De-Globalization & Its Discontents

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In 2002, Joseph Stiglitz, winner of the Nobel Prize in Economics and former chief economist for the World Bank, wrote a book entitled Globalization And Its Discontents. In it, he was sharply critical of the International Monetary Fund and its policies with regard to developing countries. In particular, he condemned the process of globalization, which he considered primarily a form of economic colonialism. He wrote that neoliberal economic theory is little more than a blend of ideology and bad science. Today, as Russia practices blitzkrieg on Ukraine, some believe we are seeing the beginning of de-globalization.

It was once popular to say the world was shrinking. Thanks to supertankers and colossal container ships, goods could be manufactured wherever people were willing to work for lower wages and transported to wherever they were needed most. Oil and methane (the primary component of unnatural gas) could be transported for use a half a world away, as could raw materials such as copper, aluminum, cobalt, nickel, and lithium. Once the world is bound together by commerce, then peace will guide the planets and love will steer the stars was the conventional wisdom.

De-Globalization Begins

As Russian tanks rumble toward Kiev, suddenly the illusion of globalization has been shattered and the notion of de-globalization has appeared. Europe woke up from its decades long dream of cheap Russian methane to find it has made itself a hostage to the ravings of a madman. “The longer-term implications of this war are that we will see a faster de-globalization and a more fundamental move away from the — above all German — doctrine that economic interests often stand above foreign or security policy interests,” Carsten Brzeski, an economist at the Dutch bank ING, tells the New York Times.

Jack Ewing, who covers the automotive industry for the Times, writes that western Ukraine is where the wiring harnesses for many German automobiles are manufactured. No wiring harnesses, no cars. Volkswagen has idled many of its factories, including its principal manufacturing facility in Wolfsburg. Mercedes and BMW are experiencing similar production cuts.

Industry analysts are predicting the war will force all companies to reckon with their exposure to an increasingly hostile political climate and add to the pressure that corporations now face to manufacture closer to home and reduce the risk that turmoil in a faraway place will throw their operations into chaos. De-globalization is the new mantra, thanks to Putin.

What About China?

The wild card in all this is China. Both European and American companies have made enormous investments in production facilities in China. Volkswagen sells more than half the cars it makes in that country, which also accounts for about a third of all sales for BMW and Mercedes. Tesla, of course, has placed a huge bet on manufacturing in China and has just announced an expansion of its factory in Shanghai that, once completed, will enable it to manufacture more than a million vehicles a year in China.

We all love China, of course. It keeps the shelves at Walmart stocked with cheap products we cannot possibly live without. We ignore its brutal crackdown on Hong Kong, its enslavement of the Uighur people, and pretend that it will never dare annex Taiwan the way Russia has annexed Ukraine. Yet what is there to stop it from doing so? The lesson from Ukraine is that the developed world will not lift a finger to fight aggression directly, but will rely on economic sanctions instead.

What happens to Tesla, for instance, when Xi Jinping bares his claws to grab Taiwan? What becomes of Elon Musk’s vaunted defense of free speech when China decides to nationalize Tesla China? Musk’s high brow ethics were not offended in the slightest by the mistreatment of the Uighars. Will he feel differently when his own interests are threatened?

One consequence of Russian aggression against Ukraine is that countries that seemed safe a few years ago may not be anymore. “Usually, Ukraine would have been considered a relatively stable investment location,” a healthy democracy open to foreign investment, Peter Wells, director of the Center for Automotive Industry Research at Cardiff University in Wales tells the New York Times.

Supply Chains & War Zones

It’s not just wiring harnesses that are interfering with the production of automobiles. The Ukraine war and the economic sanctions imposed as a result of it could soon crimp supplies of raw materials from Russia that carmakers need, warns the German Association of the Automotive Industry. Such raw materials include the palladium used in catalytic converters and the nickel that is essential for making electric car batteries. Ukraine is a major source of neon, a gas used for high performance lasers required for production of scarce semiconductors.

The unanswered question is what effect the Ukraine war will have on international commerce. 86% of the gross domestic product of the European Union is derived from trading goods with countries outside its borders. (For the US, that number is only 23%.) Already the supply of parts from German automakers destined for their factories in China has been disrupted because many of them make use of the Trans Siberian Railway that traverses Russia.

Guntram Wolff, the director of Bruegel, a research organization in Brussels, questions how far China will want to go in supporting Putin in a prolonged confrontation with the United States and Europe. China is “very intertwined economically with the West,” he tells the New York Times. “I don’t know how far China can really go in giving indiscriminate support to Russia.” In fact, that is a question no one knows the answer to. Just prior to the Russian invasion of Ukraine, the two leaders made a big public display of affection.

Renewables Enable Local Production

One of the key factors that has made globalization possible is the cost of energy. Electricity in some countries is cheaper than in the US and Europe largely due to government subsidies, which helps lower the cost of production. But oil and gas prices can fluctuate wildly, as evidenced in the past few months when the price of methane gas in Europe had shot up 50% or more. Renewables have a significant advantage. Not only are they cheaper than thermal generation today, their prices never vary because their source — the sun — provides energy for free. All we have to do is harvest it and distribute it.

Nations that once sought to “offshore” everything are now realizing there are costs associated with doing so. The biggest cost is that if those foreign resources become unavailable, business can come to a halt virtually overnight. Somehow the economic thinkers who set the great globalization game in motion seemed blissfully unaware of that fact until just a few months ago when Russia began massing tanks and troops at the border with Ukraine.

Conventional wisdom says that people who fail to plan have a plan to fail. For decades, the assumption has been that conventional warfare involving the developed nations of the world is now unthinkable. But now the unthinkable has happened and the consequences of relying on unstable nations in far flung corners of the world have become evident.

De-globalizaton — creating domestic energy and manufacturing independence — is now ascendant. In the words of a sadder but wiser character from the world of literature, “There’s no place like home, Toto. There’s no place like home.”