The Changing of the Global Economic Guard

China has profited immensely from the open global trading system. But whether it remains open depends on the actions of the West’s increasingly reactive democracies.

East German citizens climb the Berlin wall at the Brandenburg Gate as they celebrate the opening of the East German border on November 10, 1989.
East German citizens climb the Berlin wall at the Brandenburg Gate as they celebrate the opening of the East German border on November 10, 1989. (Reuters)

In January 2017 the global economy changed guard. The venue was Davos, the annual gathering of the world’s wealthiest recyclers of conventional wisdom—and consistently one of the last places to anticipate what is going to happen next. This time was different. The assembled hedge-fund tycoons, Silicon Valley data executives, management gurus, and government officials were treated to a preview of how rapidly the world is about to change. Xi Jinping, the president of China, had come to the Swiss Alpine resort to defend the global trade system against the attacks of the U.S. president-elect, Donald Trump. With minimal fanfare, the leader of the world’s largest developing economy took over the role of defending the global trading system in the teeth of protectionist war cries from the world’s most developed nation. It portended a new era in which China would apparently play the role of the responsible global citizen. The bad guys were swapping places with the good. “Some people blame economic globalization for the chaos in our world,” Xi told Davos. “We should not retreat into the harbor whenever we encounter a storm or we will never reach the other shore. … No one will emerge as a winner from a trade war.”

After more than 70 years of U.S.-led globalization, Xi’s declaration of global stewardship in the spiritual home of capitalism was an Alice in Wonderland moment. A few days later President Trump gave his by now notorious “American carnage” inaugural address. Much has changed since then. For the time being at least, Trump has dialed back his more outlandish protectionist rhetoric. A U.S.-China trade war looks less likely than it did in January. But things can change fast in Trumpland. In the space of half a day this week, Trump was reported to be considering scrapping NAFTA but then seemed to change his mind after talking to his Canadian and Mexican counterparts. Earlier in the week he slapped steep tariffs on Canadian softwood lumber imports. Even if Trump’s protectionism ceasefire with Xi sticks, that switch in roles—the changing of the global economy’s sentinel from the U.S. to China—is taking place nonetheless.

It has long been anticipated. Set aside the most recent forecasts. As far back as 1902, when China’s imperial ruins had long since been picked over by the European powers and the United States, the British historian John Hobson anticipated the day when a resurgent China would turn the tables. Hobson’s prescience is worth savoring: “China, passing more quickly than other ‘lower races’ through the period of dependence on Western science and Western capital, and quickly assimilating what they have to give, may re-establish her own economic independence, finding out of her own resources the capital and organizing skill required for the machine industries and … may quickly launch herself upon the world-market as the biggest and most effective competitor, taking to herself first the trade of Asia and the Pacific, and then swamping the free markets of the West, and driving the closed markets of the West to an ever more rigorous Protection.”

Though something of a Nostradamus, not even Hobson envisaged the speed with which China would pull this off. From barely a statistical rounding error in 1978, with less than 1 percent of global trade, China rose to become in 2013 the world’s leading trading nation with almost a quarter of its annual flows. As recently as the turn of the 21st century, the U.S. accounted for almost three times as much global trade as China. Nothing on this scale or speed has been witnessed before in history. In 1750, China and India accounted for almost three quarters of global manufacturing production, according to economic historians. By 1914 their share had shrunk to 7.5 percent. We are now in an age of convergence as the rest catches up with the West. There is still a long way to go.

The return of China, and the 15 other fast-growing non-Western economies, including Indonesia, Thailand, and India, which together account for half the world’s population, is dramatically reconfiguring the global power structure. Within my lifetime, the emerging middle class has gone from virtually nowhere to supplant the established Western middle class as the engine of global growth. Since 1970, Asia’s per capita incomes have increased fivefold. Even in Africa, the world’s worst performing continent, incomes have almost doubled. The West’s median income, meanwhile, has barely shifted in the last half-century. In some parts of Asia, such as Singapore and South Korea, incomes have either overtaken or are level with those in the West. In others, notably India, they still languish at less than a 10th of the Western average. But the direction is clear. If you chart a global economic map, the center of gravity in the 20th century could be found somewhere in the mid-Atlantic, according to the Singaporean economist Danny Quah. That point has now shifted eastwards to Iran. Over the coming decades it will settle at a point somewhere between China and India, in the Himalayas. From the middle of the Atlantic to the roof of the world in 50 years—our generation is present at the re-creation.

China has profited beyond its wildest hopes from the club it joined, and now offers to cheerlead. Whether the global trading system remains open will depend on the actions of the West’s increasingly reactive democracies. Xi Jinping and his peers can bank on the support of their largest foreign investors, the multinational companies that have located large chunks of their production supply chains in China and other parts of the Asia Pacific. In today’s world, most cross-border trade is intra-company movement of unfinished goods. Apple’s iPhone is produced in nine different countries. Since the goal is to capture Western technology, it makes no sense for developing countries to slap tariffs on imports, which are as likely to be intermediate goods moving from one part of the supply chain to the next. It differs greatly from the old factory model in which all a product’s components were made in one location. Since China has the world’s largest labor force, and its most rapidly growing consumer base, Xi’s best allies are the global chief executives who came to hear him in Davos.

