The pandemic proved, once and for all, that the world can’t be flat. But global trade can recover—if we rewrite the rules
A pair of sentences, published on April 17, show us how strange globalization has become: "Two semi-trailer trucks, cleverly marked as food-service vehicles, met us at the warehouse. When fully loaded, the trucks would take two distinct routes back to Massachusetts to minimize the chances that their contents would be detained or redirected."
This passage didn't appear in one of Richard Stark's crime novels or in the script of an East Coast reshoot of Breaking Bad. It was published in the New England Journal of Medicine, describing a hospital's desperate efforts to secure a shipment of personal protective equipment.
This is not simply a story about the United States. It reflects a much bigger change from a world of predictable trade and exchange to one of government blockades and daring heists—a change triggered by the coronavirus pandemic. The United States intercepted medical masks being shipped from Thailand to Germany and redirected them for its own purposes, in a move German officials described as piracy. Germany itself blocked the export of masks and other medical equipment at a time when its fellow European Union member Italy was begging for help. India restricted the export of key pharmaceuticals and drug precursors. Newspaper reports describe a chaotic global marketplace where governments and health care officials consort with dubious middlemen for medical supplies, acting on rumors and personal connections, fighting to outbid and undercut each other. And this behavior has spread to other sectors like auto manufacturing; experts worry that the next battles may be over food.
The crisis that globalization faces has roots that go far deeper than the current pandemic.
But the crisis that globalization faces has roots that go far deeper than the current pandemic. Many political and business leaders still hope that they can reverse the arrow of time, returning to a golden age in which free market globalization worked magic. The problem is that that age never existed, except in their imaginations. In a hyperglobalized economy, it made sense for individual firms to focus heavily on increasing efficiency and achieving market dominance—actions that led to greater returns and rising stock prices. But these trends also generated systemic vulnerabilities, imperiling fragile supply chains in times of crisis and tempting governments to target dominant companies for their own advantage, creating new risks for citizens and states.
To move forward from our current crisis of globalization, we need to build something better in its stead: a system that mitigates the risks of economic and political dependency and supports a new vision of global society. Rather than withdrawing from globalization, we would remake it so that it focused on different problems than economic efficiency and global markets. Now that the pandemic has dramatically underscored what's wrong with the system, we can think more clearly about what an alternative would look like.
Globalization—the vast increase in flows of money, goods, information, and people over the last 30 years—was supposed to make the world less vulnerable to disruptive economic shocks. How did we get it so badly wrong?
In part, we were blinded by the mythology that pundits like Thomas Friedman wrapped around the real workings of globalization. These arguments depicted globalization as the triumph of market efficiency over retrograde national politics. Businesses and consumers could search the globe for better and cheaper suppliers. If one supplier proved unreliable, greedy, or recalcitrant, they could be easily substituted or replaced. The geopolitics of the Cold War would fade away as states too were subjected to the ruthless discipline of a world market that had escaped their control and become their master. Finally, while global interdependence might create new problems—pandemics, global warming, pollution, overfishing—these difficulties could be solved by markets with a little help from liberal international institutions.
These mutually reinforcing claims underpinned an apparent golden age for multinational business. Manufacturing was transformed from something that happened mostly inside countries to something that happened across them, supported by a fantastical gossamer of global supply chains and just-in-time delivery. Global economic networks rapidly conducted information and money around the world. Governments bought into the myth, fearing that capital would flee their economies if they broke with the iron disciplines of neoliberalism.
Governments also provided the foundation for global institutions that facilitated economic cooperation and prioritized openness as their organizing ambition. Everyone seemed to agree that more trade was a good thing. The General Agreement on Tariffs and Trade was transformed into the World Trade Organization (WTO), which tore down barriers to global trade and settled disputes among states. Other institutions such as the World Bank and the International Monetary Fund pushed the famous Washington Consensus, a set of principles for economic reform that emphasized liberalization and deplored government interventions that might impede market processes. Governments implemented reforms that reflected these new principles—willingly or because they had to.
But behind the soothing stories about the benefits of the global marketplace, globalization was quietly becoming more fragile and riddled with vulnerabilities. In some sectors, suppliers had become concentrated in geographically dense clusters, while in others the demand for efficiency drove companies to rely on just one supplier that could provide a necessary component. Apparent flexibility disguised the development of new rigidities.
