The Bear’s Lair: Into a De-Globalized World

This column has been predicting de-globalization for almost a decade – the June 2010 piece “Back to the Kaiser’s World” was its first example of this theme. Now that the coronavirus has caused everybody else to leap onto this bandwagon, it is worth examining what the new de-globalized world might look like. While it has its downsides, it is overall not an unattractive prospect.

In one respect, this column was too optimistic in 2010. It quoted Kaiser Wilhelm II’s speech to the departing troops facing the Chinese Boxer Rebellion in 1900, then said the new Kaiser would be Chinese. Based on the Kaiser’s aggressively protectionist approach to international trade and his build-up of armaments, that appeared a reasonable prediction that has indeed been realized – China today is aggressively building up its armaments, and far more protectionist than it pretends to be, while taking advantage of the West’s free trading focus. However, as we learned from Christopher Clark’s “Sleepwalkers,” published after the 2010 piece was written, the Kaiser was not militarily over-aggressive, and he was certainly committed to an autarkic form of capitalism in Germany itself.

Regrettably, China appears more militarist than the Kaiser’s Germany, and is certainly far more committed to government control over the economy. The situation we face today is much more akin to the 1950s Cold War than to the less malign international competition of 1870-1914. The Chinese propaganda campaign against the West, claiming that the U.S. Army originated the coronavirus and including even relatively non-aligned countries such as France in stories about Western carers abandoning their elderly charges to die, is far more reminiscent of Soviet efforts in the 1950s, or indeed Nazi efforts under Dr. Goebbels, than anything undertaken by the Kaiser’s gentlemanly regime.

Much of the belief system that governed Western and global policy in 1991-2016 has now been shown to have been delusional. Supra-national institutions are not forces for good; they consist of bureaucrats who are paid large salaries and cannot be removed. They therefore become self-perpetuating (I can think of no such organization that has ever been wound up) and push for policies that damage the interests of ordinary people more than is necessary. President Trump’s threat to de-fund the World Health Organization is just a first small step in a movement that should be extended to all-out war against all such entities, with the possible exception of the World Trade Organization (equally bureaucratic, but its international dispute-settlement function is actually necessary).

China is not becoming an “ordinary” country, obeying the rules of the global trade system and gradually becoming more democratic as she gets richer. On the contrary, much of her wealth has rested on the theft of intellectual property, and on terrorizing the multinational companies who are foolish enough to rest a large part of their fortune on the possibilities of doing business there. As we have seen with the coronavirus statistics, all China’s figures are phony (it was an indication of this that her GDP figures are reported within a day or two of the end of the quarter concerned, far too early for any genuine gathering of data).

In the 1980s and early 1990s, China’s vast growth rates may have been more genuine – she was after all a well-educated society recovering from one of the most economically evil regimes ever known to man – but since the middle 1990s, Chinese data have been falsified more and more. The bad debt position of her banks alone has absorbed all the huge trade surpluses she was accumulating. If the world ever gets properly tight monetary policies again, China’s economy will collapse like a house of cards. That will however be a dangerous moment – her military capabilities are alas all too real as were those of the economically feeble Soviet Union.

If we are very lucky (and President Trump is re-elected, a major factor in that luck) we will enter a world in which these realities are recognized, and Western policy is set accordingly. As I said in 2010, the new world will bear some resemblance to that of the pre-1914 era, when tariffs were high, as were geopolitical rivalries between several strong powers, one of which was geopolitically somewhat more aggressive than the others. However, it will also bear a resemblance to the 1950s, in which the West is engaged in a Manichean struggle, with China taking the place of the 1950s Soviet Union, a militarily powerful antagonist, but with rather more economic capability (and more people) than the Soviet Union.

Politically the wise Western governments will realize this quickly and will take steps such as building up their defense forces and granting diplomatic recognition to Taiwan that prevent China from making easy geopolitical gains. Russia, not an economic threat, will be better re-integrated into the Western political/economic system; it is a more capitalist economy than China, and a natural geopolitical antagonist to it.

