The following wave of globalization: Asia within the cockpit
Four years ago, the Trump administration came into office promising to bring back industrial jobs from Asia and revitalize America’s manufacturing foundation. He pledged to slash the country’s trade deficit with China by forcing it to buy more oil, food and industrial goods from the U.S.
But things haven’t worked out as planned. November 2020 was the busiest month in the history of the port of Los Angeles, with up to 20 container vessels being unloaded every day — mostly from China, which sent a record $52 billion of goods across the Pacific Ocean that month.
Trump trumpeted his anti-globalization credentials from the beginning of his administration to the end, promising to protect American industries from Chinese competition and defeat the “ideology of globalism.” But ultimately — and not surprisingly — it got the better of him.
Today’s world is beset by contradictory megatrends of the type just illustrated. High-stakes tensions between the U.S. and China over trade, technology, and Taiwan, but also massive investments in new connective infrastructure from freight railways to internet cables. Protectionism and industrial policy to nearshore manufacturing and boost self-sufficiency, but also intense competition to export digital technologies and lure investment into capital markets. Nationalism and xenophobia restricting migration, but also a war for talent to capture students, nurses, and tech workers.
The scenario that best pulls these threads together is one that George Orwell might recognize: A tripolar geopolitical landscape of continental-scale zones competing in a tug of war over resources, supply chains, and markets. Instead of Orwell’s Oceania, Eastasia and Eurasia, today we have North America, Europe and Asia.
None are monolithic, to be sure. These are not politically uniform regions, especially Asia, which is a multipolar region in this multipolar world. Furthermore, their alignments overlap and intertwine: Europe is the cultural heart of the West but commercially leans East; North America is geographically remote from Eurasia, but has convened the “Quad” of Asian powers including India, Japan, and Australia in Indo-Pacific to prevent Chinese hegemony. Then there is China’s Belt and Road Initiative, which has knit a web of dependence across much of the developing world.
While many commentators claim we have entered a new era of geopolitics and left an old era of globalized commerce, it is wrong to oppose these two scenarios. Globalization and geopolitics are not antithetical forces, as if rivalry reverses interdependence. Without the imperial ambitions of the Romans, Mongols, Portuguese, Spanish, Dutch, British, and Americans, we would have no globalization. Geopolitics and globalization are nothing if not two sides of the same coin.
“Geopolitics and globalization are nothing if not two sides of the same coin”
It follows that this new period of great power competition hardly conforms to the buzzword “de-globalization,” a term trotted out after every crisis that picks a single downward trend and elevates it into the fate of globalization itself. On the contrary, never has the world’s power been so geographically distributed, with internal regional integration accelerating — think United States-Mexico-Canada Agreement in North America and Regional Comprehensive Economic Partnership in Asia — while a new generation of intercontinental linkages takes shape. But there is a key difference: While the previous era of globalization was equated with a withering away of state sovereignty, the new era of globalization will be state-driven.
Europeans and Asians, Latin Americans and Africans, practice a shrewd “multialignment” in all directions. This reality betrays today’s conventional wisdom that we are heading into a “G-2 world” in which countries must choose between American or Chinese diktats. Globalization will be a vigorous marketplace, in which powers must prove their relevance and quality as providers of capital, technology, energy, military assistance, and other services.
From monopoly to marketplace
Few remember one of the numerous flare-ups between China and Japan over islands, known as Senkaku to Japan and Diaoyu to China, that took place more than a decade ago. But after a Chinese trawler collided with a Japanese Coast Guard vessel in September 2010, China expressed its displeasure by suspending rare-earth mineral exports to one of its largest trading partners. Japan responded by rapidly diverting new foreign direct investment away from China toward Southeast Asia. As both Japan and the U.S. began restructuring mineral supply chains outside China, its share of the market fell from 95% in 2010 to 70% in 2018.
This rare-earth mineral episode is a reminder that monopolies only exist because we let them. The same is true of oil supplies, reserve currencies or fifth-generation telecom equipment — dominance is never assured, and can erode either slowly or quickly. But make no mistake: The law of entropy eventually prevails over all efforts to concentrate power.
