Is globalization fading? An economist who can talk

Chad Bown addresses this question and other trade-related topics in an interview with Janet Bush of the McKinsey Global Institute (January 18, 2023, “Thinking Forward on the Complex and Controversial State of Global Trade with Chad P. Bown”).

If globalization means trade agreements…

If deglobalization means less non-discriminatory trade policies, most of the world’s major economies are members of the World Trade Organization. One of the basic rules and pillars of the WTO is MFN rule. You’re supposed to apply a non-discriminatory policy, which is basically the same tariffs vis-a-vis everyone. Well, that is changing now.

We saw that really start to change in 2018, 2019, in the context of the US-China trade war, as those two countries moved from imposing tariffs toward each other that were of the non-discriminatory types that they applied toward trading partners in the rest of the countries. Globalism. The United States towards China was about 3 percent. China towards the United States was about 8 percent. Well, at present, those countries are applying tariffs in the range of 20, 21 percent towards each other. For everyone else, they’re still in the 3 to 8 percent range, so they’re still relatively low. But they largely apply discriminatory trade policies, tariffs, towards each other.

With the conflict, the Russian invasion of Ukraine, we saw not only financial sanctions, but also a number of countries, such as the United States, the European Union, the United Kingdom, Canada, and the G7, applying much higher tariffs against Russia. Discrimination, essentially breaking one of the central tenets of the WTO system – now, with good reason, obviously. But if that’s what we mean by deglobalisation, in the sense of not applying non-discriminatory policies towards each other, and trying to shape economic activity for non-economic reasons, for example, I think some of that is happening. At the end of it all, we may still have as much trade as we did before, just as the movement of goods and services across borders, but the patterns of that may look fundamentally different than they did before all of this. New things have started to come up over the past four or five years.

Trade-offs between economies of scale and wider distribution of global suppliers

Companies, whose job is to cut costs and provide goods and services to consumers at the lowest possible price. And if governments lower trade barriers and make it seem as if trade relations with trading partners are safe, and reduce uncertainty, then it makes sense for companies to make significant investments and build supply chains to try to reduce these costs. What we’ve seen happen is that, at the end of the day, you have certain types of commodities where you already have geographically concentrated supply sources. …

Another one we’ve seen is the semiconductor story, and cutting edge semiconductors in particular. For the United States, globally, the most important [sources] Of the cutting-edge semiconductors, the fastest and most impressive are mainly Taiwan and South Korea. Companies like TSMC and Samsung produce the vast majority of high-end semiconductors. For the United States, these are not countries or entities of interest. These are places of friends and allies.

However, that doesn’t make much sense in a new world where we not only have geopolitical shocks and concerns, but you have pandemics and shocks from climate change. Whether these are incredible storms or floods or droughts, it doesn’t really make sense to have incredibly geographically concentrated sources of supply, even though these can be incredibly economically efficient and may be the result of very good economic policies, which companies have driven to achieving economies of scale and creating really great supply chains. … Additional geographic diversification may ultimately be beneficial.

Now, it may end up being more expensive. There are economies of scale to getting all this production locally there in Taiwan or in South Korea. And provided nothing ever goes wrong, that would be great. But the concern is that we now live in a world where we are more likely to be hit with things that can go wrong, and we have to plan accordingly. And we have to convince companies to do more for their supply chains, and some of that will likely be achieved through policy.

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