Their wagons are tightly hitched. The rise of China has coincided with the golden age of the global corporation. Both are also threatened by the stagnation of the West’s middle classes. From Procter & Gamble to Unilever, Western consumer goods companies are increasingly tailoring their output to where the money is—among the West’s upper income groups and the emerging world middle classes. The median Western consumer is no longer driving their bottom line. That is why corporate investment rates in the U.S. are so low even as corporate profitability is remains at near record highs. The Western middle class consumer is no longer a cash cow. Buying back your company’s shares offers an easier return than investing in research and development.

In China’s case, the West’s populist disaffection threatens the goose that lays its golden eggs. Although Trump has tamped down his protectionist rhetoric since January, China is aware that he achieved victory partly by targeting China for stealing American jobs. In reality, most of the downward pressure on Western incomes has come from the effects of technology. China, itself, is now confronting the same unstoppable forces. Its manufacturing employment is shrinking even as its value-added production rises. But China serves as a more tangible scapegoat for frustrated Western voters than the abstractions of automated software.

Like the Western elites, China dreads the wrath of an alienated Western middle class. Yet for all its brainpower, the Davos crowd is perhaps the least equipped on earth to know what to do about it. Every January, the Davos gathering sounds a little more bemused about what is happening in the world outside. In 2016 it worried about the threat of mass disease, just as the Ebola epidemic was receding. In 2015, its annual report dwelt on the return of geopolitics following Russia’s annexation of Crimea the year before. In its first report in 2006 it was anxious about epidemics and the risk of terrorism after the Asian flu crisis and the London Underground terror attacks. And so on. Davos specializes in projecting the future from a recent past that took it by surprise. We are all guilty of this. But Davos has made a brand of its blow-dried conventional wisdom. George Orwell said that “the great enemy of clear language is insincerity.” By that measure the global elites have something to hide—although I believe they are concealing it mainly from themselves. The more our elites call for “thought leadership” and “disruptive thinking,” the less they seem to mean it. Buzz terms, such as resiliency, global governance, multi-stakeholder collaboration, and digital public square, are the answer to every problem, regardless of its nature. Too many wars happening? We need more collaboration. High risk of another global pandemic? More stakeholder participation. Populist revolts convulsing the Western world? We must rebuild trust in global governance.

For every risk, Davos offers an identikit fix. Most of its Latinate prose sounds innocuous. But the lexicon betrays a worldview that is inherently wary of public opinion. Democracy is never a cure. If the middle classes are angry, they should listen more closely. Here was Davos’s 2015 solution to economic populism: “Without trust, no decisions at the international level will be taken. However, the responsibility extends beyond the political level: multinational companies and consumers also have a role to play to strengthen the argument in favor of global collaboration in the face of growing pressures to prioritize national economic self-interest.” Translation: Democracies must listen more to multinational companies. Pursuing national economic self-interest is always a bad thing. Yet what is still true for China, which has been greatly enriched by foreign direct investment, rings hollow to large chunks of Western society that believe they have lost their jobs, or forfeited their income growth, because of production shifts to China and elsewhere. Here is Davos’s solution to multipolar disorder: “Managing this risk will require flexibility, fresh thinking and multi-stakeholder communication.” No translation required—though it would be good to get a preview of the fresh thinking that Davos keeps saying we need (they are right: we do).

The gulf between the view from the Swiss Alps and realities on the ground continually widens. Given the electoral shocks of the previous year, the 2017 outlook is the best example to date. This is Davos’s solution to the immigration crisis convulsing European and American politics: “To some extent, the cultural challenges associated with immigration could be tackled by getting better at communicating change: data show that voters will change their views on cultural changes in society if politicians highlight the assimilation already taking place.” Which means that we need to get better at telling people how well things are going. And here is its cure for the West’s crisis of democracy: “One potential solution could be to make better use of technology in the process of government—not only to deliver services in a faster, more transparent, inclusive and consumer-oriented way, but also to establish a ‘digital public square’ with more direct communication between leaders and people.” Politicians should thus spend more time online. Davos perhaps ought first to have read what people are saying on the internet. As one person quipped about Donald Trump’s Twitter-propelled candidacy, “It is like the comments section running for president.” If this is thought leadership, how does followership sound? Davos has become the emblem of a global elite that has lost its ability to listen.