The analogy to our global system is clear. Many countries are using industrial policy to promote innovation and grab a larger share of manufacturing, clean energy, cloud data storage and other markets, making globalization more competitive than ever as a new layer of infrastructure crisscrosses the planet, trade in digital services rises, and capital markets open.
This remains true even as North America and Europe attempt to onshore and nearshore manufacturing supply chains in electronics, pharmaceuticals, and other sectors. Apple began making MacBooks in Texas at a plant owned by Flex in 2012 — to which it imports displays and memory chips from South Korea and Japan. Apple’s new “in-house” ARM-designed M1 chip is made by Taiwan Semiconductor Manufacturing Co. More “American” cars are made in Mexico with parts from Asia than ever before. Europe’s imports of Chinese equipment and Vietnamese apparel and coffee have been rising, as well. Debating the volume of globalization is foolish until we update our metrics to capture how deeply embedded globalization has become in almost all aspects of life.
And let’s not forget the flip side of industrial policy: promoting exports. The European Union now has free trade agreements with South Korea, Japan, Singapore, and Vietnam — the latter two paving the way for an eventual free trade agreement with the Association of Southeast Asian Nations as a whole. The U.K., too, managed to complete a free-trade agreement with Japan in 2020. Most EU members have realized that they need to emulate the German model of boosting exports to create jobs and generate growth.
The EU’s rush to conclude a Comprehensive Agreement on Investment with China underscores its ambition to expand its edge over the U.S. in access to Asian markets. Not only is the EU more trade-dependent than the U.S., but its outstanding pension liabilities are far larger and more immediate. Europe, therefore, can’t afford to be ideological about its China ties, though German Chancellor Angela Merkel, in any case, believes in the mantra of “Wandel durch Handel” (transformation through trade).
Europe’s overall trade in goods with Asia — including China, ASEAN, Japan, and India — stands at $1.6 trillion annually, far larger than even Europe’s trade with North America. This is one of the strongest indicators of the irreversible shift in the global economic center of gravity eastward, from trans-Atlantic to Eurasia. It also provides clear guidance to the next U.S. administration: Engage with Asia, or lose more American companies to Asia.
Getting Asia right
Regional trade integration has been intensifying for more than a decade. In North America, Donald Trump signed the U.S.-Mexico-Canada agreement, resulting in U.S.-Canada and U.S.-Mexico trade holding strong at more than $600 billion respectively in 2019, about that same as U.S.-China trade. But as the US and China seek to decouple from each other, trade amongst North American states will surely rise further at China’s expense.
At the same time, China-ASEAN trade now exceeds China’s trade with both the EU and U.S., and is helping Southeast Asian economies recover from the effects of the pandemic in a manner reminiscent of the post-1998 Asian crisis “early harvest” policies that won it favor in the region. In this respect, the “Sinodependency” that many commentators have denounced as a sign of excessive reliance on exports to China doesn’t appear to be a bad thing.
There is a healthy two-way street between the regional and global levels. Indeed, regional integration reinforces globalization in the same ways that regional diplomatic bodies are essential for “global governance.” (How strong would global norms of human rights or data privacy be if the EU didn’t promote and enforce them?)
In Asia, the long-standing division of labor between East Asia’s main five exporters — China, Taiwan, Hong Kong, Japan, and South Korea — accounts for over $4 trillion in annual exports, almost the same as the EU and North America combined. Not one country alone, but these dynamic production centers together, is why Asia became the factory floor of the world.
With the signing of the RCEP trade agreement, covering more than one-third of the world population and gross domestic product, Asia is well on its way to having multiple globally connected factory floors — especially the lower-wage production centers of Southeast Asia. Incremental trade and investment liberalization is what has brought countries such as Vietnam into global manufacturing supply chains, with multinationals from Japan, America, and Europe pouring capital in. No wonder many in Asia joke that the winner of the U.S.-China trade war is Vietnam.
India’s manufacturing and tech sectors have also been gaining as supply chains diversify out of China. Apple and Samsung Electronics have led electronics companies investing in plants in India, and Reliance Jio easily raised $20 billion in fresh capital, including a 10% stake taken by Facebook. Tata Consultancy Services, which recently overtook Accenture to become the world’s most valuable IT services company, is ramping up hiring on the back of demand to build a robust digital backbone for increasingly digital, remote companies.
