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contributor perspectives

Mar 8, 2017 | 08:56 GMT

Connectivity, Not Primacy, Is the Way of the World

Board of Contributors
Parag Khanna
Board of Contributors
As emerging markets form more connections in all directions, they're becoming less reliant on the developed world.
(EKAPHON MANEECHOT/Shutterstock)
Contributor Perspectives offer insight, analysis and commentary from Stratfor’s Board of Contributors and guest contributors who are distinguished leaders in their fields of expertise.

As surprising as it may seem, speaking of "deglobalization" as an unstoppable trend became fashionable long before Donald Trump was elected the United States' 45th president. Citing the persistent after-effects of the 2008 financial crisis, such as lower cross-border interbank lending, rising tension in Asia and pressure to bring manufacturing back within America's borders, the arguments for "peak globalization" held a certain appeal before Trump's "economic nationalism" agenda of tearing up trade agreements took center stage this year.

But as in every previous episode, the rumors of globalization's demise have been drastically overstated. Today's reality — and the megatrend of the 21st century — remains a massive expansion in the volume of cross-border connectivity within and across the regions of the world, and in the scale of movements of people and transactions of goods, services, capital and data. Globalization is alive and well. The question that really matters for American strategists is whether the United States is being left out of the loop as the rest of the world's regions deepen their connections with one another.

Get on Board or Get Left Behind

Trump's worldview rests on the belief that America's economic might gives it almost unlimited leverage — and that the rest of the world will need to play ball if it wants access to American customers and finance. That may have been true once. But a closer look at just how global trade has been realigning suggests that it's likely to keep growing with or without the United States.

An example already in the public eye is former U.S. President Barack Obama's signature international economic effort, the Trans-Pacific Partnership (TPP). After the previous administration proved unable to push it through Congress and Trump ditched it in one of his first executive orders, most of the TPP's other signatories are moving ahead anyway with a "TPP minus one" format. In fact, though America will be absent when the new TPP constellation of negotiating countries comes together in Chile in March, China will be present for the first time. This is quite a reversal of fortune for a trade agreement that was initially pitched to Congress as a way to contain China's rise.

Even more important, more than a dozen Asian countries have rekindled their efforts to advance an alternative megadeal — the Regional Comprehensive Economic Partnership (RCEP) — centered not on the United States but on China. If the RCEP moves forward, it will integrate Asian markets in a way that will make them even harder for American firms to penetrate. Indigenous Asian firms will quickly move up the value chain and start occupying spots that U.S. companies are used to having for themselves. This is why America's biggest corporations aren't so keen on Trump's efforts to erect barriers that would keep manufacturing, pharmaceuticals and other sectors at home. Not only would "border adjustment taxes" raise the cost of their imports, but without the TPP's push to open markets, multinational companies' declining profits abroad will mean less capital to invest in competing for the high-growth markets where the majority of their revenues come from.

As Americans, it's easy to assume that global trade still depends on the United States as the consumer of last resort. But that's no longer true.

In fact, the bulk of trade in emerging-market nations is with one another, not with the United States. In 1990, emerging economies sent 65 percent of their exports to developed peers like the United States and Europe, and only 35 percent to other developing countries. Today, that figure is nearly reversed. This rising emerging-market trade is a multidecade trend that many Western economists neglect. China's annual trade with Africa is nearing $400 billion per year — more than U.S.-Africa trade — and its trade with Latin America is almost $200 billion, about the same as trade between Latin America and Europe. Emerging markets won't decouple from advanced economies, but as they connect more in all directions, they're becoming less reliant on the developed world.

This is only natural given their geographic proximity to one another. Consider that most of the world's oil now flows between the Middle East and Far East, across the Indian Ocean and through the Straits of Malacca to China, Japan and South Korea. A full 80 percent of China's oil and natural gas imports traverse this route, along with roughly 66 percent of China's imported and exported goods. Even if China diverts some of these flows to Arctic routes, for example, this is a shift in trade geography, not a decline in trade overall.

It's become trendy among globalization skeptics to point out that global trade growth is decelerating relative to global gross domestic product growth. But given how fast Asian economies are expanding in consumption and services, this isn't surprising. By most estimates, consumption in China now represents two-thirds of China's output and contributes 75 percent of its growth. Yet China has also continued its investment binge in infrastructure and real estate, which are keeping commodities imports steady. And remember that as they grow, wealthier societies tend to import more, borrow more, spend more and travel more — which means Asia's rising middle class will likely be a driver of international trade even as its companies reduce their dependence on the West.

