Hope Restored

Is globalization a boon or a curse? It depends on where you sit in the supply chain. As we witness the global trade order go up in flames, we are confounded by what is to come. Tarun and I recently went to a panel discussion at MIT titled “Rethinking Globalization: America First, The World Last?” to understand what is happening and the prognosis. A timely topic indeed.

Led by three stalwarts, the discourse was thought provoking.

Richard Locke, the Dean of the Sloan School of Management was the moderator. Suzanne Berger, an Institute Professor, provided the historical perspective rooted in political science. Simon Johnson, 2024 Nobel Prize winner in Economics and professor at Sloan anchored the discussion on America’s role.

Globalization ushered an unprecedented windfall for consumers. Prices dropped as companies sourced the least expensive labor and materials from across one or many borders. Made in China, Japan, Bangladesh, Mexico, Vietnam, India became ubiquitous on labels from clothes to cookware to cars. Access to goods was democratized with increased affordability and upward mobility was fueled by dinfectious consumerism.

For workers in the manufacturing sector, globalization brought one of two realities: a cosmic blessing or economic catastrophe. If you ran factories in low labor cost economies, you scaled massively, hired millions to cater to consumers in nearby and faraway geographies. If you worked in high labor cost economies, you could not participate in global labor arbitrage and jobs, livelihoods and paychecks simply evaporated.

"The World is Flat," proclaimed Thomas Friedman with his 2005 book that heralded low friction geoeconomics. Twenty years later many have traveled to the other side of the flatness and fallen off a cliff.

Dr. Berger provided a fascinating historical perspective on globalization. The first globalization started in 1870 and collapsed overnight on August 4, 1914 when the United Kingdom declared war on Germany. Decades in the making, the flow of capital and goods aided by advances in transportation, mass migration and growth of international trade could not sustain itself when Europe got embroiled in World War I. It took 60-odd years to shift from the national focus that followed this collapse to the next wave of globalization which coincided with seismic shifts in the auto industry.

When Japan rocked the world of cars, a second era of technological advances spurred the flow of capital, goods and people. The dotcom years and stratospheric rise of big tech in the last twenty years helped sustain this round of globalization. Now the Trump administration and populism have taken a sledgehammer to it. Dr. Berger’s outlook is that once globalization reverses, it takes a decades for it to revive. Look at Detroit: it is yet to fully recover from the whiplash of the 1970s.

Simon Johnson struck a more optimistic note. He pointed out that geopolitics of globalization has centered on America first since the conclusion of World War II. The Bretton Woods Agreement of 1944, spearheaded by the US, saw 44 countries sign up for a new economic order in which a fixed exchange rate was pegged to the US dollar. Since then, the US has directed the ebbs and flows of global economics. America dictating world order with “America First” is not a recent construct at all. He left us feeling tentatively more hopeful that we aren’t in the midst of a completely unknown catastrophe. Maybe this is a new manifestation of an old situation?

In the post discussion Q/A, China came up, as expected. There was agreement that China’s inclusion in the WTO was a pivotal moment in globalization. But when members turned a blind eye to Chinese trade malpractices things started to go awry. Dr. Berger did not mince words on the reason: it was detrimental to big US corporations to jeopardize access to the Chinese market.

There you go.

We are where we are, not just because it is faster, better, cheaper to manufacture elsewhere, it is also because we deferred to a global powerhouse and made choices not conducive to our own labor force. We offshored, outsourced and bent to political whims to advance our investment interests over what is good for the individual. Dr. Berger pointed out that manufacturing jobs fell far more in the US than in Germany because nationally-focused policies prevented the bottom from falling out in Germany. This is where US politicians failed to exhibit appropriate foresight and leadership.

At the end of the talk, I had a chance to ask Dr. Johnson whether the reversal of globalization would have happened if Trump was reelected in 2020 and not in 2024. His perspective is insightful. Had he been elected in 2020, the reversal would have been more gentle because COVID would have prevented the dramatic rejection of world trade order we are witnessing right now. The Biden administration was working on providing relief to the manufacturing sector that suffered the most negative impacts of globalization but these changes were slow and would have taken years to impact individuals. To make matters worse, COVID and its after-effects exacerbated the economic conditions across the board. I walked away with a better understanding of why Trump’s win is equated with a mandate for change in the here and now and not someday down the line. America first his supporters demand, except - and ironically! - it’s been about America first for 80-odd years.

The prevailing populism and a loud cry to focus on national interests puts at peril cross-border geoeconomics and geopolitics. In 2024, the majority was ok with this shift. and now with the magnificent seven tech stocks dwarfing the 493 other S&P tickers, we are unlikely to have relief from this administration’s trade wars any time soon. How then do we deal with the whiplash and how does life become better for those who were so negatively impacted by globalization? The answers are clearly not simple.

Still, Berger, Johnson and Locke provided valuable insights and restored hope that a multi-disciplinary approach to understanding the challenges related to globalization is the only way forward. May the next era of growth be less skewed so nobody is first or last.