IS GLOBAL INTEGRATION FAILING? FROM ROME TO COVID-19

By Jan-Benedict Steenkamp

The globalization of markets is one of the most important developments in the last half century. One straightforward measure is the value of global exports. Between 1913 and 1950, export volume grew by 50% (at constant prices), while the export volume increased 2900% between 1950 and 2014. The sum of world exports and imports as share of world GDP was around 20% in 1950 versus 60% in 2011. Since the end of World War II (approximately), trade grew three times as fast as GDP.

Trade growth actually underestimates the globalization of the marketplace as at the same time, companies expanded their global reach through foreign direct investment (FDI). At first, investments by multinational corporations were overwhelmingly directed towards other developed countries, but since the 1980s, emerging markets like China, India, and Latin America were the recipient of much FDI. Most recently, firms from China, India and other emerging markets have started to expand internationally as well, as detailed in my book Brand Breakout: How Emerging Market Brands Will Go Global.

Indeed, anybody born after the Second World War, which presumably includes most readers of this article, may be excused if they regard globalization as a unidirectional process towards ever-greater economic integration of the marketplace. Yet, if we adopts a bird’s-eye perspective to the passage of time, we observe that global integration is anything but a linear process. In fact, global integration has collapsed at least three times in world history, none anticipated at the time. Can this happen again?

First collapse of global integration: The Fall of Rome

Why is the Catholic Church the oldest existing global organization in the world? Why do Germans drink beer and French wine? Why does much of the world basically have the same legal system? Why are the Spanish and French languages so similar but so different from German or Danish? Why is the hill on which the U.S. Congress building stands called Capitol Hill? Why are U.S. soldiers allowed to retire after 20 years? Why is the downtown city grid of Mainz, Vienna, Belgrade, and Budapest basically the same? Where does the idea of the separation between Church and State come from? What did European leaders invoke when they warned about the consequences of not being able to secure the borders in the midst of the 2015 refugee crisis? Why do you read this article in this alphabet? The answer to all these questions is the Roman Empire, arguably the most powerful and influential edifice the world has ever seen.

In the book of Daniel (2:40), the Roman Empire is described as “strong as iron – for iron breaks and smashes everything – and as iron breaks things to pieces, so it will crush and break all the others.” Daniel prophesied correctly. The Roman legions swept everything before them, even the vaunted Macedonian phalanx. Rome’s trade network reached into India, China, Central Asia, and Africa. Yet, after reigning supreme over much of the known world for 600 years – the Pax Romana, Rome fell in AD 476 after a protracted period of barbarian invasions, civil war, xenophobia, incompetent leadership, and economic and population decline. Much of the known world plunged into half a millennium of darkness (Ward-Perkins 2006). Intercontinental trade routes were cut off, and economic complexity declined to below pre-Roman levels. Even as late as AD 1700, standards of hygiene in Europe had not reached Roman standards set around AD 100.

Second collapse of global integration: End of Pax Mongolica

The second collapse came with the fall of the Mongol Empire. In the 13th and 14th century, international commerce and communication flourished and hummed along during a period known as the Pax Mongolica. The Mongol Empire created a trade zone (“Silk Road”) stretching from Venice to Korea. Among its most famous merchant traders was Marco Polo. Where the Romans had assimilated conquered territories through strong military and cultural presence, the nomadic Mongols were assimilated, and some say domesticated, by their captives. The once massive empire divided into four Mongol khanates, loosely by geography. The bubonic plague swept west from China across the empire, wiping out roughly half the population. Each khanate fell in short order to political dissension, thus ending two hundred years of global progress, trade, and prosperity (Morgan and Morgan 2009).

Third collapse of global integration: End of Pax Britannica

At the beginning of the 20th century, the world economy was integrated as never before, centered upon Britain. Pound sterling was its anchor, Britain its linchpin and the Royal Navy its guarantor. Investments flowed to other countries, which all heavily traded with each other, mediated by British shipping, insurance, and financial services. This world brutally ended in the trenches of Flanders.

