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From Deep Globalisation to the Risk of Deglobalisation: the Rise of Local-Contentism

November 12, 2013 • GLOBAL ECONOMY, EMERGING TRENDS, Capitalism in the 21st Century, International Relations, In-depth, Unprotected Post

By Marcos Troyjo

As the world transitions from ‘Deep Globalisation to Deglobalisation’, economic policies based on a ‘Doctrine of Local Content’ take center stage. As a consequence, the global economy underperforms. Below, Marcos Troyjo argues that Reglobalisation can only resurface if countries move away from ‘Local-Contentism’ and closer to a productive interdependence turning out ‘Made in the World’ goods.

‘L’air du temps’ is how the French tradition in the social sciences generally characterises the ‘prevailing atmosphere’ of a given historical epoch.1 As 21st Century capitalism struggles to find a way out of the period of marked uncertainty inaugurated by the ‘Great Recession’ that broke out in September 2008, it is clear that Globalisation as ‘l’air du temps’ is at a crossroads. The dynamics of freer circulation of goods, capital and people has lost steam. Trade protectionism is on the rise.2 Multilateral institutions such as the International Monetary Fund, the World Bank and the World Trade Organisation provide slow and often insufficient responses to contemporary challenges. There are indeed various forces of ‘Deglobalisation’ operating around the world today.

Globalisation as a concept should represent more than just the ever-expanding technological advances in transport and communications. It is instead about decreasing obstacles to international trade and investment, increasing global supply chains and improving macroeconomic coordination among the world’s top economic players, especially those member-countries of the G20. The Globalisation of common and shared ways of experiencing the world help interdependence and interconnectedness – the basis for productivity gains on a global scale and the sustained expansion of the world economy over time. All of these different drivers of Globalisation now seem to be clearly in check,3 particularly the Globalisation of values, the notion of a normative compass found in the 1990s idea that the principles of market economy and representative democracy as a system of government were the best parameters for the organisation of societies across the globe.4

 

Deep Globalisation
In the early 1990s, the interplay of different elements brought about an era of ‘Deep Globalisation’ during which the global economy expanded vigorously. The demise of the Soviet Union and the subsequent ‘End of History’ seemed to allow for renewed international cooperation based upon the pillars – and promise – of democracy and free markets. The U.S. seemed destined to remain a ‘hyperpower’ in the decades to follow: a new hegemon shaping a ‘new American Century’. With increased competition and cooperation with other economic powers notwithstanding, the U.S. would go on unchallenged as a geopolitical player and as the country to most vehemently embrace the principles of democracy and free markets. The globe’s geoeconomic meridian, as far as manufacturing output was concerned, seemed to be shifting towards Asia – and this process was being led by Japan.5 Regional blocs appeared to be the up-and-coming economic actors – and the success of European integration was seen as paradigmatic. Both the rise of Asia – propelled by Japan and the so-called ‘Asian Tigers’ – and European integration were compatible with the interests of the United States as a hyperpower, since more democracy and free markets would only deepen Globalisation.6

Now, in 2013, these parameters seem to have shifted and comprise a scenario in which we observe:

1) ’Multiplatform’ conflicts and tensions (viral terrorism, across-the-board criticism of the West and its liberal political and economic order, cyber-vandalism). Instead of the ‘End of History’, the emergence of ‘multi-histories’.

2) The U.S. in serious doubt as to its role in global affairs as it weighs the impact of the Great Recession of 2008, the heavy legacy of the War on Terror and the costly military interventions in Iraq and Afghanistan. As a consequence, the U.S. seems more inclined to focus on its domestic issues and more reticent to play the part of leading global force for what it perceives as democracy and free markets.

3) The rise of Asia led by China.

4) A slower – and less deep – pace in regional integration and the revival of the nation-state as the leading player in global economic relations.

 

From ‘Deep Globalization’ to the ‘Risk of Deglobalization’
In short, over 20 years we have left a period of ‘Deep Globalisation’. We have moved closer to the ‘risk of Deglobalisation’. In this context, international relations (understood here as relations involving nation-states) have resurfaced powerfully. It is not necessarily a world of renewed nationalisms, but rather a global juncture in which nation-states are particularly selfish, individualistic, acting according to an ‘every nation for itself’ mode.7

And as Deglobalisation gains ground, a strong trend shows its face in the world economy. Against a backdrop of great uncertainty, countries increasingly adopt industrial and trade policies based on a ‘Doctrine of Local Content’; a notion we could call ‘Local-Contentism’.

