Steering Globalization: The Humans' Hand Behind the Trend

Markets Hold Power, But Norms Define Their Limits

The World Trade Organization in Geneva, Switzerland

What is Globalization? How is it Measured?

Globalization occurs when businesses and organizations expand their international influence through increased trade and commerce. It intensifies as the percentage of global trade in World GDP rises.

Some people are under the impression that more globalization is inevitable. You can see it here when, in 2016, Obama spoke at a news conference in global trade with Mexican president Enrique Pena Nieto and Justin Trudeau when he said “Integration of national economies into a global economy, that's here, that's done."

Obama at a NAFTA Conference

Can Globalization be “Steered?”

While it is true that integration of economies is “already done”, it's important to recognize that increased globalization isn't inevitable. As in, its not inevitable that World Trade as a percentage of global economic output will continue to increase. As of 2022, that number hit 63%, it’s not inevitable that World Trade must continue to go up. I would argue that globalization (higher exports and imports as a percentage of World GDP) is driven more by international standards and geopolitics (basically the human will of political elites) more than technological progress & a cosmopolitan philosophy.

So why do I believe that globalization is more a function of politics and decisions than technology? Just look at history and data - there have been moments in history where technology was advancing, yet the globe was deglobalizing (reducing global trade as a percentage of global GDP). For example, the World was more globalized at in 1911 than it was in 1970. In 1911, people used telegraphs, mail, and zeppelins, while in 1970, we had cars, telephones, radios, airplanes, trains, cargo ships, TVs, and early satellite communication. If globalization were purely a function of technology, the 1900s-1910s wouldn't have had higher rates of globalization than the post-WWII to 1970s era. The graph below illustrates the fluctuations in globalization rates.

Trade as proportion of World GDP; 1870-1970 from Our World in Data, 1970-2022 data comes from the World bank

As you can see from 1870 to 1913, the world was becoming more globalized, mainly due to the British enforcing a regime of free trade via gunboats. However, from 1913 to 1945, the world deglobalized, with trade shrinking as a proportion of global activity. This shift was driven by WWI, protectionism, the Great Depression, the collapse of an international system at the 1933 London Economic Conference, the rise of fascism and communism, and WWII.

It wasn’t until the post-WW2 system, where America created a new hegemonic order, is when the world became more open again. Instead of free trade being enforced through gunboats, institutions like the General Agreement on Tariffs & Trade (GATT), and its successor World Trade Organization(WTO), World Bank, and International Monetary Fund would act as agents of American influence. However, it wasn’t until 1974, where global trade levels surpassed those of 1913.

Technology plays a crucial role in globalization, but policies, international norms, and trade agreements determine how it is utilized.

How “Globalized” is the World?

Globalization is not evenly distributed. As of 2022, 80% of global trade is concentrated in three regions: North America (US, Mexico, Canada), East Asia (China, Japan, South Korea, Southeast Asia& Oceania), and Liberal Europe (EU, UK, Switzerland, and Norway).

Only three regions are responsible for most trade - North America, East Asia & Pacific & Europe

Russia, the Central Asian “Stans”, the Caucuses, South Asia, Africa, Latin America, and the Middle East are only responsible for 20% of global trade.

Data Comes from World Bank

Why is that? The vast majority of trade is intermediate goods.

Russia, Central Asia, Africa, Latin America, and the Middle East mainly sell commodities which is at the tail end of a supply chain. In addition, Latin America and South Asia are very protectionist economies that are not connected to international supply chains as much as the rest of Asia, North America, or East Asia, hence why their total trade volumes are low.

We see this in semiconductors, where only East Asia, North America, and Europe are involved in the “meat of the supply chain” (research, design, assembly, packaging, distribution, testing), while the exporting the raw materials silicon/germanium/gallium/arsenic/copper is at the tail end of the supply chain reserved for nations like Russia & Kazakhstan (silicon, germanium, gallium, arsenic) and Democratic Republic of Congo, Congo-Brazzaville, Chile, Peru, and Zambia (copper).