It’s worth noting that India did not formally join RCEP, but the country’s “Look East” policy aspires to trim the country’s trade deficit with Japan, South Korea, and ASEAN. Japan’s Nippon Steel and India’s ArcelorMittal are eyeing closer industrial cooperation, given the current steel slump, but also to more formidably take on Chinese competitors.
The Biden administration may wish for the U.S. to rejoin the Trans-Pacific Partnership trade agreement (renamed the Comprehensive and Progressive Agreement for Trans-Pacific Partnership) — though significant hurdles stand in the way, such as his party’s protectionist base and the treaty’s weaknesses in protecting intellectual property and preventing data localization. That said, corporate America has long priced in this political intransigence and will continue offshoring to Asia to compete against Chinese, European, and national champions. U.S. investment in ASEAN is already larger than in China, Japan, South Korea, and India combined — and the gap will widen even if America never rejoins CPTPP. Some call this a “China plus one” strategy, meaning adding another country besides China to one’s Asian manufacturing footprint. A more straightforward motto multinational companies should adopt is: “Make where you sell.”
From billions to trillions
But remember that while trade is generally measured in billions, finance is trillions. And between West and East, flows are prevailing over frictions. If trade is increasingly a battleground between the world’s top economies, the realm of finance shows no evidence of relations breaking down.
This is especially true in China. Even before the US-China Phase One agreement from a year ago, Western banks were taking enhanced control of their onshore Chinese brokerage and insurance operations. Alongside the EU-China investment agreement, China continues to offer incentives to lure foreign capital onshore into its financial sector. Next, China’s capital account liberalization to allow more freedom in financial in- and outflows will draw trillions of dollars into the country’s bond and equity markets. Ten-year renminbi bonds offer 250 basis points higher yield than U.S. Treasuries.
Though foreign investors hold only 2.4% of China’s $14 trillion bond market and just over 3% of the country’s $12 trillion stock market, a number of factors have boosted inflows from abroad into the Chinese bond market over the past twelve months. These include China’s supportive fiscal and monetary policies, the attractive valuations of the Chinese bonds, their inclusions into major global bond indices and the strong demand among global investors who seek for diversification, according to Ming Leap of HSBC Global Asset Management.
The last phase of globalization was characterized by Asian savings flowing “uphill” to lower-yield but safer assets in the West. Now, capital will flow in the direction it should: toward dynamic and high-growth Asia.
But after the significant portfolio capital outflows witnessed during the pandemic, emerging Asia will need to undertake a major new privatization wave in order to match the China opportunity. From Pakistan and India through Indonesia, Vietnam, and the Philippines, state-owned conglomerates in energy, transportation, aviation, construction, agriculture, hospitality and other sectors should float shares and engage more in joint ventures with foreign partners both to raise capital and raise their game.
This too will correct for one of the region’s weaknesses in the eyes of foreign investors: Too few of the region’s economies are composed of publicly listed assets. The region’s stock markets have outperformed over 2020, but would have far higher market capitalization if more equity was available for both domestic and foreign investors.
Beyond Belt and Road
In late September 2019, I stood in front of a large and boisterous audience in the European Commission’s Charlemagne Building on Rue de la Loi in Brussels. Moments earlier, then-Commission president Jean-Claude Juncker and then-Japanese Prime Minister Shinzo Abe had signed, to enthusiastic cheers, the EU-Japan Partnership on Sustainable Connectivity and Quality Infrastructure. In their brief remarks, neither leader mentioned China — nor America. Yet this diverse and committed gathering manifestly embodied the future of globalization.
Looking across the full auditorium, I saw a wide assortment of diplomats representing the 28 EU members (as the British were still involved), as well as invited guests from Japan and South Korea, Arab states and Iran, Balkan countries and former Soviet republics, even India and Pakistan. It was a contiguous and coherent Eurasian conversation — and, absent China and America, there was a constructive vibe of solidarity in the air as well.
This EU-Japan initiative, as well as the U.S.-Australia-Japan “Blue Dot” network, among others, all intend to accelerate modernization around the Indian Ocean without reliance on China. At the same time, China has reoriented its Belt and Road portfolio in several ways, prioritizing neighboring regions such as Central and Southeast Asia far more than others, and shifting lending into its own and foreign state-owned enterprises rather than more overt bilateral sovereign lending. This infrastructure arms race embodies the competitive connectivity at the heart of the next wave of globalization.