Many confuse Local-Contentism with defensive trade measures erected against artificial exchange-rate stratagems that boost the attractiveness of a country’s exports. There are clear differences however between Local-Contentism and old-school protectionism. While the latter is essentially about import quotas and tariff barriers set up to protect what is ‘national’, the former idolises foreign direct investment and makes extensive use of government procurements as bait. After all, by its very definition, Local-Contentism is all about being ‘local’, not necessarily ‘national’. From the U.S. to France, from Brazil to China, Local-Contentism can be easily identified in the way state-owned enterprises, official banks, municipalities, states, provinces and central Governments interpret and implement a country’s interests in the global economy. Today, Local-Contentism is one of the top parameters of how governments indirectly protect domestic companies from foreign competition, foster the creation of jobs and go about procurements.

The practice is becoming the most recurrent tool in bulking up a nation’s capacity to compete in world trade and attract investment. But it carries a heavy price tag. In Brazil, for example, since 2003 the Federal Government only allows Petrobras (the state-owned oil company) to buy oil tankers that have been built with at least 65% of local content. As a consequence of such requirements, Petrobras ends up paying a premium of 100% on top of the average international price for any large oil-transporting vessel.

In Latin America, successful local-content policies enacted by Colombia and Peru, for example, have parted ways with traditional forms of xenophobic protectionism that plagued the region during much of the twentieth century. The economic translation of ‘Bolivarianism’, for example, means basically the nationalisation of industrial assets, as if wealth resided in possessing physical facilities, not in people’s talents or knowledge-intensive processes.

 

Local-Contentism in the U.S. and Europe
But the recent move towards Local-Contentism is also visible on radar screens in the U.S. and Europe. Recent presidential campaigns in America and France were not centered on free markets or enhanced regional economic integration. They focused instead on the job creation side of Local-Contentism. We are experiencing far more than just ‘currency wars’. Exchange-rate tactics make for ancillary rather than decisive battles. The world has set the stage for the waging of ‘clashes for competitiveness’.

In recent years, the criticism against China´s hyper-competitiveness is a good example of how countries overlooked the importance of Local-Contentism. Throughout the past decade, ever-louder American and European voices were raised against the way China managed its exchange rate. They aimed at spreading the notion that an undervalued currency was the key to China’s capacity to compete. But other factors have been more important in strengthening China’s sophisticated policies of Local-Contentism,8 which since 1978 have included:

– PPPs (public-private partnerships) as a springboard for exports and attracting foreign direct investment

– the (still) low cost of China’s domestic factors of production

– privileged access to the world’s most important buying markets (such as the United States granting China Most Favored Nation status in 1980 and Europe doing the same in 1985); and

– a vigorous business diplomacy, which reportedly results in two separate Chinese trade and investment missions visiting the US and Europe every day.

Instead of examining how China became a champion of Local-Contentism, until recently the US and Europe looked for allies in their criticism of China’s currency in multilateral forums, hoping, for example, for Brazil’s endorsement. Yet it would be wrong to describe any growing criticism by Brazil of China’s economic policies as simply a way of ‘sharing the view of the US and Europe’. Brazil has major concerns of its own over how the rise of China contributes to the ‘deindustrialisation’ of its economy.

Against a backdrop of great uncertainty, countries adopt industrial and trade policies based on a ‘Doctrine of Local Content’; a notion we could call ‘Local-Contentism’.

Nevertheless, Brazil has been able to partially offset its China-led deindustrialisation by ‘reindustrialising’ through its own version of Local-Contentism. One of the reasons Brazil has been able to accumulate enough capital to foster local content is that China has overtaken the US and European Union as Brazil’s top trading partner and major source of FDI (foreign direct investment).

China’s appetite for agricultural and mineral commodities, where Brazil has competitive advantages, has automatically extended economic cooperation to other areas (logistics, infrastructure, aircraft and others). Added initiatives to this mutual good can be seen in Brazil’s moves towards recognising China as a ‘market economy’ (although this has not been formalised) in exchange for Chinese support for Brazil’s bid to become a permanent member of the UN Security Council (not formalised either) and in China’s opening up to Brazilian exports of beef and poultry.

Brazilian manufacturers who worry deeply about a ‘flood’ of Chinese goods into the Brazilian market would doubtless appreciate the government taking action in the form of quotas and other import restrictions. However, they are less critical of China’s exchange rate policies and more vocal in denouncing Brazil’s outdated and non-competitive labor and fiscal laws, shortage of domestic infrastructure and high interest rates, which hurt Brazil’s domestic and international competitiveness more than the overvalued real or China’s cheap renminbi. Consequently, China and Brazil have implemented different approaches to the notion of Local-Contentism. China has used it as the domestic platform from which it would be able to compete in global markets. Brazil applied it as if promoting a second generation of import substitution industrialisation.