The last decade provides painful evidence of the fragility of a globalized economic system that promoted efficiency and the power of markets. The 2008 financial crisis was the product of an interconnected banking system that rewarded short-term thinking, created risky new financial products, and was badly regulated at the national and global levels. Because so many firms were too big to fail, globalization itself had to fail. A few key suppliers became bottlenecks, and systemic risks increased dramatically—including the possibility of pandemics—but global institutions had not kept pace. Instead, states have exploited whatever vulnerabilities they can as they try to protect their own populations and pursue their broader geostrategic interests.
Powerful states had always wriggled out of the shackles of market discipline when their security was at stake. Most notably, the 9/11 terrorist attacks and growing U.S.-China competition led U.S. policymakers to realize that they could use their control over businesses that had made themselves irreplaceable in the global economy to hurt adversaries and coerce unwilling firms, organizations, and even states by threatening to exclude them from the global marketplace.
The main narrative of the globalizers—that of a so-called flat earth—concealed the problems of systemic fragility and state exploitation.
The United States, for example, weaponized institutions that play a central role in international banking, such as the Society for Worldwide Interbank Financial Telecommunication, better known as SWIFT, using them to cut Iran out of the global financial system. It similarly used its influence over Qualcomm and other makers of sophisticated semiconductors to hamstring the Chinese telecommunications manufacturer Huawei, which it viewed as a strategic threat. Japan has used its control over specialized chemicals manufacturers to threaten South Korea's electronics industry.
The main narrative of the globalizers—that of a so-called flat earth—concealed the problems of systemic fragility and state exploitation. Now, both have emerged and threaten to reinforce each other. When powerful states suddenly realize how frail global supply chains are, they are tempted to use their coercive power to redirect supplies to themselves at the expense of others. This tempts other states to retaliate, weakening the entire system. It's hard to get things done when key parts of the global economy suddenly seize up. It's even harder when they become key battlegrounds in a tacit economic war.
The coronavirus pandemic has not only shown up the weaknesses of the global economy and the narratives that justify it but has also demonstrated that unregulated globalization can be dangerous. One of the reasons why the economy is hurting so severely is because it is so densely interconnected. When the coronavirus closes down a components factory in Italy's Lombardy region, the entire Western European car industry may be affected. When cars aren't being manufactured, car dealerships can't do business, and financial institutions can't make profits from car loans. An entire economy can go bad very quickly when everything depends on everything else.
But the problem is even worse than that. The coronavirus dramatically increases the demand for some goods at the same time as it damages supply. This explains the extraordinary shortages of medical supplies that plagued states in the wake of the pandemic. Suddenly, everyone wanted masks, test kits, and ventilators. However, some of these goods relied on complex supply chains that have been thrown into disarray: Test kits, for example, require chemical reagents that are suddenly hard to find. The markets for masks and personal protective equipment are highly concentrated, with key components provided by only a few suppliers located in a handful of countries. Three-quarters of the hygiene and medical nonwoven fabrics needed for masks are made by a single German manufacturer. Finally, the global logistics system has been paralyzed—it is not only difficult to find sources for key components and products, but it is hard to transport them when you do find them.
This explains why states used dirty tricks to fight each other for medical supplies. For example, the Trump administration identified the key role that businesses like 3M play in manufacturing medical masks. While masks are made using global supply chains—it is cheaper to make them in China than in the United States—companies faced growing legal pressure from a few powerful states. When the coronavirus pandemic started, the Chinese government effectively blocked all exports of masks, forcing 3M's Chinese factories to produce for China alone. This spurred vigorous complaints from Trump administration officials such as trade advisor Peter Navarro, who claimed in February that Beijing effectively nationalized 3M, a U.S. company operating in China, "to prevent them from sending us any stuff." In April, after the Trump administration had finally woken up to the threat of the coronavirus, it took a leaf from China's book, asking 3M to stop exporting respirators from the United States to Canada and Latin American companies, prompting 3M to warn that other countries might retaliate. The United States also escalated the crisis by using the Defense Production Act to require 3M to redirect masks that were made by its subsidiaries in China and elsewhere back home.