Which brings us to the largest coordinated investment program in history: the construction of "One Belt, One Road," a China-driven infrastructure project meant to weave many new and sturdy Silk Roads across the Eurasian landmass. For the past quarter-century since the Soviet Union's collapse, Europe has been steadily rehabilitating its former Warsaw Pact and Soviet republic neighbors with modern infrastructure, while China has begun to do the same with the dozen countries on its western periphery, turning most Central Asian states into supply chain colonies and passageways to the Near East and Europe. In the next quarter-century, they will meet in the middle, fusing the Eurasian supercontinent into an integrated commercial zone encompassing over two-thirds of the world's population.

But we don't need to wait until then to see the potential: Europe's trade with Asia — including China, Japan, India, Australia and the Association of Southeast Asian Nations — already exceeds trans-Atlantic trade at more than $1 trillion per year, and that's even before most of these high-speed railways, pipelines and other corridors are built. No wonder European governments (and their construction companies) were tripping over themselves to join the Chinese-sponsored Asian Infrastructure Investment Bank, despite America's objections. Germany's record trade surpluses aren't going to be absorbed in the sluggish eurozone, or by a protectionist America. Thus, for all of today's uncertainty, this undercurrent is clear: Europe and Asia are brushing aside America's unpredictability and getting on with the business of building a new world order. As I wrote in Connectography: Mapping the Future of Global Civilization, "Connectivity across Eurasia now competes with culture across the Atlantic."

An Opportunity of Global Proportions

This is not "balancing behavior" to counteract the economic hegemony of the United States; the world is not aligning against America. It still uses the American financial system where necessary and American technology when convenient. But there is a law of history far more powerful than the United States' geopolitical primacy: supply and demand. American officials talk about accommodating China's rise as if the global system has an entrenched preference for American leadership. But the logic of history has no such sentimentality. The system wants only one thing: more connectivity. It doesn't care which power is the most connected, but the most connected power will have the most leverage. It will supply the security, infrastructure and other public goods that the world desires. China has become a welcome and popular power in Africa and Latin America because it has sold them (and often built for them) the foundations of better connectivity. They have demand for infrastructure and China supplies it. Ethereal concepts such as "soft power" are a pale substitute for the power of connectivity.

The new trade and financial links across the regions of the world signal the birth of a more distributed global economy with many major regional anchors including the United States. All sizable economies have benefited massively from exploiting comparative advantages with one another, and even the limited regionalization of supply chains won't undo this positive interdependence.

This more distributed globalization is also a significant opportunity for moribund Western economies. America is a debtor nation, but Japan and Germany (along with China) are the world's largest creditor nations, generating profits from reviving global lending and trade finance. Emerging markets' faster growth rates and weaker currencies have inspired some of the world's largest pension funds, from Canada to Norway, to expand their portfolio allocation to Asia, Latin America and Africa. The Norwegian pension fund recently announced a big switch in its focus from bonds to equity, meaning it is investing more in multinational corporations with exposure to emerging markets. 

The long money is still betting on globalization. Rather than try to stop it, America should get on the right side of history.

Indeed, the United States remains not only the most powerful state in the international system but also one of the most connected. America is the world's largest oil producer, and it increasingly exports oil to China and liquefied natural gas to Europe. The American dollar provides liquidity to the global financial system; American foreign investment drives capital formation in emerging markets; America's network of military alliances provides security guarantees; and of course, American software exports and digital services are craved universally.

American competitiveness therefore isn't enhanced by isolating itself. U.S. companies rightly favored the TPP and other trade agreements because they've long since outgrown even their own giant domestic market. Without substantial margins abroad, they cannot invest at home. Trump's punitive measures are self-defeating because they hinder America from competing in a world of growing opportunity. Not only should America redouble its efforts to open markets for American goods, services and investment, but it also must be equally aggressive in reforming its own tax, infrastructure, technology, immigration and education policies so that investing at home becomes more attractive.

If this is what Steve Bannon meant by "economic nationalism," that would be fine. But Trump's brand of "America First" ignores the simple fact that tens of millions of American jobs are linked to exports, and protectionism invites reciprocity in the form of countervailing measures that will surely destroy jobs, raise prices and slow the economy. There is still time to course-correct and ensure that globalization follows a win-win path. Most of the rest of the world sees it that way, and perhaps America should too. 

Parag Khanna is a leading global strategist, world traveler and best-selling author. He is a CNN Global Contributor and Senior Research Fellow at the Center on Asia and Globalization, part of the Lee Kuan Yew School of Public Policy at the National University of Singapore.
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