After World War I, Great Britain – exhausted by its war effort where it also had to supply huge amounts of war material to the armies of France and Italy – could no longer act as the linchpin of the global trade and financial system. Tariff barriers went up everywhere and trade as share of GDP in Britain declined from 60% in 1913 to 29% in 1938, and for the world in total from 30% to 10%.

What about 2020 and beyond?

Can such a collapse happen again? In 1992, Fukuyama confidently predicted the end of history, proclaiming the universal acceptance of Western liberal democracy as the final form of human government in a globally integrated world. For many decades after World War II, a broad range of countries, led by the U.S., which had replaced the U.K. as the center of the global economic system, shared a fundamental economic vision (“Washington Consensus”). They endorsed an increasingly open system for trade in goods and services, supported by international institutions like the IMF, OECD, GATT/WTO, and the World Bank. Capital, corporations, and, to a lesser extent, people were increasingly allowed to flow freely across borders. The rapid spread of data and technology accelerated this process.

Yet, a mere 25 years after later Fukuyama’s seminal book, every aspect of this globalized economy is under assault. The global financial crisis, Brexit, “America First” policy and America’s withdrawal from the Trans-Pacific Partnership, (re)emergence of an increasingly assertive China and Russia, and heightened xenophobia have undermined the seemingly inexorable march toward greater global integration.

Political tensions are rising around the world, most notably between the U.S. and China regarding the South China Sea and trade, between Russia and the West regarding Ukraine and Russia’s meddling in Western elections, and between Iran and a collation of Israel and Sunni powers in the Middle East. Australia and the U.S. have banned China’s national champion Huawei from telecom equipment contracts due to national security concerns. None of these issues was really a paramount problem a mere decade ago.

People start to talk again of the Thucydides Trap. In his History of the Peloponnesian War, the famous Greek historian Thucydides (c. 460 – c. 400 BC) recounted the fifth-century BC war between Sparta and Athens. Why did these two great powers engage in a ruinous war that lasted for nearly three decades? Thucydides gave the answer: “It was the rise of Athens and the fear that this instilled in Sparta that made war inevitable.” Thucydides identified one of the most chilling principles of international power politics: When one great power threatens to displace another, war is often the result. The last time this happened was when Germany challenged Britain’s global and naval dominance, leading to the First World War. Many are afraid the 21st century rerun of the Thucydides Trap will be China versus the U.S. When I gave a speech at the U.S. Military Academy at West Point, I used the Thucydides Trap to explain why so much is expected from them to prevent it from happening again. The peaceful transition of global leadership from the U.K. to the U.S. shows that there is an alternative.

The anti-globalization effect of China’s industrial masterplan named "Made in China 2025" is also worth noting. This plan aims to give China a leading role in 10 “priority sectors:” 1) New advanced information technology; 2) Automated machine tools & robotics; 3) Aerospace and aeronautical equipment; 4) Maritime equipment and high-tech shipping; 5) Modern rail transport equipment; 6) New-energy vehicles and equipment; 7) Power equipment; 8) Agricultural equipment; 9) New materials; and 10) Biopharma and advanced medical products (Kennedy 2015). The goal is to comprehensively upgrade Chinese industry, making it more efficient and integrated so that it can occupy the highest parts of global production chains. The plan identifies the goal of raising domestic content of core components and materials to 40% by 2020 and 70% by 2025. To many Western policy makers and CEOs, these goals sound a lot like protection of domestic markets, if not outright mercantilism; a state-sponsored grab for world power in industries that form the backbone of Western economies. I wholeheartedly concur. Boardrooms and governments have become increasingly wary of Chinese acquisitions of “local jewels.” While many EU leaders are not particularly fond of U.S. president Donald Trump, his tough attitude toward China on lack of intellectual property protection, forced sharing of technology with local firms, and Chinese protectionism are widely shared. 