The “meat of the supply chain” activities in North America, Europe, and East Asia drive technology transfer, sustained foreign investment, innovation, sophisticated jobs, managerial expertise, and economies of scale. Simply selling commodities does not provide access to these benefits. Meanwhile, countries like India and Brazil focus on creating national champions rather than competing in free trade (which isn't necessarily a bad thing).

Additionally, Europe, East Asia, and North America are the dominant trading regions and primarily trade within themselves. If we combine Europe and Central Asia, then most of their trade is interregional:
1. Russia and Stan states for commodities
2. Poor EU countries for cheap labor(Romania, Hungary)
3. Research & High-Tech Design done by Britain, France, Germany

East Asia and the Pacific surpassed North America in trade volume in 2008, even without a free trade agreement at the time. North America conducts just under 50% of its trade internally. Africa and the Middle East mainly export commodities to other regions, and Latin American, Caribbean, African, and South Asian intergovernmental organizations like Mercosur, CARICOM, African Union and SAARC, those intergovernmental organizations are mainly “talk shops”. Over the last three years, 2021, 2022 and 2023, 93% of the African Union decisions have not been implemented. The assembly refuses to transfer meaningful powers to the African Union’s organs and the Pan-African Parliament doesn’t have any binding legislative powers. The AU can’t compel member states to comply to AU rules, and most member states refuse to comply with the decision of African Union’s Courts. Look below to see levels of interregional trade:

Data was aggregated from the World Integrated Trade Solution and NAFTA data was obtained from the MIT Media Lab’s Observatory of Economic Complexity

In essence, globalization is dominated by three regional supply chains in North America, East Asia, and Europe, while other regions either sell raw materials or remain excluded from these global networks. Despite discussions on “nearshoring” and “friendshoring,” Europe is already nearshored (except removing ties to Russia), and North American interregional trade was 48% as of 2022, indicating the U.S. has room to increase its regional trade with Canada & Mexico.

People and firms prefer trading within their groups. While multinational companies like Boeing source parts globally, most firms operate regionally or locally. The average traded good travels less than 3,000 miles (4,830 km), equivalent to the distance from Boston to Los Angeles or Seoul to Singapore, meaning most trade occurs within regional blocs.

Is there a Race to the Bottom?

Despite talks of a “race to the bottom” - the idea that global investment chases areas with the cheapest labor on earth, weakest environmental regulations, and etc (which would be in Africa) is very small.

Since the "New Era of Globalization" began in the 1990s following the collapse of the Soviet Union, Singapore, a small island city-state with a population of fewer than 6 million and among the highest wages globally, consistently attracts more net foreign direct investment (inflows - outflows) than Sub-Saharan Africa every year except for 2008 and 2009. This indicates that the “smart money” executing more business subsidiary creation, mergers and acquisitions, joint ventures, land acquisition, investment in machinery and equipment, construction and renovation of buildings, and establishment of new factories occur in this small Southeast Asian island than in all of Sub-Saharan Africa, despite the latter having a population of 1.1 billion.

Singapore’s net FDI vastly exceeds Sub Saharan Africa

Why? That’s because businesses don’t just care about cheap labor. They care about roads, ports, electricity, an educated workforce, and the ability to quickly repatriate capital (which some African countries won’t do because foreign currency is scarce and do not want capital flight putting downwards pressure on their currency).

This is why the three biggest places for global net FDI has been the United States, China, and Singapore respectively. Also Chinese wages are no longer “cheap”, over 30 years from 1992 to 2022, average Chinese wages have increased 30 fold, surpassing Turkey, Malaysia, and Brazil. In fact, it doesn’t make sense to look at China on the aggregate, as wages on provincial-level administrative divisions, Beijing, Shanghai, Jiangsu, and Fuijan are comparable, if not exceeding the lower & middle end of European Union countries like Romania, Poland, Hungary, Greece, Croatia, Czechia, Estonia and Portugal.

How is the System Changing Today?

Post-WWII, American supremacy has supplanted British hegemony. Institutions like the IMF, World Bank, and WTO serve as cost-effective tools for American influence, replacing gunboat diplomacy. While British gunboats enforced trade, American gunboats were deployed in geopolitical conflicts.

However, now it seems that these institutions are changing. Key parts of the World Trade Organization has affectively been rendered useless.

