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[Andrew Sheng] Is Asia prepared for deglobalization?

By Korea Herald

Published : Feb. 27, 2024 - 16:51

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In 2021, the US Director of National Intelligence Report 2040 saw five future scenarios by 2040: shared global challenges, fragmentation, disequilibrium, contestation and adaptation. These five possible outcomes from different structural forces and emerging dynamics comprise (i) a renaissance of democracies (ii) a world adrift (iii) competitive coexistence, (iv) separate silos and (v) tragedy and mobilization. In the post-pandemic condition, which saw a Vaccine Divide and Digital Divide along West-Rest lines, there seems to be fragmentation into blocs reinforced by nationalism and polarization, deepening inequalities, failed international cooperation on mutual issues such as climate warming, and the rise of nonstate actors like terrorists, drug lords and rich foundations.

With global supply chains de-coupling and de-risking, the fragmentation scenario of de-globalization looks more and more likely. Is Asia prepared for such a de-globalization scenario?

The reality is that the rich West is turning inward and building up fences to protect itself along trade, finance, digital, migration and military lines. The recent European Carbon Border Adjustment Mechanism, to be implemented by 2026, indicates that new barriers are being erected, even though the idea of putting a fair price on the carbon emitted by producers exporting to Europe is laudable.

According to Oxford Economics, the sixfold Increase in US tariffs on Imports of Chinese Goods since 2018 have reduced both US jobs and output. Chinese imports to US were cut but US imports from third party countries such as Mexico and Vietnam have increased, with such exports carrying substantial Chinese inputs. Nevertheless, onshoring of essential production vital to national security, such as semiconductors and defense equipment, will not be reversed.

The irony is that the West is dismantling the global free trade order that it created and propounded, even as the Rest is pushing for more trade and opening. The Rest has bought into regional trade blocs, such as the Regional Comprehensive Economic Partnership, the Comprehensive and Progressive Agreement for Trans-Pacific Partnership or regional free-trade zones, such as the ASEAN-China free trade negotiations. The US is not a member of these regional groupings, and neither the Democrats nor the Republicans have appetite for major trade reforms.

Why are we in such systemic gridlock? Robert Lighthizer, trade negotiator during the Trump Administration, laid it out as, “I believe trade policy should help working-class Americans find and maintain good-paying jobs. But for decades, it has instead centered on price optimization, efficiency, and corporate profits. The result has been the loss of millions of jobs, the destruction of thousands of communities, and the accumulation of trillions of dollars of trade deficits. This policy has made the country weaker and poorer.”

The blame for the working-class impoverishment has been laid on China, but China and the Rest of the non-Western world cannot influence US domestic tax and labor policies on how to narrow the gap between its rich and poor. The real barrier to change is the political gridlock whereby domestic politics and vested interests are unable or unwilling to break the bureaucratic silos and layers of government that protect their own turf.

Inevitably over time, many leaders have adopted a presidential style governance, wherein the top leader (president or prime minister) has gathered more executive power into a core center of power overseeing not just policy-formulation, but also execution and funding. Indeed, some of the stronger leaders have eroded checks and balances by the legislative and judiciary branches of government, displaying autocratic tendencies rather than the democratic tradition. It is not surprising that with the election of Prabowo as the next president in Indonesia, many of the leaders of the largest and most powerful nations are old men aged 70 or over, who all display right-wing, centralized forms of leadership.

At the same time, the nature of trade has changed profoundly. Trade thought leader Richard Baldwin has argued that the future of global trade will be in digital services, not physical goods, which peaked around 2015. Even if supply chain reconfiguration is distributing production out of China, intra-Rest trade is growing faster than trade between the West and the Rest. Furthermore, goods and services trade would have to meet environmental, social and governance standards which would include inclusive trade between small and medium enterprises. In other words, the large multinationals will not dominate the trade as key hubs but there will be more business-to-business and consumer-to-consumer trade, as individuals and small businesses trade and clear payments with each other through different digital platforms.

Despite geopolitical differences that border on existential de-coupling, all sides agree that preserving ESG-compliant trade for SMEs would help create domestic jobs. The big fight will be how to create the standards, processes and trustworthy trade, clearing and payment systems that would enable consumers, companies, financial institutions and nations to be the winners in the changing trade landscape. Much of the trade will still be denominated in dollars, euros or yen, but there will be more alternative media such as digital tokens, stablecoins and new forms of cybercurrency.

Despite talk of de-dollarization and de-globalization, the shift out of dollars and global trade is stickier than thought earlier. But the more sanctions imposed, the greater the incentive by BRICS countries to use their currencies and crypto-assets to enable trade that is not transparent to Western surveillance.

In sum, the Rest still buys into the idea of using open trade to uplift their economies and create jobs, with greater awareness that the rich West may become more protectionist and isolationist in subtle forms. Instead of de-globalizing, there is re-globalizing, meaning that trade will emerge profoundly different, more complex and more diffused than before. The world has become more entangled, interconnected and interdependent than ever. No amount of chest-beating isolationism can change that trend.

By Andrew Sheng

Andrew Sheng is Distinguished Fellow of Asia Global Institute, University of Hong Kong, and Chairman of the George Town Institute of Open and Advanced Studies, Wawasan Open University, Penang. -- Ed.

(Asia News Network)