The Big Picture – Globalisation: Part One
24 November 2020
The purpose of this article is threefold. Firstly, to elucidate the historical context within which globalisation occurred, and how it became the medium for which the US simultaneously created and dominated global markets. Secondly the article will investigate the shift in paradigm that has gripped global markets since the turn of the millennia. Finally, it will illustrate how over the past two decades - and more recently due to the catalyst that is Covid19 - what was once a steady and dynamic evolution has morphed into an economic maelstrom of instability and uncertainty.
Globalisation, by definition is the process by which businesses or organisations develop international influence or advance their operations to act on a global scale. In its modern-day form, it bears witness to the omnipresent reach of huge multinational conglomerates. For decades it has been utilised by America in acts of its own brand of neo-colonialism, which focussed on creating ever expanding opportunities for trade and enterprise and in so doing influenced culture and politics beyond its own borders. However, the momentum for US globalisation has stalled, not least because of Trump’s refocus on ‘American jobs for American workers’, along with the ongoing trade war with China, which sees the world’s two largest superpowers locking horns over tariffs. A comparative glance at the American and Chinese automotive industries illustrates that modern globalisation is shifting away from the structure within which it has operated over the past half a century.
The destruction of the Second World War called for a period of creativity – it allowed for economists to reimagine how the global economy would function. At Bretton Woods, in 1944, Harry White and Maynard Keynes oversaw the transference of economic and colonial balance from the UK to the US, consequently rendering the United States as the creditor for European nations saddled with war debt. With the primary aim of preventing another global financial crash, the British Pound was pegged to the Dollar, and the Dollar to gold. Whilst in theory this was a promising approach to laying strong foundations for the global economy, there were those who were frustrated by the international constraints placed on capital. By the 1970s, Richard Nixon’s decision to remove the US from the Gold Standard altered the post-war global economy. Whereas Bretton Woods had set the precedent that the Dollar’s source of wealth was in relation to US gold reserves, Nixon’s decision to alter this highlighted that it was in fact that the dollar would act as a default global reserve currency. By the 1980s, neo-Liberalism – a concept that originated from the minds of the Mont Pelerin Society in 1947 - had cemented its position as a key component in the globalisation and the financialisation of the world. In the 1980s, with Reagan and Thatcher presiding over their respective governments, neo-liberalism facilitated the conception of huge multinational conglomerates, often through hostile acquisitions.
Simultaneously, in the same year that neo-liberalism was conceptually birthed, the General Agreement on Tariffs and Trade (GATT) was signed. It initially included twenty-three nations and it came into effect in January of the following year. The inauguration of the GATT was the result of the United Nations conference on Trade and Employment, and the desire to encourage international trade by substantially reducing tariffs. GATT remained in effect, until the signature of 123 nations in Marrakesh in April of 1994 - a result of the Uruguay Round table – that would be the establishment of the World Trade Organisation on January 1, 1995. Prior to the signing of the GATT, for the key GATT participants – the US, Western Europe, and Japan – average tariff levels stood at 22%. By 1999, the average tariff level was 5%. The GATT had successfully managed to reduce the average tariff and encourage trade emphatically.
Whilst China had secured observer status with GATT in 1986, it wasn’t until 2001 that it joined the World Trade Organisation. This proved to be a key moment in China’s ascension to the superpower that we recognise today. Following its economical reorientation, and the opening of its economy to foreign investment, China has managed to move from its peripheral status in global affairs to rivalling the United States across all aspects of industry and political influence.
American neo-colonialism is fundamentally an economic enterprise, one that’s primary focus is not necessarily political or cultural influence but rather, aimed to create global markets that American companies and investors could profit from. Albeit, with the necessary political persuasion or interference when negotiations demanded such action. It was this opportunity to globalise through capital venture that proved to be the vehicle that enabled them to expand their own brand of neo-colonial ambition.
