Globalization is here to stay, but a major realignment is underway. This realignment will have significant implications on economic activity and prosperity for years to come. It is inevitable as long as autocracies continue to choose repression and aggression over freedom and justice. There is no evidence that autocracies are intent on changing their ways. Quite to the contrary, they are doubling down and joining forces. The brutal aggression by Russia in Ukraine, and the coercive and insidious tactics of China to expand its influence are currently the main drivers for realignment. As long as these two autocracies and others like them continue to act like bullies, democracies have no other alternative but to curtail their involvement with them. Bullies don’t have many friends.

Friendshoring, Reshoring, Onshoring

Globalization 2.0 involves friendshoring, along with elements of reshoring and onshoring, especially where strategic and national security interests are at stake. Friendshoring is purchasing goods and services from geopolitical allies, and reducing trade with countries that cannot be trusted. The shift by Europe to reduce its dependence on oil and gas from Russia is a prime example of friendshoring. Companies also apply friendshoring whenever it is in their best interest. For example, Samsung significantly reduced its production of goods in China, from 60,000 employees in 2013 to less than 18,000 today. The company no longer has a smartphone factory in China.¹ The move by Samsung was triggered by higher production costs and “coercive economic tactics” by China.² Aggressive Covid-19 lockdowns in China also caused Samsung to look for production alternatives.

Reshoring is the opposite of offshoring. It is the process of returning production to the country of origin (thus reversing the action of offshoring that previously took place). By contrast, onshoring is the process of building new capacity to produce goods and services domestically, as opposed to continuing to rely on other countries for production. Prime examples of reshoring include new legislation from the Biden administration, which provides incentives for companies to manufacture semiconductors, electric vehicles and pharmaceuticals in the United States. The main purpose of the legislation is to protect national security interests by reducing production and supply chain reliance on China for key industries. Since the new legislation, Intel announced investments of $20 billion in the United States. Taiwan Semiconductor Manufacturing and Micron Technology also made pledges of $40 billion and $20 billion respectively. More than 35 companies pledged a total of $200 billion related to semiconductor investments in the United States during 2022.³

Trade Account Deficits

For years, the United States and other OECD countries have complained about unfair trading practices by China, while engaging China to become a market economy. Unfortunately, the results of this policy are very disappointing. From a fair trade perspective, very little has changed over the years. China continues to fix the value of its currency to gain a trading advantage over developed countries that allow their currencies to fluctuate.⁴ The approach by China is a form of price fixing that subsidizes Chinese exporters by undervaluing the price of goods that they export. It provides a competitive advantage that is not consistent with fair trade. In addition, China continues to import much less than it exports, despite repeated assurances to allow more access to its market. There is widespread evidence of western companies frustrated with doing business in China. The trade policies of China have resulted in huge annual trade deficits by OECD countries (Figure 1).

When the subject of trade deficits comes to the surface, Chinese authorities are quick to point out that the very large deficits “call into question the viability of economic decoupling” namely the realignment of production and trade away from China. However, Chinese authorities are silent on the fact that their economy (mostly devoid of natural resources) is heavily dependent on foreign trade, and that they are making very little effort to rebalance trade. Interestingly, a country with a very large trade account surplus such as China normally has a very strong currency relative to others. But that is not the case because the exchange rate of the Chinese currency is artificially fixed to a low value by its central bank, in accordance with directions from the Chinese communist party.

Geopolitical Risks

Globalization 2.0 is in progress and ramping up. From a national security perspective, it should have started a long time ago, even before Russia invaded Crimea in 2014. Western countries were patient with autocracies such as Russia and China in the past. Unfortunately, the policies of diplomacy and engagement have not worked. The military aggression of Russia against Ukraine demonstrates that Russia cannot be trusted, and there is clear evidence that China is supporting Russia. China has officially stated that its friendship with Russia has “no limits” and that there are “no forbidden areas of cooperation.”⁵ During 2022, at the same time as the war in Ukraine was raging, China’s imports from Russia jumped by 65%, while its exports to Russia increased by 4% (Figure 2).

China’s sharp increase in imports from Russia during 2022, came at a time when OECD countries adopted measures aimed at reducing their imports from Russia to punish its aggression of Ukraine. The willingness of China to support Russia economically by substantially growing its purchase of Russian goods is a clear and undeniable sign of taking sides in favor of Russia. Interestingly, trade account balances between Russia and China were balanced in the past, with the exception of 2022 where China sharply increased its purchase of Russian goods. Bilateral trade between Russia and China is expected to increase by 25% during 2023 and continue to grow in 2024.⁶

There is clear evidence that China is reneging on its promise to allow democracy and autonomy in Hong Kong. It is equally clear that China is intimidating Taiwan and South China sea countries with repeated military exercises involving wartime aircrafts and ships, rocket launches, political threats and encroachment of territorial and international waters. Finally, it is also well documented that both Russian and Chinese authorities restrict basic freedoms, deceive their population with propaganda and disinformation, eliminate intellectual and political dissent, and conduct human rights abuses. These actions are getting worse. They indicate an ongoing and systematic shift away from western values of freedom and democracy, and away from world peace and stability.