If, on the one hand, Local-Contentism is a pillar upon which China built its current economic might, on the other it is also one of the concepts countries are now implementing to fight China’s hyper-competitiveness. As a consequence, we may see fewer ‘Made in the World’ goods coming from ‘network-corporations’ that in the heyday of globalisation combined worldwide logistics, supply chains and talent pools to achieve productivity gains, and more of these processes taking place simultaneously in a single country.9 Even China, which based its prosperity on a ‘trading nation’ strategy, has to model its Local-Contentism not so much on the way it sells to the world, but rather on how China buys from the world. Major contracts by China’s government, corporations and consumers as buyers will have to support activities carried out locally, generating local jobs and taxes.

 

BRICs and the Global Economy
On a broader scope, we can essentially argue that the idea of the BRICs (Brazil, Russia, India and China) that emerged over the past dozen years is one that pertains to how the future is going to be built. These nations have reached the status of economic powerhouses because for the past three decades they have been able to adapt successfully to the changing contours of the global economy, and especially by becoming local content hubs. That is to say, in a world where the generation of jobs is key to economic success, they have been able to pursue alternative strategies so that their economies have always been busy in providing local content.

And if local content remains an essential part of BRICs’ industrial policies only up to the point where their corporations are able to compete on a leveled playing field, then the BRICs’ vocation as global growth engines will definitely be confirmed. If BRICs are indeed able to translate their local content policies into springboards for knowledge and innovation, they will certainly become some of the world’s most dynamic, prosperous and influential group of nations.

But it is equally important to observe that although Local-Contentism can benefit one nation or another for a number of years, the global economy will pay a heavy price for the loss of efficiency it entails. That is why many governments today are trying to build a road back to ‘Reglobalisation’ either through the launch of ambitious initiatives such as that of TTIP (Transatlantic Trade and Investment Partnership), involving the U.S. and the European Union, or the TPP (Trans-Pacific Partnership) negotiated by Australia, Brunei, Canada, Chile, Malaysia, Mexico, New Zealand, Peru, Singapore, the U.S., and Vietnam.10 A successful outcome of the Doha Round of the World Trade Organisation (WTO) would also help industrial and trade policies around the world move away from Local-Contentism and closer to interdependence. But such a positive scenario for the WTO, which depends on harmonising the interests of more than 150 nations, seems highly unlikely at the present juncture.

More broadly, if instead of playing a part in a country’s catching up strategy, Local-Contentism becomes an across-the-board philosophy for our times, it could easily be transformed into protectionism pure and simple – and as a consequence we can only expect ever-growing economic imbalances. Local-contentism would thus become the very ‘l’air du temps’ of a lengthy, unwelcome era of Deglobalisation.

About the Author
Marcos Troyjo is co-Director of BRICLab at Columbia University, where he teaches International and Public Affairs. He is the founder of the Center for Business Diplomacy, an independent think-tank on global entrepreneurship. Professor Troyjo also teaches at Ibmec University and is a Visiting Scholar at the Centre d`Études sur l`Actuel et le Quotidien, Université Paris Descartes (Sorbonne). He is a regular op-ed contributor and commentator for print and electronic media outlets in Brazil and around the world. He is the author of books on development and global affairs including Trading Nation: Power & Prosperity in the 21st Century, listed by ‘Americas Quarterly’ as one of the best new books on policy, economics and business in 2007.

References
1. Maffesoli, M. Eloge de la raison sensible. Grasset. Paris, 1996.
2. “Beware rising protectionism”, Financial Times, April 15 2013.
3. Ferguson, N. “Sinking Globalisation” in Foreign Affairs, March/April 2005. Council on Foreign Relations. New York. 2005.
4. Fukuyama, F. The End of History and the Last Man. Penguin. London. 1992.
5. Matray, J. I. Japan’s Emergence as a Global Power. Greenwood. Westport, 2001.
6. Krasner, S. D.: “Regional Economic Blocs and the End of the Cold War (in Portuguese)” in Política Externa, v.1 n.2. 1992.
7. Bremmer, I. Every Nation for Itself: Winners and Losers in a G-Zero World. Penguin. London. 2012.
8. Troyjo, M. Trading Nation: Power & Prosperity in the 21st Century. Aduaneiras. Sao Paulo. 2007.
9. Van Bergeijk, P. A.G. On the Brink of Deglobalisation. Edward Elgar Publishing. Cheltenham. 2011.
10. Kotschwar, B., and Schott, J. J.: “The Next Big Thing: TPP & Latin America” in Americas Quarterly, Spring 2013. Americas Society/Council of the Americas, New York, 2013.

 

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2 Responses to From Deep Globalisation to the Risk of Deglobalisation: the Rise of Local-Contentism

  1. […] 3,500 protectionist measures and administrative requirements have been instituted globally. More governments are required to purchase locally produced products, even if they are much more expensive than imported alternatives. As robotics, artificial […]

  2. […] protectionist measures and administrative requirements have been instituted globally. More governments are required to purchase locally produced products, even if they are much more expensive than imported alternatives. As robotics, artificial […]

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