The immediate consequence was that a politics of "sicken thy neighbor" flourished around the world. The immediate problem was bad enough—limited supply of the goods necessary to fight the coronavirus and seemingly limitless demand for those very same goods. Yet as states continue to play hardball with each other, they risk making the problem worse by deepening each other's insecurity. Hoarding toilet paper won't be funny if it becomes the new organizing principle for the world economy. Key supplies will be misallocated across countries as hot spots come and go. And those least able to fight for their corner—poor and middle-
income countries with little clout over manufacturers—will suffer most. Brazil's government labs can't carry out coronavirus tests because the crucial reagents have been routed to other countries. South Africa and Zambia are struggling too.
Even if the immediate threat of the coronavirus lessens in the coming months, the underlying political problem will not go away and might get much worse. States are currently playing defense, looking to protect their own citizens regardless of the consequences for others. But what if they start playing offense instead? Already, states fear that any company that developed an effective coronavirus vaccine would become a new choke point, allowing other governments to deny access to the vaccine for purposes of control and punishment. At the beginning of the crisis, the German newspaper Die Welt reported that the United States had offered to purchase CureVac, a German biotechnology company with an early lead on a vaccine, and supposedly requested exclusive rights to the product. While the details were disputed, Germany's foreign minister issued a stark rebuke to the Washington. Germany doesn't trust that the United States would share a vaccine even with its close allies. China has even greater reason to worry.
Pundits and politicians assumed that free markets and economic globalization could support a self-sustaining international order. Instead, it has undermined itself. The corporate world's quest for efficiency has made the global economy more fragile, and its desire to control markets has provided states with the means to turn that space into a battlefield.
The current model of globalization is unsustainable. It is creating unacceptable levels of risk both for citizens and states. The future of globalization will depend on the decisions of political leaders as well as businesses. The United States faces a particularly stark choice, as it decides on a new president amid a pandemic.
If Donald Trump succeeds in setting the agenda, America's future direction is clear. The fragility of the global system will give economic nationalists more reason to do what they want to do anyway, which is to shift from global free trade to harnessing the power of the nation-state. The globalized economy would shrink, as more production takes place inside national borders, reducing reliance on foreign components. The United States is the primary guarantor of the current global system. If it shifts to economic nationalism, other countries are likely to shift too, either because they want to or in self-defense. China's Xi Jinping would respond with his own form of economic nationalism. Europe and a few other midsize economies might try to maintain the ectoplasmic remnant of a multilateral system among themselves, but their efforts would be doomed without support from other great powers.
If Trump is defeated this November, the United States faces a much more complicated choice. The easy path is to treat nationalism as a symptom of Trump's four years in power, a temporary aberration that can quickly be forgotten as the world returns to the status quo. A Joe Biden administration might look to rebuild the existing system of multilateralism while tacitly redesigning it to hold China down or perhaps to lock China out. Once again, the United States would be willing to engage the WTO, to cooperate with allies, and to do whatever it took to support the global spread of free markets.
But going back to business as usual would worsen the problem, not solve it. The existing model of globalization, not Trump, is the root cause of the current breakdown. Even in the best-case scenarios, embracing the old approach to multilateralism would fail to solve the underlying problems. Businesses would continue to make the world more fragile as they pursued risky strategies to make their supply chains more efficient, and as the most successful of them consolidated market power, they would become easier targets for states that never ceased being interested in coercive power. The most plausible outcome is bigger future crises with worse political repercussions.
The existing model of globalization, not Trump, is the root cause of the current breakdown.
For that matter, a supposed return to normality is unlikely to look particularly normal. It is difficult to imagine, for example, how air travel might resume in anything like its previous form without far more extensive cooperation among countries to prevent new outbreaks of the coronavirus or successor viruses. Free markets are incapable of sustaining globalization without a much more extensive role for the state. Meanwhile, if China is locked out of the existing multilateral order, it will start building its own alternative order, making it far harder to coordinate to solve global problems.
The more difficult path is also the only sustainable one, creating a new model of globalization that can supplement and, over time, partly supplant the old. If the old globalization was based on the rule of markets, the new globalization will have to be based on the primacy of public safety and the well-being of people. It must recognize that maintaining a complex global economy will sometimes require active corrective measures to protect the societies embedded within it.
Rather than assuming that an open globalized system can solve its own problems, it would look to prevent them. Rather than just preserving openness, global institutions would have to address problems that ordinary people care about, such as health, equality, sustainability, and security.