Political Resolve

Western allies including OECD and NATO members continue to pressure Russia economically to abandon its invasion of Ukraine. At the same time, they help Ukraine defend itself from Russian aggression. The conflict has no end in sight. A “solution” for ending the war has been proposed by China, which is unacceptable to Ukraine. Anthony Blinken, Secretary of State of the United States mentioned that a ceasefire cannot be declared unless it includes a complete withdrawal of the Russian military, the return of invaded territories to Ukraine, and Russian compensation for destruction in Ukraine.⁷ China’s political and economic support of Russia prolongs the conflict.

Janet Yellen, Treasury Secretary of the United States and former Chair of the United States Federal Reserve, is clear on the need for realignment. She is calling for “a reorientation of the world’s trading practices” pushing allied countries to become less reliant on Russia and China.⁸ During a speech in South Korea, Ms. Yellen made references to friendshoring, and also targeted China for unfair trading practices. “We cannot allow countries like China to use their market position in key raw materials, technologies or products to disrupt our economy or exercise unwanted political leverage” Ms. Yellen was quoted as saying.⁹ “Even though policies may have economic impacts, they are driven by straightforward national-security considerations. We will not compromise on these concerns, even when they force trade-offs with our economic interests” Ms. Yellen further mentioned in a speech at the School of Advanced International Studies at Johns Hopkins University.¹⁰

In May 2023, leaders of the Group of Seven (G7) countries met in Hiroshima, Japan. A communiqué released by the G7 included a section expressing concern about China’s trade practices, alleged political interference, and human-rights abuses. The communiqué also called on China to “press Russia to stop its military aggression, and immediately, completely and unconditionally withdraw its troops from Ukraine.”¹¹ Finally, G7 leaders also agreed that “economic resilience requires derisking and diversifying” away from China given its support of Russia and rising geopolitical tensions.¹²

Corporate ESG Imperatives

Well-intended companies adopt business and management practices that are consistent with goals related to environmental, social and governance (ESG) imperatives. For example, reducing greenhouse gas emissions is an environmental imperative for addressing climate change. Adopting business and management practices that are fair to employees, and not detrimental to citizens and societies is a social imperative. Maintaining sound leadership, risk management and controls that enable a company to meet stakeholder expectations are a governance imperative. Companies that maintain production and supply chain arrangements that are inconsistent with ESG imperatives are frowned upon. Their reputation is tarnished, and their sales are negatively impacted.

Since the beginning of the war in Ukraine, many western companies have sold, closed, abandoned or significantly reduced their production and sales in Russia. According to the Yale School of Management, more than one thousand companies have “curtailed” their operations in Russia and the list continues to grow.¹³ Doing business with autocracies that cannot be trusted, that eliminate political dissent, that lie and disinform, that have no respect for human rights, that oppress their own people, that intimidate neighboring countries, and that support Russia economically is evidently not consistent with ESG imperatives. As such, companies are increasingly implementing friendshoring and reshoring alternatives away from China as it doubles down its support of Russia.

Economic Effects of Globalization 2.0

There is no denying that Globalization 2.0 will greatly affect supply chains and global trade in the years to come. The realignment of global trade away from Russia and China will be costly and inflationary according to most economists. However, the economic impact will be much greater for autocracies that become isolated from global trade. There are many alternatives to China for production and manufacturing. In the South China sea area alone, alternatives include democracies such as India, Indonesia, the Philippines, Bangladesh, Laos and Cambodia. The total population of these democracies exceeds the population of China by more than 500 million.

The International Monetary Fund (IMF) warns against the creation of economic blocks led by the United States and China. Such a split would lower global trade and economic growth per the IMF.¹⁴ According to Bob Koopman, Chief Economist of the World Trade Organization, a realignment and fragmentation of global trade is inevitable but may be costly.¹⁵ Bloomberg Economics estimates that a 20% reduction of trade between democracies and autocracies could lead to price hikes of 25% globally.¹⁶ However, Janet Yellen, Secretary Treasury of the United States and former Federal Reserve chair believes that IMF and other projections of the negative consequences of friendshoring are overblown. “The benefits of open trade, which include more efficient allocation of global resources, is maintained with friendshoring. So I think the argument that friendshoring is going to cause huge fragmentation and loss of the benefits of trade is not valid” said Ms. Yellen. Harry Moser, founder and president of the Reshoring Initiative based in the United States, attests that companies bringing jobs back to the United States are going to pay more for labor. However, those companies are automating their production at a record pace to help reduce costs.¹⁷

Conclusion

It’s time to stop being overly polite with autocracies. It’s time to shed light on their actions, and denounce their lies, hypocrisies, insidious ways, coercive tactics, oppression, military intimidation and aggression. Globalization 2.0 is long overdue. Let us be clear, bold and definitive. Democracies need to act consistently with their core values of human rights, freedom, democracy and fair trade. Actions speak louder than words. A new and consequential approach to global trade is needed.