The broader public has started to notice these events. In October 2016, market research agency YouGov surveyed people in 19 countries about globalization attitudes. The table shows that less than half of Americans, Australians, British, and French believed globalization is a “force for good.” Attitudes toward trade, FDI and immigration are even more negative. There is also a widespread belief that globalization mainly benefits the wealthy. While I do not have data for earlier years, we can be confident that a decade ago, globalization attitudes were more positive.

Table: Globalization attitudes

Source: YouGov

The Effect of COVID-19

And then, there is the effect of the corona virus pandemic. Events since early 2020 have revealed several hard truths:

1. The near unbearable economic effects of the pandemic has once again laid bare the tensions in the EU between the (allegedly thrifty) North and the (allegedly profligate) South. Northern countries like Germany and the Netherlands reproach (accuse) Southern countries like Italy and Spain for not having done enough in preceding years to reform and put their finances in order, while Southern countries accuse the North that they lack compassion and that they benefited more from the euro than they did. In an interview with the Financial Times on April 16, 2020, French president Macron Emmanuel Macron has warned of the collapse of the EU as a “political project” unless it supports stricken economies such as Italy and helps them recover from the coronavirus pandemic. He said there was “no choice” but to set up a fund that “could issue common debt with a common guarantee” to finance member states according to their needs rather than the size of their economies. This is an idea that Germany and the Netherlands have opposed. 
2. When the going gets tough, nations think about themselves first and foremost. Borders are closed, immigration and visa applications are halted, export of critical medical supplies are hindered, if not outright prohibited.
3. Countries that were able to secure the necessary medical equipment (e.g., Germany) fared better than countries that were unprepared or countries that could not quickly acquire the necessary supplies.
4. Global supply chains are vulnerable, too vulnerable for the good of the country. First, reliance on a single overseas country for critical supplies (often, China) is inadvisable. If a (health) crisis hits that country, supplies dry up. Apple and many other companies experienced that. This provides a powerful incentive to diversify sourcing.
5. One step further than 4. is reshoring. If the COVID-19 crisis has shown one thing, it is that major powers like the U.S. need to secure domestic supply lines. Companies like Ford are switching domestic production to ventilators and respirators, working together with 3M and GE. This echoes what was done in World War II. However, that is only possible if there are still manufacturers and suppliers in the U.S. The COVID-19 crisis has made it clear that reshoring is not a luxury but a matter of national security.
6. The economic devastation caused by the COVID-19 crisis is just beginning. You ain't seen nothing yet, as president Ronald Reagan famously said (albeit in a much better context). Government deficits and debt are exploding and the finances of many individuals, small business owners, and even large companies are severely weakened. We can expect years of retrenchment. In the past, this often led to increased protectionism. Below are projections of U.S. government debt in the "optimistic" scenario that the economy will experience a robust recovery in 2021 and a full recovery to pre-crisis projections by 2025. 

Conclusion

It remains to be seen whether current turmoil and setbacks are temporary hiccups on the road to a more open, global economy, or whether global integration will stall, and even lose ground. Clearly, history has shown that continued globalization is anything but set in stone. It takes wise, steady, courageous, and far-sighted leadership to navigate the political and economic storms in the wake of COVID-19. Without going into politics, it is my honest assessment that few leaders measure up to their great predecessors, who faced equal, if not more daunting crises in their lives, as I detail in my new book  Time to Lead: Lessons for Today’s Leaders from Bold Decisions that Changed History Perhaps they can learn something from these great examples - from Margaret Thatcher, Franklin D. Roosevelt, Charles de Gaulle, and others.

Jan-Benedict Steenkamp is C. Knox Massey Distinguished Professor at the University of North Carolina at Chapel Hill, Honorary Professor at EIASM (Brussels), Fellow at Fudan University (Shanghai), and and Executive Director of AiMark.

His new book, Time to Lead: Lessons for Today’s Leaders from Bold Decisions that Changed History, will be published on September 8, 2020 by Fast Company Press.