Céline Sophie Lüdtke, ESSEC MiM student and finalist in the 2023 CoBS student CSR article competition, explores the facts behind deglobalisation to offer a glimpse of what a new world approach to business and trade and business might be.
Brave New World: How can we navigate in the new world order, or have we already seen it all? by Céline Sophie Lüdtke.
The word “deglobalisation” seems to hang like the sword of Damocles above our heads. However, it is necessary to understand the notion in both its systemic and practical implications. It encapsulates both the decline of political and economic cooperation. The 1970s heralded the era of the Washington Consensus as well as presumed the “End of History” (Fukuyama, 1992), arguing the victory of liberal democracy and neoliberal institutionalism.
However, the rise of China as well as the general instability of the economy under the Washington consensus has led to a re-organisation of the word order and hence a “slowbalization” (Aiyar and Ilyna, 2023). MNCs now have to decide on how to navigate in this new world.
A snapshot of international economic history
De-globalisation is not a recent phenomenon. In fact, it is not even a new phenomenon. One could even go back as far as antiquity to identify rise and decline of globalisation. International trade has existed for a long time – trade routes such as the silk route were discovered and used for centuries and port cities like Venice, Bruges or Lisbon gained unprecedented wealth. However, due to social and political unrest and even pandemics (most infamously the bubonic plague) slowed down or led to a decline of globalisation. Only because “globalisation” has become a keyword in recent discourse does not make it a new development in human history.
The first time we experienced de-globalisation in modern history was in the interwar period (WWI and WWII) which was, unsurprisingly, coined by protectionism and strong nationalist tendencies. Globalisation was on the rise again in the post-war period (Aiyar and Ilyna, 2023). There, social welfare and reconstructing the economy were major objectives of the Western global order. Stabilising the economy was achieved through the “Bretton Woods Agreement”, which essentially fixed global exchange rates against gold (of which 2/3 were held by the US) as well as the US-Dollar. International institutions such as the IMF, the WTO and the World Bank were to oversee the system (Pozuelo-Monfort, 2015). In broader economic history, John Ruggie referred to this period as “Embedded Liberalism”. It describes market processes and business activities being constraint by social and political objectives and rewards to create a balance between global free trade and national welfare. It ended in 1972, upon the collapse of the Bretton Woods system (Baylis et al., 2014).
The Washington Consensus – an illiberal liberal approach?
The Bretton Woods agreement established numerous international institutions governing the international trade and business. After its collapse, these institutions, most of which were based in Washington, gained even more importance and effectively governed global business. Together with a rise of liberal leaders such as Margaret Thatcher and Ronald Reagan, leading (Western) countries controversially committed to trade liberalisation, elimination of domestic subsidies, liberalisation of FDIs, privatisation of state industries and, among others, to deregulation of industries and reduction of non-tariff barriers to foreign capital investment.
These policies, primarily pushed by the US, are referred to as the Washington Consensus, or in a political economy context, as neoliberalism. This economic ideology especially after the collapse of the USSR was coined by US-American hegemony. Less powerful states needed to adhere to the Washington consensus in order to participate in international business, even if it was a disadvantageous framework.
Today, critiques of neoliberalism pinpoint it as the reason for rising inequality and financial deregulation, ultimately leading to the global financial crisis in 2008 (Rodrik, 2017).
The decline of US hegemony and domestic resistance globalisation rules
At the very latest, the crash of the global financial system and the resulting economic crisis showed many countries that neoliberalism was not an ideal, even unstable solution. Additionally, starting from the 1990s, most notably China together with other emerging countries gained more economic and political importance (ecpr, n.d.). Moreover, the EU emerged as a more and more integrated partner, unifying numerous countries and representing and economic power player.
At the same time, innovation and poor domestic policy decision-making led to many people in the western hemisphere to feel “left behind” by the elitist politicians and rise to right-wing populist movements, infamously spear-headed by Donald Trump. These movements heavily critiqued globalisation and actively worked against it. For example, in March 2018, Trump imposed tariffs on steel and aluminium imports to protect American producers as part of his “America First” doctrine (Swanson and Eavies, 2020).
Together with the Russia-Ukraine Crisis and the rise to power of China, the world is no longer governed by a US-American unipolar world order, nor by the mechanisms put in place by the Washington Consensus.
Can we expect a new bipolar world order?
Nowadays, the structural bipolarity of the US and China is widely regarded as a fact. Economically, there is a strong interdependence between China and the US – the US exports and imports more from and to China than from any other country and China has experienced unprecedented levels of growth once it started trading globally (Berman and Siripurapu, 2022).
However, there are many points of friction making a peaceful and orderly coexistence less and less likely. Tensions mostly stem from currency manipulation, labour and human rights violations and perceived national security interests and different understanding of territorial sovereignty (Parry, 2021).
During the Covid-19 pandemic, the strong dependency on China has become more visible. On May 5th 2021, the EU presented its new industrial strategy with plans to reduce its economic dependency on China (Clarke, 2021). Similarly, President Joe Biden has continued his predecessor’s policies towards China believing that the US must “decouple” from China. Due to economic and national security reasons, he argues that US dependence on Chinese products and supply chains must be reduced (Kucik and Menon, 2022).