Addendum

On June 3, 2023, United States Secretary of Defense Lloyd Austin addressed a gathering of top defense officials in Singapore. Mr. Austin vowed that Washington would not accept any “coercion and bullying” of its allies and partners by China. He mentioned that the United States is committed to the status quo for Taiwan, and prefers dialogue over conflict. He also lobbied for Washington’s vision of a “free, open, and secure Indo-Pacific within a world of rules and rights” as the best course of action to counter increasing Chinese aggressiveness in the region. “We are committed to ensuring that every country can fly, sail and operate wherever international law allows, and every country, large or small, must remain free to conduct lawful maritime activities” Mr. Austin said.¹⁸

Mr. Austin also mentioned that Washington is committed to deterring North Korean missile threats in the region, and China’s claims on Taiwan, a self-governing island democracy that China says is part of its territory. Mr. Austin indicated that the United States is stepping up defense planning, coordination and training with partner nations in the region. “To be clear, we do not seek conflict or confrontation. But we will not flinch in the face of bullying or coercion” said Mr. Austin. He added that Russia’s invasion of Ukraine underlines how dangerous the world would be if big countries were allowed to invade peaceful neighbors with impunity. “Conflict is neither imminent nor inevitable. Deterrence is strong today – and it’s our job to keep it that way. The whole world has a stake in maintaining peace and stability in the Taiwan Strait” Mr. Austin further stated.¹⁹

Companies Operating in Russia

Find companies still operating in Russia based on this link from the Yale School of Management located in New Haven, Connecticut, United States:

https://som.yale.edu/story/2022/over-1000-companies-have-curtailed-operations-russia-some-remain

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¹ Jacky Wong, Samsung is a Case Study in How Manufacturers Leave China (Wall Street Journal, May 3, 2023).
² Jacky Wong, Samsung is a Case Study in How Manufacturers Leave China (Wall Street Journal, May 3, 2023).
³ Don Clark, Ana Swanson, U.S. pours money into microchips in hopes of dominating market (Globe and Mail, Jan 2, 2022).
⁴ Stanley White, Winni Zhou, How does China manage the yuan, and what is its real value? (Reuters, Aug 9, 2019).
⁵ Lingling Wei, China Declared Its Russia Friendship Has ‘No Limits.’ It’s Having Second Thoughts. (WSJ, Mar 3, 2022).
⁶ Dezan, Shira & Associates, China-Russia Trade – Breakdown and Future Development Trends (March 9, 2023).
⁷ Susie Blann, Matthew Lee, Withdrawal a must for peace deal: Blinken (National Post, June 3, 2023).
⁸ Andrew Duehren, Janet Yellen Calls for Trade Overhaul to Diversify From China (Wall Street Journal, July 19, 2022).
⁹ Andrew Duehren, Janet Yellen Calls for Trade Overhaul to Diversify From China (Wall Street Journal, July 19, 2022).
¹⁰ Andrew Duehren, Janet Yellen Says Security Comes Before Economy in U.S.-China Relationship (WSJ, Apr 20, 2023).
¹¹ James Griffiths, G7 takes a tough line on China as it leaves door open for economic engagement (G&M, May 22, 2023).
¹² James Griffiths, G7 takes a tough line on China as it leaves door open for … (Globe and Mail, May 22, 2023).
¹³ Yale University: https://som.yale.edu/story/2022/over-1000-companies-have-curtailed-operations-russia-some-remain.
¹⁴ Andrew Duehren, Gregg Ip, U.S., Allies Weigh How to Reduce Economic Ties With China (WSJ, April 17, 2023).
¹⁵ Bryce Baschuk, Globalization 2.0 Will Realign Trade and Make Things More Expensive (Bloomberg, May 19, 2022).
¹⁶ Bryce Baschuk, Globalization 2.0 Will Realign Trade and Make Things More Expensive (Bloomberg, May 19, 2022).
¹⁷ Dion Rabouin, U.S. Companies on Pace to Bring Home Record Number of Overseas Jobs (WSJ, August 20, 2022).
¹⁸ David Rising, US Defense Secretary says Washington won’t stand for ‘coercion and bullying’ from China (AP, 06/03/2023).
¹⁹ David Rising, US Defense Secretary says Washington won’t stand for… (Associated Press, June 3, 2023).