Has the Black Swan appeared for Globalisation!!
In the decade of 90s, newly found wisdom wheel of Globalisation was getting traction through USA inspired multilateral free trade agreements like NAFTA, multilateral institution like WTO and trade blocks like EU. The World was getting interconnected for movement of capital and technologies, intercontinental trade in goods and services and for movement of people in limited way. In this emerging interconnected world order, all countries were asked to consider each other as equal without discrimination. A case for grand borderless world for output and consumption was being pushed. One of tool left to signatories- member countries of this emerging world order was tariff barrier to protect their markets.
The Developed economies were shifting all types of repetitive manufacturing and back-end services to Asian countries to take advantage of labour arbitrage opportunity that existed in such relocations. Multinational corporations hid this labour arbitrage exchange under exotic jargons like supply chain efficiency to avoid discontent in local labour market. Once buzzing industrial cities of west, like Detroit-started turning into ghost town. This Walmartisation of first world countries was complete by onset of 2010. In this game of labour arbitrage, all ASEAN countries gained, but China emerged as the clear leader.
To understand why Chinese benefitted most from this industrial relocation, it would be prudent to delve deeper into Chinese civilizational pillars and value system. Author Sanjay Dixit explains in article dated 5th April 2020 — China is Zhongguo in Mandarin, meaning the Middle Kingdom, or the Central Empire. This centrality is a part of the tradition of China, a civilisational imperative. Under centralised, at times ruthless command of CPC- Communist Party of China, Chinese society worked efficiently, relentlessly and obediently, much like a giant ant colony of Formica yessensis where millions of worker class ants work tirelessly under Queen ant. This very nature of Chinese society was attractive enough for multinational corporations for making China hot destination for relocating their manufacturing.
Dani Rodrik, Turkey born American economist was first to red flag this fast forwarding wheel of Globalisation. He had two genuine apprehensions. One, there would be more losers in this game as only few countries more poised to accept capital and technology would win. Two, Globalisation would create social tensions and disturb domestic norms in many countries as domestic labour wages and jobs will face downward pressures. Another American economist Joseph Eugene Stiglitz joined Dani Rodrik, as he became wary of Globalisation due to very intent of multilateral institutions. He felt these institutions acted against the interests of impoverished developing countries.
At this point, plugging in Indian experience of Globalisation on some domestic industries would be in order. Preparation years for Beijing 2008 Olympics were a watershed duration in China’s domestic steel capacity building effort. Steel was need as most critical input for all infrastructure projects. By 2006 China became the world’s largest steel exporter by volume, up from the fifth largest in 2005.
During this period world Iron ore and finished steel prices remained high as Chinese black hole sucked both from major producer countries. Post 2008 Olympics steel demand in China started easing off and by 2014, the dumping of cheaper Chinese steel in international market became a huge problem for worldwide steel manufacturers. Cheaper steel imports brought domestic Indian steel prices to unsustainable low level. Even most profitable Indian steel manufacturers started booking losses and domestic steel industry as whole fell in debt trap beyond recovery. Similarly, Indian tyre manufacturers were badly hit by cheaper imports from China.
Unfortunately, UPA government of that time under leadership of much acclaimed economist prime minister, did not take tariff related, anti-dumping measures permitted under WTO framework to protect domestic industry. Rather the government of day further added fuel to raging fire as it signed bilateral trade deal with Korea in 2009 and Japan in 2011. By 2014, when UPA government was shunted out of power, Indian manufacturing and banking was crawling under huge NPA of debt. India was effectively working as trading nation where only traders & importers were making money and manufacturers were in red. Fortunately for country, this economist prime minister could not sign FTA with ASEAN before leaving his office, sparing many other domestic industries from further bloodbath.
Before 2014 and during first half of NDA government tenure, dice was clearly loaded in favour of trading and against manufacturing when import tariffs and excise duties compared. In 2011–13 period the basic custom duty on mobile phones was 2%. In 2013 budget excise duty on domestic manufactured/assembled phones was increased to 6%. This policy discrimination even wiped out domestic assembly line mobile phone manufacturers who were sourcing knocked down kits from China and assembling these phones under their brands.
Many established Indian manufacturing houses started selling imported finished goods under their own brand names in white goods space. Big retailers started copying Walmart model and started selling cheap imported white goods under their roofs. But Chinese were upping the game in value chain, as a result Haier, Huawei, Xiaomi and many others became household names in India. National brands got cannibalized by multinational brands.
Once new government took over, it made “Make in India commitment” and applied brakes to this incessant imports, by activating higher tariff and anti-dumping duty barriers. Domestic prices firmed up and most local industries including steel and cement came out of ICU. For example in 2018 basic import duty on mobile phone was raised to 20%. Country like Japan was so irked by this high tariff wall (permitted under WTO) that it lodged complaint in WTO in May 2019.
In this game of Globalisation, India and many other countries were losers (Rodrik’s first point), when manufacturing as contributor to economy either stagnated or contracted. Before 2014 and later in 2016, social tensions built up (Rodrik’s second point) in India and USA respectively, new protectionist governments took charge. Across the world, in many countries pro-Globalisation policies were being reversed. On January 31st, 2020, four year old process of BREXIT was also completed. Though all multilateral institutions are still working.
If we try to understand three decades of rise and fall of Globalisation from point of view of a Lebanon born writer, philosopher and Professor Nassim Nicholas Taleb, this process was routine, obvious and predictable as it happened inside Mediocristan (type 1 randomness).
In his seminal book The Black Swan: The Impact of the Highly Improbable he explains another side of world, Extremistan (type 2 randomness) — where one event can easily affect total in a disproportionate way. Having survived through the Lebanese Civil war (1975–1990), an exceptional disruptive event in otherwise progressive and calm society of Lebanon, Taleb proposed that disruptive events cause unpredictable mega impacts on world. Globalised world was yet to encounter Taleb’s Black Swan
In November 2019, this Black Swan appeared in Chinese city of Wuhan as COVID-19 virus. At the time of writing this article, is spreading like forest fire throughout this substantially interconnected world. Countries are responding with emergency measures hardly seen by any living human being. By the time this Black Swan would disappear, it would be time for the world ponder over few strategic choices for future. Would it be better calling chickens back home to roost, or move these chickens away from one Poultry farm at least, is not for sure. The thing that is for sure is that the wheel of Globalisation is badly damaged now.
References:
1. Has Globalisation Gone Too Far?- Author Dani Rodrik
2. The Black Swan: The Impact of the Highly Improbable –Author Nassim Nicholas Taleb
