Confronting the Long Crisis of Globalization

Tomorrow, the 40th anniversary session of the World Economic Forum begins in Davos, with the theme of “Rethink, Redesign, Rebuild“.  To coincide with it, David and I have teamed up with CIC director Bruce Jones to co-author a new report entitled Confronting the Long Crisis of Globalization: Risk, Resilience and International Order.

The report – commissioned and sponsored by the UK Foreign Office (though not a statement of government policy) – focuses on the mismatch between new transnational threats and flawed international institutions, and argues that if efforts to develop, reform and renew international institutions continue to fail, then there is a real and under-appreciated risk of a systemic failure that sees the current period of globalization start to unwind.

There’s precedent for this, we note in the report. The ‘first globalization’ came to an abrupt halt in 1914 with two world wars and an intervening depression, having failed because:

States’ shared assumptions pushed them towards fragmentation rather than cooperation, mutual incomprehension instead of shared awareness. An epoch that that seemed to be characterized by interdependence and common interests ended in shared disaster.

Even just in the last decade, the three defining events –  9/11, the 2008 food and fuel price spike, and the credit crunch – were all about a collective international failure to manage shared risks effectively.  So, we argue, states’ foreign policy doctrines need to move away from the national interest – which is in any case defined badly, if at all – and towards shared risk management.

We also set out a range of concrete recommendations in pursuit of the same ends, including:

Creating new analytical mechanisms for creating shared awareness about shared risks. E.g. the IPCC provides crucial analysis of the problem of climate change – but there’s no equivalent on the solution.

Improving the ‘bandwidth’ of the G20. E.g. by strengthening Sherpa mechanisms, and building links between the G20 and formal institutions, thus improving the range of policy options going to heads.

Setting up a ‘red team’ in the international system that has the job of exploring risks and challenging policymakers on whether enough is being done to manage them – similar to the Defense Research Advanced Projects Agency in the US, which has the job of “preventing surprise”.

Changing how governments organize and deliver foreign policy. We argue that all governments will need to spend more money on managing global risks, and do more to integrate the different elements of foreign policy (aid, diplomacy, military).

The paper’s conclusion:

The challenge facing globalization can be compared to ‘shooting the rapids’. Charting a course through whitewater, there are many possible paths, but few attractive destinations. It is the river, not the paddler, that dictates the speed with which the boat moves. There is no opportunity to pause and rethink strategy, or to reverse direction: it is the capacity to reorganize while undergoing change that ultimately determines the journey’s outcome. Above all, the challenge is a collective one: the direction of the boat depends on the combined efforts of all those on board.

The task of building a resilient globalization is similar. Much could go wrong. The pace of the transition will be dictated by the risks themselves, yet governments will only succeed if they are prepared to take the initiative. Even in the best case, outcomes will be ‘messy’ and far from perfect. Results will be determined by governments’ ability to act in concert, as well as with networks of non-state actors.

The aim should not be to balace power between competing states, but to aggregate the efforts of those willing to aim for the preferred destination, while marginalizing or excluding those who are not (including those who actively seek to capsize the boat).

There go the supply chains

The FT has a big splash this morning on how concerns about future climate policy and the global downturn are both driving a move away from global supply chains and towards more regional ones.

Companies are increasingly looking closer to home for their components, meaning that for their US or European operations they are more likely to use Mexico and eastern Europe than China, as previously. “A future where energy is more expensive and less plentifully available will lead to more regional supply chains,” Gerard Kleisterlee, chief executive of Philips, one of Europe’s biggest companies, told the Financial Times.

Mr Kleisterlee said businesses needed to find ways to build an economy on a sustainable basis ahead of the Copenhagen summit on climate change later this year, with “a review of global logistics and transport” one of the important steps. He said that until now cheap transport costs had meant “Mexico wasn’t competitive with China for supplying the US”. But he now forecasts that companies such as Philips will use countries such as Ukraine for supplying Europe rather than Asia.

Nor are climate regulation and the downturn the only drivers towards a more regional world – there’s also the prospect of a return to very expensive oil in the near future. If you’re wondering what that means for global supply chains, look no further than what started to happen during 2007:

…competitiveness in steel had already shifted away from Chinese exports and back to North American producers. Soaring transport costs – first on importing iron ore to China from Australia or from halfway around the world in Brazil, and then on exporting finished steel overseas to North America – added as much as an additional $90 onto the cost of what was then $600 per ton of hot rolled steel. That more than offset the Chinese wage advantage on what, thanks to technological change, had become as little as an hour and a half of labor time for that ton of steel.

For the first time in over a decade, made-in-America steel had become cheaper than Chinese imports in the US marketplace. Long before the recession blew up the US steel market, Chinese exports to the US fell 20% between July 2007 and March 2008 – and US steel production was up 10% over the same period. All of a sudden American steel producers were winning back their home market. Who would have thought that tripil digit oil prices could breathe new life into America’s rust belt?

That’s Jeff Rubin, in his very highly recommended new book on what peak oil will mean for globalisation (regular readers will remember his CIBC World Markets research paper on Could Soaring Transport Costs Reverse Globalisation a little over a year ago) – go buy it.

If I were the Chinese government, I’d be worried. First you see your export sector getting hammered by triple digit oil prices.  Then even when they crash to less than half of their pre-spike levels (though n.b. still way above their pre-2000 average of 10 or 20 dollars a barrel, even in the biggest recession since 1929), you find that the downturn’s still driving a shift towards regionalisation in trade.

Time to start investing heavily in a more endogenous growth model, perhaps…