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A glossary to interpret the terms of the debate about the process of re-globalization / regionalization[1]

2023 10 10

Daniele Langiu, daniele.langiu@gmail.com

Fabio Sdogati, sdogati@gsom.polimi.it

Introduction

Few still doubt that the process of moving beyond the China-U.S. cooperative model prevalent until 2017 is proceeding apace. Under this model, which we have illustrated and discussed for example here and here, China accumulated growing trade surpluses vis-à-vis the U.S., the balance of which was largely allocated to the purchase of securities issued by the U.S. government. In a nutshell, the model produced industrialization for China and public, and indirectly private, debt financing for the Us.

As with all major transition episodes, there is a gap between the reality of the material change, the ‘transition’, and the language we can use to represent, to model, to interpret the phenomena that give substance to the change. That said, we therefore feel it would be useful to have a ‘glossary’ available to help clarify the meaning we attribute to the terms used in the current transition debate. We have, of course, little interest in a normative approach; rather, we want to clarify the meaning we associate to the terms used in the debate in the hope that this will also be the way other researchers interpret them. Moreover, we do not want to produce a list of terms, rather, we want to clarify the context in which the terms we choose are being used in the debate.

  1. Globalization

By this term we primarily mean the process of international fragmentation of production processes originally located in a single country, and often in a single plant, and thus the emergence and spread of global production and supply chains. Globalization differs from internationalization in that it indicates the possibility for firms to locate fragments of production processes potentially anywhere on the globe, with few and, over time, diminishing restrictions imposed by national governments. Along with the gradual reduction and even dismantling of tariff and quantitative restrictions on international trade, a process that began in the 1950s, globalization of production induces globalization of trade and capital flows, the latter in the form of both foreign direct investment and financial investment.

 Elsewhere, we have used the term globalization to identify that period of about half a century between early 1970’s and middle 2010’s, a period characterized by the greatest amount and variety of freedom ever known by firms to sell, supply, and invest anywhere in the world. In this process of globalization of the exchange of goods, of capital, and of production processes, governments and supranational institutions were assigned, by the policy debate, the role to create the conditions for increasing the number of countries adhering to the same rules and, once those rules had been adopted, firms would do the rest by maximizing the efficiency of production in the new regulatory framework. Thus, in this context the firms’ decision to globalize stems from the search for ways to maximize profits in an environment where ‘politics’, i.e., national governments, tend to restrict comparatively little the set of possible choices. This is precisely the reason why we speak of globalization rather than internationalization.

2. Decoupling versus de-risking

By decoupling, a term which we have already been using for years, we mean exactly the set of specific forms taken by the transition process from the pre-2017 China-Us cooperative regime, which is the model that largely produced the globalization process, to the increasingly non-cooperative forms the post-2017 regime has taken and is taking. The concept is very inclusive, and we propose to use it with reference to both public and private actions.

The public actions intended to initiate the transition process were tariffs and quantitative restrictions, which the Trump government imposed on Us imports from China in 2018. The Biden Administration, with conciliatory tones and sometimes friendly rhetoric, has continued along the same path, launching an impressive number of trade, industrial, and financial policy initiatives aimed at decoupling.

Private decoupling actions are those taken by private enterprises that adapt, not necessarily passively, to the uncooperative cultural environment and industrial and trade policy directives of their government. If one wants to get at least some feeling of the direction in which the world economy will evolve in the coming decades, it would be a serious mistake to underestimate the impact that changes in industrial and trade policies have on business strategic choices.

The type of economic globalization we have witnessed over the last half a century or so favored a collaborative approach between countries so that firms could freely pursue their own production, sourcing, and sales choices of location. Since 2017, and particularly in the post-Covid period, we seem instead to be looking at a world in which trade and industrial policies are coordinated to politically guide how global production chains will be structured. Becoming aware of the newly found interest of governments in matters of global resource allocation, implies recognizing the fact that governments make sure that the location choices of production activities lead to relocations, that is to reconfigurations of global production and supply chains, consistent with their own political and geopolitical agenda.

Decoupling, then? Of course, only not just that. Jake Sullivan, U.S. presidential security adviser, has made it clear that the United States is not interested in a strategy of repatriating the generality of production processes in which Us-originating firms are globally involved. Certainly, for some processes and specific products this may happen, but the strategy is to build production and supply chains whose multiple operating centers are located in friendly countries in a process that already two years ago the Us Treasury secretary called friend-shoring.

Decoupling has thus been joined by a new word: de-risking. With this term, adopted by both the Biden Administration and the European Commission, we identify those trade policy measures whose purpose is to reduce exposure to risks arising from globalization, as well as to the emergence of effects that a government might deem undesirable, such as excessive dependence on a specific country in the supply of energy, raw materials, semi-finished goods. Increasingly, it seems that the word de-risking is being preferred to the word decoupling.

