The Taiwan crisis is the stuff of economic nightmares
This was extremely important for both political and economic reasons. Over the past 40 years, globalization has had a major effect on the world economy. It has helped contain inflation and increase prosperity in the West, while lifting millions out of poverty in the East.
By far the most important driver of globalization was China’s rapid development and full participation in the world trading system. Many people blithely assumed that this development was both inevitable and irreversible. They were deeply wrong.
The world had been heavily globalized before the outbreak of World War I in 1914. Globalization was pushed back by a severe surge of protectionism in the 1930s and then by World War II. Over the next few years, as a share of GDP, world trade recovered to pre-World War I levels, before soaring in the 1960s. But it didn’t really take off until the 1990s, reflecting the rise of China.
As it happens, long before the recent deterioration in relations between China and the West, it seemed that globalization had reached its peak. It now seems likely that there will be a reversal. It’s not that we’re ready to move into a world of national self-sufficiency (autarky) – although many eco-fanatics would like that. Rather, the world is likely to split into rival blocs, one centered on the United States and the other on China.
Companies are already reviewing their supply chains to reduce their dependence on Chinese inputs, and governments are examining their strategic interactions with Beijing. Meanwhile, China is reconsidering its ties with the West and seeking to strengthen itself in the face of a deteriorating relationship or, even worse, the imposition of the kind of sanctions the West imposed on Russia after its invasion. from Ukraine.
Such a splitting of the world into two blocks will tend to put upward pressure on costs and reduce real incomes, thus undoing some of the gains of globalization that have occurred over the past 40 years.
Be careful, the results are not necessarily terrible. As Chinese labor costs have risen relentlessly, many good judges have seen Africa as the new upcoming center for cheap manufacturing. This could still happen, as long as China’s close involvement in this country does not prevent it.
In any case, it is not clear that the West would need another source of cheap manufactured imports if China’s were to dry up. Much will depend on developments such as 3D printing, which would reduce the cost of manufacturing in the advanced economies of the world and thus could see a considerable amount of ‘reshoring’ of economic activity.
Similarly, advances in robotics and artificial intelligence could lead to substantial reductions in home manufacturing costs, while potentially leading to cost reductions in the service sector, which derived little direct benefit from procurement. cheap Chinese.
One way or another, the future will not simply be a continuation of the recent past. It seems like the story still has some life after all.
Roger Bootle is President of Capital Economics