Firms and governments will have to pay the necessary short-term costs to confront the problem of fragility and to reassess the risks within supply chains. This will require not just stockpiling but more focus on the location and distribution of manufacturing, pushing companies to build in redundancies both for their own safety and that of the global economy. As Barry Lynn and others have argued, it will also require a new model of antitrust. Regulators need to recognize how monopolies create single points of failure in times of crisis, while judges need to pay attention to the national security as well as economic consequences of their decisions. Concentrated economic power creates new choke points in the economy that make it less adaptable and more vulnerable.
A problem-oriented globalization might also moderate the security competition that is heating up between the United States and China. Continued economic nationalism will quickly intensify this competition, while rebuilding multilateralism to exclude China will lead to a new era of clashes, which the world can ill afford. The United States and China are currently more inclined to exploit the system's weaknesses than to mitigate them, even if that hurts them as well as everyone else in the long run.
The first step toward lowering tensions is for states to acknowledge that globalization is not producing a flat world but a complex system and to figure out how to insulate themselves from its risks.
The first step toward lowering tensions is for states to acknowledge that globalization is not producing a flat world but a complex system and to figure out how to insulate themselves from its risks. Mapping this world's networks and vulnerabilities will require new bureaucracies and mandatory reporting and transparency requirements for business. Just as businesses need to report possible adverse events to their shareholders, they would have to stress-test their supply chains, reporting and rectifying the weak points or risk actions from new regulators or lawsuits from investors or customers if their supply chains fail.
A more thoughtful globalization will also require a new approach to trade: With better information, states will sometimes have legitimate reason to limit their exposure to the world economy so as to minimize vulnerabilities. Instead of the crude reshoring and high national tariffs proposed by economic nationalists, we must map the intricacies of the system, identify key vulnerabilities, and mitigate them. Rather than decoupling, states would have to recouple. Sometimes that might lead to reshoring within national borders, but more often it would involve identifying bottlenecks and creating more robust global supply relationships, on the basis of active agreement among allies and tacit accommodations among adversaries not to exploit vulnerabilities.
Individual state action will be insufficient on its own. Some of those bureaucracies will have to be international. For example, resuming travel in a world where new viruses can instantly circle the globe will require extensive—and sometimes intrusive—information sharing. This new model of globalization would give institutions such as the World Health Organization extensive new powers to gather information and to investigate when states are being deceptive. International organizations could also administer shared rewards to scientists and companies that develop vaccines, on the condition that the vaccines and associated patents and rights be made universally available. Of course, the Trump administration wants to defund the world health apparatus—but U.S. allies in Europe and elsewhere are betting that this decision will be reversed if Trump loses in November.
Similar institutions could help solve other problems being created by globalization, most importantly including global warming. It's conceivable that state power could be used to solve some of globalization's pathologies, rather than worsen them. A Biden administration, for example, might turn its effective control over the dollar and U.S. clearing system to tackle collective problems such as climate change, imposing financial sanctions on climate cheats. The threat of unilateral action could spur the creation of new multilateral institutions by making laggards and free riders pay some of the costs of their inaction. The EU has long sought a partner in the global climate fight, and even China might welcome external pressure to justify a crackdown on provincial authorities building coal-based power plants. The United States has been willing to use its formidable economic power in the past, forcing other countries for example to enforce their laws against bribery. If it deploys its power to address obvious global needs, it may find itself pushing on an open door as domestic interests realign around solving global problems.
The coronavirus has exposed the deep weaknesses of globalization, making it clear that we need to build something new. In domestic politics, everything suddenly seems up for grabs, as social movements challenge the established political order to face up to problems that it has swept beneath the carpet for decades. The challenge is to build a better approach to solving global problems, too, before they tear everything apart.
Globalization's current dysfunction is a product of market forces and will not be solved either by economic nationalism or a naive return to the open market liberalism that created it. Instead, the current crisis opens up an opportunity to create a different approach to globalization, one that recognizes its tendency to generate problems that it cannot solve itself and also one that prioritizes people's safety and prosperity. Our lives depend on it.
Henry Farrell is the Stavros Niarchos Foundation Agora Institute professor at the Johns Hopkins School of Advanced International Studies. Twitter: @henryfarrell
Abraham Newman is a professor in the government department and the Walsh School of Foreign Service at Georgetown University.
Disclaimer: This article first appeared on foreignpolicy.com, and is published by special syndication arrangement.