The first necessity of the new de-globalized world will be to China-proof global supply chains, and armor-plate them against disruptions. Well-run multinationals may not stop sourcing in China altogether, but they will ensure that China is not the sole supplier of major components of their products, and that alternative sources are both available and produce a substantial percentage of output. In general, large complex global supply chains will go out of fashion. Companies will not “domesticate” their supply chains altogether, but they will ensure that domestic sources of supply are protected even if they are somewhat more expensive. Even if the world remains nominally committed to free trade, sensible companies will operate as if there were a 25% tariff on imports from all except close allies, and a 50% tariff on imports from China. That way, the costs of political and health disruptions will be covered.

In a de-globalized world, there will also be far less international acquisition activity, by corporations or by private equity companies. By and large, foreign ownership is inefficient and risks losing precious local capabilities. Local control of local industries will be given far more priority, by governments, citizens and companies, so damaging international mergers will be prevented. There are two central European examples of which I am aware. First, under globalization the Croatian pharmaceutical company Pliva, with a patented drug research capability based on the very high-level capabilities at the University of Zagreb, was swallowed up in 2008 by the Israeli primarily generic pharma company Teva Pharmaceuticals. Its separate research capability was greatly reduced in size and scope. Second, in 2015, the Slovenian brewery Pivovarna Lasko, supplier of premium Czech-style pilsners since 1825, was acquired by Heineken; its Lasko beer sales have since been restricted to the Slovenian market. In both these cases, truly superior local capabilities were extinguished following acquisition by an inferior global-scale multinational. In the de-globalized world this will no longer happen, and local capabilities will be allowed to flourish.

In a de-globalized world, there will be much less travel and tourism. In business, since supply chains will be less extensive, far less travel will be needed, and much of that travel will be replaced by extensive videoconferencing. In tourism, the tendency for mass travel to reduce all destinations to dull uniformity has already greatly reduced its attractions; the threat of new viruses will exacerbate the pull-back. Leisure travel will be substantially more expensive, because airlines and hotel chains will have to build reserve funds for outages. While the low-skilled and moderate-waged will have better work opportunities in their domestic economies, they will find global travel substantially more expensive and less available than in the artificially subsidized globalized era. Meanwhile, dangerous viruses will spread at a more measured pace.

Global fads will be much less pervasive in a de-globalized world. This will have some effects in the arts, such as popular music, about which I am not qualified to comment. It will have a much greater effect in global politics. In particular, we will see the disappearance of spurious global political fads such as the global warming hysteria, which require global regulation and the construction of monstrous global institutional superstructures by which overstuffed global bureaucrats control the lifestyles of ordinary people. “Greta” will no longer dominate the global media; she will return to her local school, where she belongs.

A de-globalized world will not have central banks supplying infinite capital; those that do so will see the collapse of their currency and roaring inflation. Real interest rates will thus be much higher, which will enormously benefit productivity growth. Naturally, stock, bond and urban real estate markets will collapse, but this collapse will greatly benefit younger people, who will be able to buy properties they can afford and invest in stocks and bonds with a decent return, well above the inflation rate.

Another corollary of higher interest rates is that governments will have to manage their budgets properly and companies and individuals will have to manage their balance sheets and debts properly. Probably governments will shrink, as will the largest companies (which will be less multi-national). There will be no more apparent free lunches, as during the era of globalization. Share buybacks will be frowned upon, if not actually illegal. There will be fewer billionaires, and corporate top managements will have to bring their own earnings more in line with those of their workforce, a collapse of differentials similar to that of the U.S. 1930s,

Globalization was always an unattractive ideal, reducing the infinite diversity of this planet to a monotonous sameness, dominated by gigantic international bureaucracies, whether governmental or corporate. While de-globalization has costs, such as the reduced availability of ultra-cheap clothing items, it will provide a better and more varied living for the great majority of ordinary people.

(The Bear’s Lair is a weekly column that is intended to appear each Monday, an appropriately gloomy day of the week. Its rationale is that the proportion of “sell” recommendations put out by Wall Street houses remains far below that of “buy” recommendations. Accordingly, investors have an excess of positive information and very little negative information. The column thus takes the ursine view of life and the market, in the hope that it may be usefully different from what investors see elsewhere.)