For much of the previous century, the US spent their time consolidating the western hemisphere, with acts such as the Monroe Doctrine, signed in 1823, which opposed European involvement in the Americas. Furthering this, during the first half of the 20th century, the US endeavoured to create and consolidate markets within their own auspices which became known as the period of American Isolationism. Prior to the mid 20th century, global trade was heavily dependent on the shipping and rail industries. This, in addition to the United States having the means to exploit its own resources meant that there was simply no need for America to expand globally. Consequentially the United States had created an infrastructure that allowed them to be the most dynamic manufacturer and producer of new technologies – in industries such as automotive, aerospace and construction, to name but a few. This dynamic economy facilitated the opportunity for increased international trade. The Second World War, therefore proved to be the catalyst the US needed to initiate an era of expansion and became the watershed that allowed for the United States to become the leading global economy that it is today. The second significant factor in this transformation into an economic superpower is the dualism of the Cold War – an arms race, space race and an economic race, as the Capitalist west confronted the Communist east. There is no doubt that warfare, reconstruction, threat and competition are key themes within America’s modus operandi.
The United States and China, have been locked in a trade war since 2018, imposing tariffs upon hundreds of billions of dollars’ worth of goods. Whilst the preliminary deal signed in January 2020 is a positive step towards a resolution, and Chinese officials have labelled it a “win-win” situation, the outcome of these agreements have yet to be fulfilled. The deal would see China boost US imports by $200 billion above 2017 levels, and manufacturing specifically would be subject to a $78 billion dollar increase. In exchange the United States have agreed to halve a portion of the new tariffs that have been imposed on Chinese goods. In spite of this, the majority of border taxes are still in place. One industry that has had to keep its ear to the ground and react accordingly is automotive. In reference to the ongoing trade war, the President of Audi America, Daniel Weissland, stated “things can change within days” and that a “certain flexibility” is necessary. US car makers saw an 8.2% decline from the previous year, with consumers in China turning away from the big three from Detroit, and towards German and Japanese manufacturers. The United States share of the Chinese Automotive market has also taken a hit. The market share of US automotive companies has fallen to 8.9% from 10.45% in 2018 and 12.3% the previous year. Meanwhile, the German share of the automotive market accounted for 24.2% of sales, up from 21.43%, and Japanese brands increased their share of the market to 21.3% up from 18.75%
“Regardless of the US election outcome, people are telling me that the tariff policy will continue moving forward.”
Whilst many with a watchful eye on the proceedings between the US and China are hoping for the tariff war to subside and a resolution to be achieved, it is the prediction of one Senior VP that this is unlikely, stating “Regardless of the US election outcome, people are telling me that the tariff policy will continue moving forward.” Covid19 has resulted in a huge leap in American unemployment figures, and whilst they have dropped from the initial apex of 14.7% in April to 6.9% in October, there will still be enormous pressure on the government to lower that figure to the pre-pandemic level of 3.5%.
Whilst the slump suffered by US car makers in China is not necessarily indicative of US globalisation having entered complete decline, when paired with the advancements being made by Chinese and Indian conglomerates, it does indicate a shift towards diversification. After entering the WTO in 2001, the Chinese automobile market grew 21% between 2002-2007. Many automotive companies have embarked upon joint ventures within China, with SAIC and FAW entering partnerships with VW, and Dong Feng with Peugeot-Citroen. There are however instances of Chinese automotive companies having European subsidiaries, with Geely owning both Volvo and Lotus. Furthering this, in 2008 Indian conglomerate Tata Motors, gained ownership of Jaguar Land Rover. These trends indicate that the status quo of globalisation - one that has seen the US spearhead its trajectory for the past half a century – is shifting. Chinese and Indian companies are propelling their influence beyond their own borders and increasing their global markets. One may surmise that in the same way that America used global enterprise to vicariously influence political will and culture, similar approaches are likely from other progressive economic powers.