These developments will ultimately lead to peripheral countries having to “decide” for a side in the conflict. However, contrary to the previous Russian-American bipolarity and the “iron curtain”, powerful players such as Brazil, India and the EU will have less extreme ties to whichever side they chose – paradoxically giving this bipolarity a multipolar character. Roughly, most Asian countries and Russia will side with China, as will many African countries due to high Chinese investments. Traditionally, Europe and South America will side with the US block.
In the new world MNCs will have to strategize
As neoliberal institutionalism is breaking down and bipolar politics decide rules for business relationships, it is likely that MNCs will have to decide within a sphere of influence. The recent stark deterioration of the relationship between the West and China will possibly lead to a trade war and to a breakdown of long-established supply chains. To guarantee an uninterrupted functioning of their business, MNCs will have to re-orient their business model either towards China or towards the US sphere of influence and find new suppliers as quickly as possible.
Another option could be a complete decentralisation of the company – making any affiliation to either one of the blocks unrecognisable (Witt, 2021). This would entail a radical change of management style – giving local managers more responsibilities, influence and control. In return, investments in training and recruitment, possibly even in the setup of new strategic locations would be necessary.
Is neutrality possible?
A seemingly interesting option would be to remain neutral in the conflict. At a first glance, not showing alliance to either block seems like an elegant solution. However, neutrality in this context is hardly an option and has shown to lead to lose-lose situations (Witt, 2021). In 2021 H&M received a huge backlash from Chinese consumers when they stopped using Xinjiang cotton due to reports of Uyghur forced labour (Paton, 2021). Had they continued using the cotton, the same would have happened with Western consumers. In the end, H&M recognised Taiwan to be part of China, appeasing the Chinese administration but ultimately having to deal with another controversial issue in the Sino-Western relationship.
Due to increasing government involvement in business relationships, quid-pro-quo situations have come up. When Germany decided against Chinese provider Huawei to build its mobile 5G network due to security concerns, the Chinese ambassador casually threatened retributions targeting the German car industry (Bennhold and Ewig, 2020).
Furthermore, human rights violations and national security concerns will ultimately bring many companies in difficult situations. Companies will have to question more than ever their ethical responsibility towards the locations their operate in.
The future of social value creation in the new world order
The re-orientation towards national businesses and resources has been accelerated by both right-wing populism and the Covid-19 crisis. Especially the Covid-19 crisis forced procurement managers to find to strategies to get past the supply chain inertia. However, while some global ties might be lost, there are opportunities for cooperation with local suppliers and businesses. Supply chain security might lead MNCs to find resources closer to their production/ market sites, even if they might not compete with the best pricing models.
Moreover, in the consumer goods sector cooperation with traditional, small businesses would strengthen the position of the SMB owners and their employees, leading to long-lasting poverty alleviation. These invaluable relationships could also be used to broaden the MNC’s ESG programme – by investing in small high impact projects and the local people. This way, a new wave of intrapreneurial innovation could lead to long-term stability and growth. Having economic stability in return would also, as seen historically, lead to a new wave of globalisation.
Returning to a new “embedded liberalism model”?
In the post-war period, international political and economic relations had to be repaired and many countries had to be rebuilt. The idea behind embedded liberalism, i.e. to focus on social welfare and economic stability was ideal in that situation. Considering the current social, economic and political atmosphere of unrest, a similar approach could be beneficial. This time, it would be necessary to find a new consensus, build or rebuild institutions where as many countries as possible have their interests heard and united. MNCs could have a pivotal position in forming these new rules, being in the unique position of operating in spheres of numerous national interests.
Deglobalization and the new world order – an opportunity for ESG?
Today, deglobalisation is an incontrovertible fact. It goes hand in hand with the decline of US hegemony and the slow collapse of the Washington Consensus. New powers have emerged in the international order, most notably China. Conflicts with Russia, China as well as the Covid-19 pandemic have underlined the new bipolar world order, where a declining and a rising hegemon are competing while having deep economic ties.
MNCs are now in the difficult situation to navigate in this new power balance while being less and less able to rely on the economic institutions established under the Bretton Woods agreement. Due to the tense economic and political environment, long-term strategies have to be found, which could either centre around choosing a block as a sphere of influence or decentralising and localising to an extend where affiliation to either side will be impossible.
However, this localisation could be used to further advance with ESG goals by investing in small SMBs and profiting of the know-how present in the local economy. More broadly, MNCs could also be a powerful voice in finding a new economic system to finally replace neoliberalism, both incorporating economic stability and social welfare. This could lead to a new wave of globalisation.
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Useful links:
- Link up with Céline Sophie Lüdtke on LinkedIn
- Read this and other student articles in the special issue Global Voice magazine #26
- Read a related article: Why anti-globalisation is not the solution
- Discover ESSEC Business School and the Master in Management programme.
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