For example, America has said “China has unfair trade practices and unfair trade distorting state interventions”, meanwhile America won’t look at its own trade-distorting subsidies in agriculture. If America genuinely believed in international norms and that China was engaging in unfair trade practices, it would rely on the World Trade Organization for adjudication.

Instead, of fully adhering to the WTO, America has actually hampered the WTO’s dispute settlement system, akin to the Supreme Court of Global Trade. During the Trump era, his administration made the Appellate Body virtually defunct by blocking the appointment of new judges, and Biden has shown little interest in restoring it, keeping those crucial seats vacant too. What this means is that several multibillion-dollar trade disputes sit in legal purgatory, making cross-national commerce more expensive and cumbersome. Without explicitly stating so, Biden has tacitly endorsed almost all of Trump’s protectionism while adding more of his own - export controls and more tariffs on China. Furthermore, Biden’s Inflation Reduction act - offers generous domestic industrial subsidies for clean energy (tax, investment, & project credits) which arguably violate WTO rules against government support for domestic industry. To signal how similar Biden is to Trump on trade, Biden’s US Trade Representative, Katherine Tai, left the 2024 Abu Dhabi WTO meeting early, without finishing talks on these problems.

Biden’s Trade Rep, Katherine Tai said “I don’t have enough time and money to waste resources in Geneva on a process that we don’t actually believe in”. She also said that the WTO is on “thin ice”

Katherine Tai, Biden’s U.S. Trade Rep - She isn’t an economist, but a lawyer, which influences how she views trade.

The EU recently raided the the office of the Chinese firm, Nuctech, in Poland & Netherlands for supposedly receiving unfair subsidies. The fact is when China ascended to the WTO, at the end of the day, China proved to be too good of a global competitor. China is not just a cheap labor sweatshop, but has its own brands that can compete and outcompete Western ones. China's success isn't solely due to subsidies; many developing countries employ protectionist measures but lack China's business prowess. Elon Musk used to not worry about Chinese brands, but now Musk begged for tariffs and American protection against China.

A Lamborghini-Style Electric Car - China’s BYD goes upmarket to outmaneuver Tesla

Despite these new trade distortions, trade could still potentially increase. However, this may only be the beginning. As more Western administrations embrace industrial policy, there's a strong possibility that world trade as a percentage of global output could decline.

Despite the rhetoric extolling the virtues of free trade found in publications like Bloomberg, The Financial Times, and The Economist, the reality is that there are times, industries, and contexts where protectionism and free trade both have their merits. Free trade offers consumers access to inexpensive goods but may threaten national brands in non globally-competitive sectors. Protectionism, while resulting in higher prices for consumers, shields domestic industries from death. It's a trade-off.

For agriculture and fishing, America & the EU have always had subsidies, but for e-commerce, America is staunchly free trade. America hates it that South Africa, Indonesia and India want to collect tariffs on e-commerce. Thailand dislikes Indian grain stockpiling, which drives up food prices. Europe is annoyed that Indonesia installed an export ban on nickel exports. Since Indonesia has the world's largest nickel reserves and produced 40% of the world’s metal, this forced companies to process nickel in Indonesia - aka resource down streaming. When Japanese cars, were crushing the American car industry, Reagan slapped tariffs on Japanese cars in the 1980s and forced Japan to revalue its currency. Now that America is facing foreign competition again in many important high-tech industries, America is returning to industrial protectionism, reminiscent of some post-American Revolution policies under Alexander Hamilton.

In essence, countries pursue trade policies in their own interests. While free trade may be advantageous when a country holds a dominant position, such as the UK in the late 1800s or America in the early 1990s, protectionism becomes necessary when preserving manufacturing capabilities is paramount, as seen in post-1930s UK and post-2017 US.

The likelihood of significant trade liberalization rounds in the future is slim, especially if industrial policies persist, potentially undermining the WTO's rule of law.

Besides writing about Africa, I also write about trade. You can see my other articles on trade here:
Regionalization & The Globalization Penalty
Who Dominates Global Trade?
Regionalization in Global Trade
How Many Nations Embraced Globalized Trade?

Also vote the name change for my Substack! There are 10 options!