Technology and Data
The automotive industry provides interesting insight into US and Chinese relations, and the future for globalisation, however, it is not wholly representative. For decades, oil has been a heavily sought-after commodity, and has heaped wealth upon nations that possess it. However, with the seemingly exponential growth of consumerism, the significance of data and technology as a fledgling economy has equally soared within the already established tech industry. The US, UK, Russia and China are the world leaders in stored and replicated data. It is estimated that the data stored and replicated will increase from 33 Zettabytes in 2018 to 175 Zettabytes in 2025. Seemingly however, this is another industry that the US is facing steep competition in, with China overtaking them as the country creating, storing and replicating the most data. By 2025, China will be responsible for 27.8% of global data, whereas the US will be storing 17.1%, a drop from 21% in 2018. This is not to say that the US cannot recover lost ground in the data and technology industry, just that the current trend is going against US superiority. Just as new technological advancements proved to be the catalyst for the United States cementing their position as a superpower, the emergence of data and technology in this form, could prove to be a similarly abundant stimulus to other nations. Whilst our focus and scope as a business is predominantly automotive, the automotive industry does not operate in a vacuum. It would be naïve to ignore the symbiotic relationship that connects leading global industries, especially as the automotive industry converges with big tech as it continues towards electrification and driverless vehicles.
In November 2019 the first cases of Coronavirus (Covid19) were discovered in China. At the point of writing this article the virus has reached Pandemic levels, with 59.8 million cases worldwide and 1.41 million deaths with Covid. With many nations declaring international lockdown and closing their borders, it has proven an enormous hinderance to global trade. This is particularly true within the world of automotive logistics and supply chain. One seasoned Senior Vice President for Global Procurement in the automotive sector, stated that the pandemic highlighted the vulnerability of their supply chain. With many of their sourcing categories having only one supplier, and those suppliers having to shut down due to either positive cases or border closures, despite their best efforts, production had to be halted due to a lack of parts. It is also true that with car sales predicted to contract by 17% in 2020, the demand for production to continue was null and void.
“how can we as a supply chain react faster and quicker?”
With the advent of the pandemic and the current tariff war, one could imagine that there may be a resulting change in how we interpret global trading, with the current climate demanding that companies look to build a more local supply base. However, the Senior VP indicated “that financially it does not make sense.” He continued that “if today you make the traditional return of investment calculation in the majority of cases it doesn’t make any sense financially”. The Senior VP also indicated that there would be a change in approach in terms of working to increase reaction times to events such as the Covid19 pandemic, predicating that the approach would now be “how can we as a supply chain react faster and quicker?” Whilst it may be too costly to build a more local supplier base, or even to change their supplier capability internationally, this does not negate the exposure that many global companies are suffering currently.
Since taking on its modern-day form, globalisation has been experiencing a steady evolution with the coming together of numerous historical, cultural and economic factors. Post Second World War, in the wake of Imperial Britain, boosted by technological advancements and victory in the Cold War, the United States commenced their ascension to the position of global superpower. With multinational businesses and organisations beginning to expand their influence and act on a global scale, it would not be until China’s acceptance in the WTO at the turn of the millennia that the United States would be rivalled. The advent of the US-Chinese trade war, and the emergence of new burgeoning industries such as technology and data illustrate the competition that the US is facing. These changes, which had been happening gradually have recently been catalysed and compounded by the Covid19 pandemic. Whilst it is unlikely that huge multinational companies will be forced to change their methods of operations entirely, Covid19 will have surely highlighted weaknesses in their global strategies. Globalisation’s steady evolution has been restrained, and, unlike at the time of its conception, it is no longer dominated by one entity. The pedestal that was once firmly American, is now slowly but surely being shared. The question of how this will materialise following a change of leadership at the White House, or when Covid19 ceases to impact many societies around the world and the subsequent spending habits of masses of consumers is yet to be seen. There is no doubt that 2020 is perhaps the clearest watershed moment for how globalisation enters a new economic incarnation, where technology becomes the dominant and most important industry that interacts with every other sector and consumer, whereby every transaction and interaction is part of its reach.
Calum Rigden MA