That is why China’s Belt and Road Initiative — and the rivals to it — will together continue to drive the next wave of globalization. “Belt and Road” has become a shorthand for the much more sprawling, multidirectional, and competitive area of global infrastructure finance. China’s heavy footprint and high debt approach has evoked strategic responses from America, Europe, Japan, India, Australia, and other nations whose coalitions offer more sustainable (in both senses of the term) packages.
Importantly, this means that even though China is building many roads, all roads will not lead to China. As several studies have pointed out, cross-border infrastructure is promoting trade in all directions, not just bilaterally with China. “Asia to Asia” — A2A — has become a mantra for numerous financial institutions seeking to finance energy and trade along these new silk routes.
China has also promoted a “Digital Silk Road,” but technology is an even more obvious incarnation of globalization’s multidirectional future. The U.S.-led pushback against Huawei is clearing the way for European firms Nokia and Ericsson and Japan’s NTT to aggressively push for 5G contracts worldwide.
Meanwhile, the blacklisting of Chinese chipmaker Semiconductor Manufacturing International Co. aims to ensure America and Japan’s edge in semiconductors. The India-Japan-Australia “Resilient Supply Chain Initiative,” an industrial counterpart to the military Quad, aims to pull production of medical and telecom equipment, as well as other sensitive technologies, out of China and into its own markets.
The same process is underway in manufacturing. Europe’s industrial leaders, such as Siemens and Robert Bosch, have been among the chief drivers of China’s astounding progress in factory automation, with technologies such as machine vision and Internet of Things sensor networks enabling Europe-based engineers to oversee and remotely correct operations in Suzhou and Shenzhen. In the next chapter, European champions will both bring these upgrades home to maintain output amid COVID-19 lockdowns, while also spreading them to newer markets such as India and Southeast Asia.
In digital technology, cloud computing and social media personify the heated battles already underway between East and West. Whereas Amazon Web Services and Microsoft Azure currently have a large lead in cloud services, Alibaba Cloud has aggressive expansion plans in the region. Given the company’s enormous presence in the region’s e-commerce infrastructure, its strategic partnership with customer relationship management leader Salesforce will enhance its integrated value proposition as millions of companies are forced to accelerate digitization.
Alibaba Group Holding is a role model for the vanguard Chinese tech companies that have exploded onto the global scene in gaming and social networking, such as Tencent Holdings and ByteDance. In light of the regulatory pushback they have faced in the U.S. and Europe, both have boosted their corporate presence in Singapore, from which they have rebranded as global companies operating according to international standards of data privacy.
I have observed, for some years, that the further from mainland China a company operates, the more it acts like a capitalist entity instead of an arm of the state. Rather than attract the stigma of Huawei Technologies, these companies want to maintain their upward global trajectory — despite growing suspicion of China. Trip.com Group, owner of C-Trip, and SenseTime are two more major Chinese innovators pursuing transparent partnerships globally rather than opting to lose their hard-earned advantages to the turbulence of great power competition. Despite China’s overt political nationalism, we should view it as a dynamic and multifaceted player in the new Great Game — one capable of changing course and adapting to new realities.
Quality, not quantity
The 21st century is the first time in human history that every continent or region represents independent poles of power in their own right. This complex global system is far greater than any single power: Within its webs of relationships, no power can impose itself on the world. This new geopolitics portends a new phase of globalization that is more competitive than the last, no matter what the volume of trade or investment at any given time.
What all powers should agree on is that we must seek a progressive globalization rather than more or less for the sake of it — a globalization that raises incomes, reduces inequality, and includes everyone. At the same time, we should celebrate declining oil demand and the accelerated uptake of alternative and renewable energy. Until aviation emissions can be substantially reduced, less intercontinental business travel would be a good thing — even if it means less of one vertical of globalization.
My five Zoom calls per day with five different countries are hardly evidence of de-globalization. Wherever you are, you should worry less about globalization’s quantity than its quality, and less about whether it is waxing or waning than whether you are catching its next wave.