. And so the EU is accused of ‘technonationalism’ in its approach to US Big Tech, or of “enivironmental protectionism” by introducing a unilateral carbon levy, CBAM. Some European leaders are more outspoken and simply propose “Buy European” schemes.
As a form of economic nationalism at an EU-level gradually takes shape the hope is that its standard-setting power – also known as the “Brussels Effect” - will capture other countries in the EU’s regulatory orbit, thereby molding globalisation to the EU’s values rather than undoing it. But the same holds true for China and the United States. Competing standards, based on normative considerations, are emerging and shaping globalization along the way.
Though cross-border digital trade is booming, it is increasingly subject to rules and regulations. In digital services, three models are taking shape: a Chinese state-controlled model, a US market-based model and a European privacy-based one. In other sectors, such as Artificial Intelligence and Robotics, the choice may be only between a Chinese and an American standard. In the absence of a fully functional World Trade Organisation that is able to act as a coordinating body, the result is a fragmented system, where trade integration moves forward but it coalesces around two or three main regulatory centres.
Geopolitics of trade agreements
A third feature of fragmentegration is the geopolitically-inspired competition among plurilateral agreements. Forget about multilateral WTO negotiations, the future is for large plurilateral trade agreements that pull regional economies closer together.
Nowhere is this clearer than in Asia. Two mega-deals have been reached in recent years in the Asia-Pacific removing trade barriers, deepening trade ties and boosting regional growth. But the two deals – the Regional Comprehensive Economic Partnership (RCEP) and the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) – have different memberships and different ambitions. RCEP includes China, CPTPP does not. RCEP includes all Association of Southeast Asian Nations’ (ASEAN) countries, CPTTP does not. CPTPP was initially envisaged as part of America’s ‘pivot to Asia’ to balance against China’s rise. The US withdrew from the agreement and now China seeks membership of the deal, following the British and Taiwanese example to join. Though American trade policy has been remarkably unimpressive over the past four years, its singular initiative -the Indo-Pacific Economic Framework – now adds a US component to the Asian trade tug-of-war. For years, the EU has also been pursuing bilateral Free Trade Agreement’s of its own in the region, with ambitions for an EU-ASEAN deal.
In a fragmentegrating world, major economic and geopolitical powers like the US and China will seek to lock in preferential trade commitments or strike sector-specific deals with key regions. How the countries caught in the middle respond will determine to a great extent the course of globalisation. In the transatlantic trade space it remains to be seen whether the recently-established EU-US Trade and Technology council (TTC) will evolve into a forum for more material steps towards regulatory cooperation and trade liberalization that goes beyond coordinating sanctions policies towards Russia.
Elsewhere, in Africa, trade integration is moving ahead despite the economically-nationalist headwinds blowing across Europe and the US. The recent African continental free trade agreement has reduced trade barriers among Africa’s economies and is a prime example of the continued attraction of trade liberalization.
There is no going back to the period before globalisation, but globalisation is undeniably changing. Fragmentegration amounts to the reordering of globalisation in response to prevailing geopolitical pressures. Global trade ties are fragmenting and integrating at the same time, as trade is becoming increasingly influenced by geopolitical and national security concerns. A complex interplay of centrifugal and integrationist forces will shape trade relations, but fragmentegration is not the same as disintegration. A new chapter of globalization has been opened.