* * *

A few months before I graduated from university in 1990, the Berlin Wall fell. A group of friends and I abandoned our tutorials and took a ferry from Dover to Zeebrugge and drove overnight to Berlin. We participated in that orgy of historic vandalism with chisels and small pick axes. We returned to England with small pieces of the Berlin wall. It was a dramatic and moving moment that I was privileged to witness. We believed we were on the right side of history. I still very much hope that we were. But we can no longer be certain. A decade later, I found myself employed as speechwriter to Lawrence Summers, when he was the U.S. secretary of the Treasury in the Clinton administration. Looking back, I am astonished at that era’s unshakeable self-confidence. This was the high noon of the Washington Consensus. Alongside Alan Greenspan, the chairman of the U.S. Federal Reserve, and Robert Rubin, the previous Treasury Secretary, Summers personified the global intellectual elite. Though often abrasive, he is also brilliant—especially when he is wrong. But when the facts change he is capable of changing his mind. By 2008 he had already walked away from much of the triumphalism of the late 1990s. Summers complained of “the development of stateless elites whose allegiance is to global economic success and their own prosperity rather than the interests of the nation where they are headquartered.” By 2016, he was warning that the public’s tolerance for expert solutions “appears have been exhausted.” He advised a new “responsible nationalism,” which would “begin from the idea that the basic responsibility of government is to maximize the welfare of its citizens, not to pursue some abstract concept of the global good.” The global elites, in other words, need to catch up with how most people view the world— not the other way round. I believe what Summers is saying now closer to the truth.

According to the World Values Survey, people identify far more strongly with their nation than with a global identity. The two exceptions were Colombia, which has been wracked by a brutal civil war for more than a generation, and Andorra, which has fewer than 80,000 people. The more we cede power to global bodies, the more virulent the backlash against globalization. Dani Rodrik, one of the world’s leading international economists, talks of the “global trilemma.” We cannot simultaneously pursue democracy, national determination, and economic globalization. They are incompatible. One of them has to go.

China is sticking with the last two. Indeed, Xi is undoing even the tentative steps towards political liberalization that were carried out by his predecessors. Prospects for multi-party democracy in China are as far away as ever. In contrast, most Western countries have chosen to do away with much of the substance—if not the appearance—of national self-determination. This is particularly true of European countries. Under the old General Agreement on Tariffs and Trade (GATT), which ended in 1995, any nation was free to veto any deal. Nowadays democracies routinely suffer reversals in the WTO’s appellate court. For example, the European Union’s objections to importing genetically modified foods and hormone-infused beef were overruled by the WTO even though it conceded the science was unsettled. If the democratically backed will of the world’s largest trading block can be undone by a group of unelected trade judges, imagine the odds for anyone else.

The space for national democracy is shrinking. Vast areas that were once the preserve of national sovereignty are now ring fenced by international law and global regulation. The instinct in Davos is to push even more policy-making out of the range of nation states. The answer to Europe’s problems is always more Europe. The answer to the global trade backlash is always to sell trade deals more effectively. It should come as no surprise that democracies are now loath to ratify such agreements. The last time any serious world trade talks were held in a Western city was in Seattle in 1999. It was shut down by protestors. The next time global leaders made the attempt was in 2002, from the safe space of the Arabian Gulf where no dissenters could be heard. The Doha Round died a few years later. Now Donald Trump has killed the Trans-Pacific Partnership, the deal that was launched by George W. Bush and completed by Barack Obama. Trump is also re-evaluating the Clinton-era North American Free Trade Agreement and has buried hopes of a transatlantic agreement. Britain, meanwhile, is abandoning the European single market.

The world’s elites have helped to provoke what they feared: a populist uprising against the world economy. Globalization is going into reverse just as the impact of new technology is showing signs of picking up. In his Harvard class, Rodrik offers students a choice: Should we globalize democracy, or restrict it at home? Students always vote strongly for global democracy. But if it does not work at the European level, what chance would it stand worldwide? Digital democracy, meanwhile, is an empty slogan. The other choice—autocracy—is a bleak prospect, though a disturbingly broad range of nations are edging towards it.

China’s economic success has created an allure for its political model. But it is false song. Few electorates would knowingly relinquish their right to vote. Which leaves us with one practical alternative: abandoning the drive to deep globalization. Rodrik calls this “thin globalization.” I prefer to think of it as the last chance for liberal democracy as we know it. It may be the only practical way of salvaging a peaceful global order. In the 1990s, Thomas Friedman, the New York Times columnist, came up with his famous Golden Straitjacket for the brave new world that came after the fall of the Berlin Wall. Ironically, this meant less democracy precisely at the moment of its triumph. When you put on the Golden Straitjacket, “your economy grows and your politics shrinks,” he wrote. Friedman possesses an uncanny knack for catching the spirit of the age with revealing insights. But he should have dropped the word “golden.” Straitjackets are for lunatics. We can hardly complain if our democracies have begun to lose their minds.

This article has been adapted from The Retreat of Western Liberalism, the forthcoming book by Edward Luce of The Financial Times.