Is Asia prepared for deglobalization?
In 2021, the United States 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 decoupling and de-risking, the fragmentation scenario of deglobalization looks more and more likely. Is Asia prepared for such a deglobalization 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 has reduced both US jobs and output. Chinese imports to the 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, on-shoring 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.
Inevitably over time, many leaders have adopted a presidential style of 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 Subianto as the next president of Indonesia, many of the leaders of the largest and most powerful nations are 70+ old men 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, there is growing intra-Rest trade than trade between the West and the Rest. Furthermore, goods and services trade would have to meet environmental, social, and governance (ESG) standards which would include inclusive trade between small and medium enterprises (SMEs). In other words, the large multinationals will not dominate the trade as key hubs (B2C) but there will be more B2B (business to business) and C2C (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 RMB, but there will be more alternative media such as digital tokens, stablecoins, and new forms of cybercurrency.
Despite talk of de-dollarization and deglobalization, the shift out of dollars and global trade is more sticky 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 deglobalizing, 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. Asia News Network
Andrew Sheng is former chair of the Hong Kong Securities and Futures Commission.
The Philippine Daily Inquirer is a member of the Asia News Network, an alliance of 22 media titles in the region.
