China And The US At Odds As Globalisation Falters And Strategic Autonomy Rises

2022 was a dramatic year in markets, economies and across geopolitics. 2023 may bring more of the same and even greater change. David Skilling and I have written that the next year(s) could be characterised by Clausewitz’ dictum that politics can be ‘war by other means’ in the sense that strategic competition between the large regions will be the dominant theme acting on international political economy. In this note, we focus on a key element of this – globalisation and the shift towards strategic autonomy.

Globalisation has been battered and challenged over the past several years, but the death of globalisation is exaggerated. The period of intense globalisation is ending, but world trade flows have been resilient – moving sideways as a share of GDP since the global financial crisis. The outlook for global flows in 2023 is weaker on a slowing global economy, but this is not deglobalisation.

However globalisation has been changing, accelerated in 2022 by the fallout from Russia’s invasion of Ukraine. The global economy is fragmenting, with a more political and regional globalisation model emerging.

Supply chains

Part of this is due to economic factors, as supply chains are compressed in response to growing supply chain risks and reduced labour cost arbitrage opportunities. Firms are gradually reshoring and near-shoring activity, and this will accelerate in 2023 even as post-pandemic global supply chain pressures ease.

But the more disruptive element is politics. In domestic politics, there is a growing push for strategic autonomy and independence in key sectors. Large economies in particular are no longer prepared to be constrained by the WTO and other international rules; multilateral institutions will continue to decay.

Industrial policy has crossed into protectionism. The Inflation Reduction Act and the CHIPSHIPS
and Science Act in the US are two examples, with sweeping local content provisions. The EU and numerous national governments are likely to respond with industrial support packages of their own through 2023. And China will continue to strengthen its development of national champions.

Semiconductors

Relatedly, growing geopolitical rivalry between the US/West and China will powerfully shape global flows. The US has imposed restrictions and sanctions on China, notably on semiconductors, and is looking to decouple parts of its economy (although US/China bilateral trade flows remain close to record levels). Similarly, Europe and others will continue to reduce economic exposures to China, albeit in a more gradual manner. China’s policies also push in the same direction – reinforced by observation of Western-led economic sanctions on Russia.

The recent G20 meetings put some guardrails around the US/China relationship, removing some of the tail risks, but the logic of strategic competition remains intact. Friend-shoring will become an increasingly evident reality in 2023 and beyond, as trade and investment flows are shaped by geopolitical alignment. Firms, investors, and governments will need to make tougher choices, particularly on China – due to government requirements as well as stakeholder pressure.

However, this is much more complicated than a binary split – we are moving into a fluid, multipolar arrangement. There are economic divisions within the West as countries looking to preserve strategic space, not choosing between the US and China. EU/US relations will be both cooperative and competitive. And middle powers in the Middle East, Africa, and Asia, will work to keep options open. Saudi Arabia is an example of this, as it strengthens relations with China.

There will be increasing frictions in globalisation, and a more fragmented world. Countries and firms will be pressured to make choices on geopolitical alignment, and will need to manage geopolitical risk more actively. 2023 will be a year in which we move into much more explicit strategic geopolitical competition and tension in globalisation.

Implications for corporates

Reduce global supply chain risk exposures by developing a multi-local presence: more local production, more foreign investment flows rather than trade flows.

Firms should integrate friend-shoring into market strategy, to reduce geopolitical risk exposures. But prepare for tension within the West: tensions between the EU and US are likely.

Firms in sensitive sectors (such as technology) need to prepare for near-term disruptions to global supply chains and a fragmentation of markets, as the push for strategic autonomy accelerates.