Reshoring, deglobalizing, de-coupling, tech cold war, industrial policy—these are words which increasingly and approvingly have slipped into the public discourse. Frankly, this does not bode well for future progress of humanity or for that matter the future of US stock market. These words represent the triumph of politics over economics, of trust disappearing among nations. All the while a ground war is tearing up the rational organization the economies of Europe. All the while an angry Washington, bubbling with testosterone and China-hatred, is raining down sanctions in an effort to cut off global commerce.
Globalization Is Economic Heaven
Most economists (Peter Navarro excepted—remember him?) regard globalization as an extremely positive force responsible for such things as “good” deflation, higher incomes, the elimination of income disparities among countries and the spread of knowledge. There are two forces affecting globalization. The first is technology breakthroughs which in the last several hundred years have become an unstoppable and accelerating force. The second is political decisions which more often than not historically have been anti-globalization. Very often politicians have tried to stop globalization which ultimately proves impossible. That is unless the politicians start a world war.
Economic historians typically classify the years 1850-1914 as the first golden era of globalization. They were fantastic years in which humanity – especially Western (white) humanity—made enormous strides. With the defeat of Napoleon in 1815 and with Britain taking the lead, Europe had one hundred years of relative peace. Canals, railroads, steamships, the screw propeller, the compound engine, the Suez Canal brought what has been called the transport revolution. Add to that the telegraph and then later the telephone, which, combined with the gold standard, allowed global capital flows. Finally, mass migrations from Europe to the Americas shifted labor to relatively labor short areas.
But the emerging technological wonders were not welcomed by all. Globalization brings change and improvement for the majority. But there will be losers. The losers can thwart globalization. One classic example of this in the late nineteenth century was the German Junker (landlord) class who managed to get tariffs raised to offset the importation of cheap grain made possible by the transportation revolution.
Despite pushback from various opponents, the good times of globalization rolled on until the outbreak of WWI. World progress and globalization went then into hibernation from 1914-1945. One hundred million or so lives were lost in the two wars, the only migrants were refugees, the gold standard was tossed in the trash and autarchy became the order of the day.
A new era of globalization and human progress began in 1945 when the free market United States took on a world hegemon pro-globalization role. To its credit the US put the Humpty Dumpty of a broken world back together. The anti globalization Soviet Union didn’t join the globalization, free market party and look what happened to them. Despite an occasional backward step such as limitations on Japanese semiconductors and some disasters in Korea and Vietnam, the United States was the beacon of globalization. The US welcomed China into the global economy. With US support China was admitted to the WTO in 2001. In the last twenty years. China has become the world’s factory and the engine of global deflation. So what’s there not to like?
And Then Along Came Trump
Unfortunately, no good deed goes unpunished. On January 20, 2017 Donald J Trump was sworn in as American president and the world changed. Trump in his inauguration speech painted a bleak picture of anti-globalization doom. Workers in American Midwest apparently were losers due to globalization and Trump seized on their plight. Soon the US was imposing tariffs, was pulling out of the Trans-Pacific Trade Pact, and was threatening not to renew Nafta.
Trump quickly gathered support in his anti-globalization efforts. He could rely on two factors. The first was that typical American voters are by nature protectionist. If they had heard of David Riccardo’s comparative advantage in some college course, they had forgotten it. Or maybe they didn’t believe it when they first heard it. The prosperity of the postwar period and the global peace that reigned after the fall of the Soviet Union in 1991 enabled an internationalist set of American rulers (both Republican and Democrat) to ignore the basic protectionism of their constituents. Trump had an intuitive understanding of this.
The second factor was the anti-Chinese attitudes of the majority of the American people. Many Americans will deny that they harbor these feelings and that anti-Chinese racism (anti East Asian in general) is all in the past. But they may not always be aware of this but the way Americans understand China is shaped by America’s past. This has worked its way into the American subconscious. Americans as a group don’t trust the Chinese, dislike their diligent work habits and classify their physical appearance as permanently foreign. I’ve gone over this in prior Dismal Optimist reports. The historical record of anti -East Asian treatment in America is appalling and cannot be just forgotten. Just ask the Japanese Americans who were put in camps during WWII. The Germans and the Italians didn’t face mass internment even though Germany and Italy were enemies. But the Japanese, many of whom were American citizens and had sons fighting for America, suffered this fate. They looked different from “us” (white people). They were permanently foreign.
The Bad News For Globalization Keeps Coming
As if Trump wasn’t enough it seems like in the last few years globalization has gotten one bad break after the other. Four “bad” events have happened.
The first was Brexit. While it wasn’t a global event, Britain’s pulling out of the EU represented a rejection of international cooperation and free trade. A rejection of trust.
The second is the war in Ukraine. If the TV reports are accurate, the Russians have committed war crimes in Ukraine and that needs to be addressed. I don’t know how this can be done without a Russian unconditional surrender. But think about it. Calls for Europe to boycott Russian energy for the foreseeable future make no economic sense and, to the dismay of all the China haters, is a gift to China. Wars kill globalization and make everybody poorer.
The third is the virus. The virus has shut down supply chains and disrupted international travel. Luckily the world is snapping back from the virus. The economics of globalization are too powerful.
The fourth is the Chinese turn to aggressive “wolf warrior” diplomacy. This is a more assertive style than prevailed in the past. This, combined with President Xi’s turn to the left, has reduced the West’s trust in China.
Sanctions On Semis – the Road to Mediocracy
In its determined effort to start a new tech cold war with China, the Biden Administration has rained down sanctions and embargoes on semiconductor firms exporting to China. Despite official BS about technology falling into the hands of the Chinese military—all technology since the invention of the railroad has alternative military uses—it’s clear the US’ real motive is to halt the technological development of China, civilian or military. To borrow a Peter Navarro/John Mearsheimer recommendation, it is in American interest to make China poor. Washington would like the emerging army of Chinese STEM students to don their great grandparents’ straw hats and return to the fields and harvest some rice.
An incredible global network for the creation of semiconductors has emerged. Call it, in the words of industry consultant Dieter Ernst, a global innovation network (GIN). The principal players in this GIN are firms from the US, China, Taiwan, South Korea, Japan and the European Union. This GIN has been a driver for innovation and economic progress. No one country or company dominates this GIN although a fair simplification might be that the US firms design the chips and the Asian firms manufacture them. And China and the US are the major markets for chips and semiconductor equipment.
At any rate it would seem it is the US’ desire to have China thrown out of this GIN. Nothing would slow China’s technological progress more than that. Unfortunately this US policy could have a devastating effect on US semiconductor firms. They could no longer sell their newest and most advanced products to China. They would have their incentive and their resources to innovate substantially reduced. Their stock market values would head straight down.
The following are some statistics compiled by Digitimes for the major semiconductor equipment firms regarding their 2021 revenues from sales to China. As can be seen, Chinese sales are a big deal.
|–||2021% Sales to China|
It’s all bad news in this regard. According to Asia Times Intel’s revenues in China were 50% greater than its revenues in the United States. Qualcomm gets about two thirds of its revenues from China and NVIDIA more than 25%! NVIDIA’s stock dropped by 12% when the market learned of the latest US limits on NVIDIA’s (and AMD’s) sales of its latest chips to China. News that the Commerce Department has for the moment eased up offer little consolation since this seems like a temporary measure.
With this incredible semiconductor GIN, by expelling China the US will consign its own world class firms to mediocrity and diminished value. The $52 billion handout in the Chips Act is a pathetic substitute for a global market with China included. NVIDIA, AMD, Qualcomm…the list goes on. These companies are miracles of technology and products of the globally superior American free enterprise system. The American government is about to become the bear in the China closet.