As the United States continues to push its "de-risking" competitive strategy against China, the geopolitical competition between the two countries has become the core of the current trend of deglobalization. The struggle between the two has expanded from a trade war to various fields such as technology and finance, leading to a restructuring of the global pattern of globalization. Currently, most attention is focused on mutual rivalry, impacting both countries' economies and future directions. However, there is still insufficient understanding of the evolution and spillover consequences of the deglobalization brought about by the "de-risking" between the U.S. and China.
IMF Managing Director Kristalina Georgieva's stark warning about the global economy facing its “biggest test since the Second World War” rings true. The potential consequences of further unraveling international ties are substantial, and individuals of varying income levels are poised to bear the brunt of this upheaval. Addressing trade restrictions imposed by over 30 countries on essential commodities like food and energy, experts suggest that reducing trade barriers is imperative to counter shortages and lower prices. Additionally, countries must prioritize diversifying imports to safeguard supply chains and curtail output losses stemming from disruptions. Amidst this backdrop, the competition between the U.S. and China functions as the "epicenter" of the ongoing deglobalization movement. The repercussions of this geopolitical shift are felt worldwide. As ANBOUND's researchers have highlighted previously, the global economic and trade landscape is undergoing a gradual shift towards a reorganization based on fragmented regional structures. Under the deglobalization wave, even past beneficiaries of globalization find themselves susceptible to the ripple effects of change.
In this process, China, which was once hailed as the "world's factory", will naturally face impacts and challenges. For the U.S., the journey of reshoring its supply chain and industrialization is not without obstacles either. It is worth noting that in the rivalry between these greater powers, many smaller economies might encounter substantial losses due to economic and trade fragmentation.
Recently, an article in The Wall Street Journal discussed the "economic losers in the new world order", using the examples of the UK and Singapore to illustrate that countries unable to afford substantial subsidies are lagging behind in this competition. While China stands as the top competitor of the U.S., and the U.S. and other Western nations have taken a relatively consistent stance on the issue of risk-reduction in relation to China, the reality is that the approach advocated by the U.S. also implies a closed market for itself and for European countries. The article in The Wall Street Journal mentioned that in pursuit of winning the industrial competition of the future, the U.S. has implemented policies to support differentiated industries, forcing Europe to invest money to participate. However, some are finding it quite challenging in this "subsidy race”.
The article states that substantial subsidies and escalating protectionism are overturning decades of free trade policies: The U.S.'s tax credits for battery manufacturing, solar equipment, and other green technologies are attracting significant funds to flow into the United States; the European Union is attempting to respond with a green-energy support package, the Japanese government and several major banks announced in June the launch of a green technology plan, aiming to attract over JPY 150 trillion of green investments within the next decade. The competition and positioning in these emerging fields are pivotal to the potential and space for the future development of each economy. The Wall Street Journal states that although these competitive industry policies are aimed at becoming “less dependent on China”, due to differing economic scales and financial strengths, some smaller players have been left behind by larger economies in this process. Former U.S. Treasury Department official David Loevinger commented that the entire world is becoming more inward, moving away from open trade and investment. He believes that Europe and the U.S. are engaging in this "subsidy race" against China, and “the losers in that competition are poorer economies with less fiscal resources”.
The article states that many of these countries have reaped the benefits of free trade over the past few decades but find themselves at a disadvantage after the onset of the industrial subsidy battle. Taking the examples of the UK and Singapore, these two countries lack the scale to compete with the largest economic blocs in terms of providing subsidies. Currently, the UK government is facing pressures from various sectors domestically, demanding that it respond to the global economic shift towards interventionism through strategies to revitalize industries. Despite its previous claims of not participating in the "subsidy race", the UK has indeed taken action. On July 19, it announced a subsidy of GBP 500 million for the new energy battery factory of India's Tata Group, the parent company of Jaguar Land Rover. However, the overall scale of its green subsidies still lags far behind that of the U.S. UK Chancellor of the Exchequer, Jeremy Hunt, has pledged to unveil the UK's response measures this autumn, but he is attempting to temper people's expectations by stating that the UK will not "go toe-to-toe with our friends and allies in some distortive global subsidy race”. He mentioned that the UK will direct funds toward sectors where it holds clear competitive advantages. As for Singapore, the country's Deputy Prime Minister Lawrence Wong frankly told supporters at a recent political rally that the country “cannot afford to outbid the big boys” to attract investments.
Regarding the current global transformation, researchers at ANBOUND have previously pointed out that the fundamental logic governing the world economy's operation, corporate decisions, and government choices has undergone a shift. It has transitioned from the economic logic of pursuing efficiency during the era of globalization to the political logic of seeking security and political correctness during the era of geopolitics. Efficiency and cost are no longer the primary concerns guiding national policies. The competition of the deglobalization era has experienced a systemic alteration, and the once freely accessible global market for sharing and exchanging has fragmented into markets of varying sizes. During this time, market space and policy autonomy become crucial resources and assets in the competition among nations and economic entities.
Back when the tide of deglobalization was beginning to rise, and before the intensification of geopolitical maneuvering, ANBOUND's founder Kung Chan introduced the theory of New Space in geopolitics (Kung Chan, 2018). The theory posits that the core of modern nations' economic competition lies in vying for market space, which holds fundamental value for economic growth. The significance of market space stems from its size and influence, determining the world's configuration and equilibrium, and forming the foundation of global leadership. Capital is bounded by space, production is constrained by space, consumption depends on space, and even the value of technology is contingent upon space. A nation's advantageous position and economic fluctuations also hinge on space, while risk avoidance and economic crises similarly require space. Hence, the differentiation and competition brought about by globalization will shift towards contention and maneuvering for market space.
The discussion of The Wall Street Journal five years later, in fact, falls within the framework of this New Space theory, partially interpreting and confirming its judgments through the changing circumstances of small economies during the period of deglobalization. In the evolution of this fragmentation of market space, certain small open economies, especially the free ports, have been hit harder than larger economies. In reality, nearly all small economies, due to their lack of market depth and fiscal strength, tend to be marginalized to varying degrees. Their economic and trade independence is challenged, and they inevitably become reliant on larger markets. This implies that for small economies, mere "political alignment" is insufficient; they must also engage in "economic alignment". Amid these shifts, larger economies like the U.S., European Union, China, Japan, and others may gain relatively advantageous positions. However, if China is collectively "decoupled" by other economies, the situation could take a different turn.
Hence, the fragmentation of the global economy will shift towards regional market-based geopolitics. Just as geopolitical games must consider "power and status", the competition in geoeconomics must similarly adhere to the overarching context of "great power rivalry". Moreover, the aforementioned transition process is likely to persist for a substantial duration; one should not hope for a swift return to the past in the short term.
Final analysis conclusion:
In the process of shifting from globalization to deglobalization, the underlying logic governing global economic operations has undergone a transformation—from "economic logic" to "political logic", where geopolitics will dominate the world. The deglobalization process will give rise to a competitive pattern of regional markets primarily led by major economies. Small open economies that once enjoyed the dividends of globalization may face significant challenges in this new landscape. For China, the lesson is clear: it should maintain its openness amid deglobalization, strive to expand market space, and exert its influence within open market domains.