3. Relocation models: Friend-shoring / near-shoring / re-shoring

As we have already made clear, the concepts of friend-shoring and de-risking, and the political-economic implication of their use, describe realities that are different from that evoked by the concept of re-shoring: Indeed, it seems that the term re-shoring is being used to identify the act of bringing back productive activities that had been off-shored. On the other hand, friend-shoring and de-risking are versions of the principle that the government wants trade flows, direct investment and choice of suppliers to take place in such a way as to ‘reward’ firms located in ‘friendly’ or ‘potentially friendly’ countries. These distinctions allow us to understand that friend-shoring and de-risking will not tend to produce a reduction in globalization, but to politically guide firms’ choices on these grounds (trade, investment, supply).

The message is not ambiguous: it seems to us that re-shoring[2]  is a weak concept that expresses a statistically less frequent phenomenon even for the United States. At the same time, the term near-shoring seems to us a devaluation of the strategy of relocation of suppliers and destination of trade and investment: ‘near’ would be anyway a choice subordinated to the identification of the friendly country(ies) of primary interest. This is the reason why we prefer to use the concept of regionalization, which therefore does not take on a geographical connotation but, rather, that of a set of countries that by culture, politics, history, and interests, are identified as “preferred” trading partners.

4. It is not just semantics

All we have been saying here is not just a matter of semantics. The post-2017 economic scenario is, and will be, substantially different from that which characterized the previous four decades not because there will be deglobalization, but because the ‘new globalization’ will be micro-managed by national governments through industrial and trade policies. Such ‘new globalization’ will be characterized by increasing ‘fragmentation,’ a theme very well discussed in Chapter 4 of the World Economic Outlook published by the International Monetary Fund in April 2023 and reiterated in the July 2023 Update as a risk to world GDP growth.

A process of re-engineering production chains is neither simple nor quick to execute (Inconvenient Truths of Decoupling; EU struggles to ‘de-risk’ trade with China; How America is failing to break up with China) and in some cases does not lead to the effects desired by Governments (US-led effort to diversify Indo-Pacific supply chains away from China runs counter to trends).

It is interesting to note, however, that firms’ responses to Governments’ industrial and trade policies do not appear to be of an exclusive nature such that firms would tend to conduct production activities either in the Us or in China’s area of influence. Rather, it appears that firms are adopting a strategy through which operations in China are disconnected from those in ‘the West’, and vice versa.  As recently as September 25, the Financial Times reported some examples of such strategy:

  • “Apple and Intel have allocated future investments to other countries including India or south-east Asia while maintaining their China plants, in a hedging strategy known as “China plus one””;
  • “Anglo-Swedish drugmaker AstraZeneca is drawing up plans to spin out its China arm and list it in Hong Kong, partly to insulate it against regulatory moves against foreign companies.”;
  • “German machinery association VDMA has found that more than a third of its members are looking for alternative suppliers so they can service both the US and Chinese markets with “neutral” products without Chinese or US components”;
  • “Volkswagen, which relies on China for about half its profits, has announced €4bn worth of investment in the country in the past year. The move would give “more autonomy and decision-making powers in China than ever before”, said Beijing-based board member Ralf Brandstätter. The Chinese business was “gradually becoming a second headquarters” for the global group, he added recently.”.
  • “French-Italian chipmaker STMicroelectronics in 2021 separated its Chinese sales and marketing functions from the rest of its Asia-Pacific division, along with its payroll, staff management and reporting structures, according to two people familiar with the company.”;
  • “Consultancies such as McKinsey and Boston Consulting Group are among businesses separating their Chinese IT systems. This is a result of increasingly stringent anti-espionage and data protection laws that mean companies require regulatory approval to transfer large amounts of data out of China.”.

Since 2017 we have, therefore, been able to observe a transformation in the terminology used by governments to explain the evolution of their relationships with China, so that, in this scenario, different words could be associated to different industrial and trade policies. These changing policies increase the likelihood of regionalization of trade in goods and investment as also reported in one of the chapters of the World Trade Organization’s 2023 Report: trade is gradually reorienting along geopolitical areas. To illustrate this trend, the report analyzes hypothetical “blocs” of countries and calculates the volume of trade. Trade between these blocs has been growing at an average rate of 4-6% lower than trade within the blocs since the start of the war in Ukraine in February 2022.

In the way of a conclusion

The era when it was believed (or made to believe) that international economic policy was dying to give way to the ‘free’ market is coming to an end. The emerging model of the international division of labor calls for governments to return to managing resource allocation processes if not as an absolute alternative to the market, at least in parallel with it, and this by strategically using industrial and commercial politics. Such process will not lead to de-globalization but rather to the re-design of the location of productive activities according to principles pertaining to the sphere of political control. Thus, re-globalization, or regionalization, not repatriation of production processes.

[1] This is a slightly revised version of our paper published in Italian on October 1, 2023

[2] Reshoring is the process of returning the production and manufacturing of goods back to the company’s original country. Reshoring is also known as onshoring, inshoring, or backshoring (Source: Reshoring: What it is, How it Works, Examples – Investopedia)

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