October 29 Comment to International Finance Forum 20th anniversary meeting in Guangzhou

For video delivery, 14:00 CST, Sunday, October 29, 2023; 23:00 PDT, Saturday, October 28, 2023

(Marsha Vande Berg, member of the IFF Academic Committee; Independent Corporate Director and Advisor with expertise in Asia Pacific capital markets. Former Chief Executive Officer, Pacific Pension & Investment Institute)

Congratulations to the leadership and the secretariat for your perseverance in reaching this anniversary milestone through a difficult two decades. My affiliation spans nearly 15 years of IFF’s contribution to global thinking about Chinese and global financial systems.

The mark of vitality in an organization like IFF is illustrated in how it continues to look forward while also assessing – and learning from those factors that shaped its present. There’s also evidence of vitality when an organization inaugurates new directors, continues to engage a committed and interested advisory panel and an academic committee – where I’m pleased to be sitting.

My assignment here is to offer a few thoughts for those of you participating in the Academic Roundtable Number One – Revitalization and Cooperation in a Fragmenting Global Economy.

The questions we are to consider include: What are the reasons for global economic fragmentation? What are the drivers? Can countries work together? If so, how do we work together, especially to address existential issues like climate change and public health.

It’s a challenging assignment because the state of the global economy is a moving target. It’s changing as we speak. And sometimes we have tendencies to describe trends in terms of outcomes rather than their internal dynamics. Rhetoric can obscure realities.

I’d like to talk about three dynamics I see as highly influential dynamics in shaping today’s economy and our economic statecraft. And in closing, I’d like to leave you with a couple of thoughts I hope you find worth remembering.

Fragmentation is incorrect as a description of the evolution that is happening currently in the global economy and with economic statecraft. What some may see as fragmentation is rather a change in the order that allows wider berth to assert domestic and regional interests first and then engagement externally in ways that reflect those domestic interests.

A more nuanced accounting identifies this change as a reordering with the consequence, intended or otherwise, of concentrating interests by those interests and geography.  It is more about re-globalization and less about fragmentation.

Whereas a high priority for trade once was cost and efficiency, today, decisions are all about economic security - and to a large extent energy and technology security.

Our world remains an interdependent world, connected by the global flows of goods, services, capital, people, data and ideas. Despite the dramatic disruptions of the last few years, we remain interconnected and aware as perhaps never before that no region is self-sufficient.

The outcomes we are experiencing are different from those we grew accustomed to twenty years ago when IFF was established. What’s more, it’s highly unlikely we will ever return to the world of trade that we knew at the turn of this century.

In an effort to explain the drivers of this change, I like to keep it simple. In this instance, I attribute the change to Three "C"s. This description works in English. I’m not sure how it translates into Chinese.

The first C is for Conflict; the second is COVID or more precisely, the shared experienced of a global pandemic and lockdown. The third C is Climate change. While not limited to these drivers, the change we are experiencing is helping to upend our prior assumptions about globalization, leading us to think the global economy is fragmenting rather than reordering itself.

The Three "C"s are continuing to disrupt and then re-order complex border supply chains. In the process they are re-ordering the structure of economies in the supply chains’ path. Some are net losers; some are net gainers.

Considering the first C - While conflict has been with us since the beginning of time, we feel the mounting pressure of a war between Israel and Hamas and between Ukraine and Moscow. We also react with frustration to the unsettled relationship between the US and China, the world’s two largest economies.

Coming to the second C – The experience of a global pandemic and lockdown, a Princeton history professor writing two years ago in the Foreign Affairs journal, described the impact of COVID as a cumulative double whammy. It’s as if COVID is completing the work of the 2008-2009 Financial Crisis, wrote Harry James. But not to worry, he added optimistically. Globalization comes in cycles. After the pandemic ends, he wrote in 2021, globalization will come roaring back.

Well it didn’t – and it won’t.

Coming to the third C – Climate change. Here is one issue on which we should be able to agree globally, but the prospect of cooperation has proved on again/off again proposition. There are indicators of progress, however, including a recently announced plan for the top sustainability representatives of the US and Chinese governments to meet in Southern California. This will follow what is anticipated as a meeting between the two presidents, Xi Jinping and Joe Biden during the November meeting at APEC. The focus of the international meeting is sustainability.

Still intentions are a far cry from what is needed to achieve progress. The most recent International Energy Agency annual outlook report tells us there’s barely a sliver of hope that we will succeed as a global society in holding temperatures below the threshold of 1.5° C - above pre-industrial levels.

It’s real. Globalization has not come roaring back. But elements are still with us. When trade is priced in terms of value add, there is an increase.

According to the World Trade Organization in an April 2023 report:

• The value of world merchandise trade increased 12% to $25.3 trillion in 2022.
• The value of world commercial services trade increased 15% to $6.8 trillion in 2022.
• Digitally delivered services exports were worth nearly $4 trillion in 2022.

Drivers of the value add are: demand for energy imports; ongoing friend-shoring and corresponding concentration of trade by region – offsetting a decline in the trade dependence between US and China.

The latter is underscored when imports of goods and services are expressed in percent of GDP for the US, China and India, a market now in an impressive upswing.

In 2022, China’s imports were 17.5% of GDP and plateauing after a sharp drop; the US was 14.6% and likewise appearing to plateau. India was 26.9% and on the upswing.

Another report, this one from the IMF last June, says explicitly that there is no conclusive evidence that international trade is deglobalizing. Yes, it has slowed since the Global Financial Crisis and declined sharply at the onset of COVID in 2020, but it has rebounded since then. However, the rebound was not uniform, but concentrated and typically in regional markets.

In other words, trade is being reallocated, not dropping away due to fragmentation of markets. Domestic conversations are about economic security. The interests of economic statecraft are focused on ensuring domestic sustainability; technology prowess; and the ability to use the assets as bargaining chips.

In the process, new alliances are being created reflecting in turn perceived necessities of domestic economic security versus aggressive economic expansion.

This doesn’t mean the world is turning a collective back on trade’s capacity to create a virtuous cycle, one that recognizes trade’s capacity to fuel economic growth, support job growth and raise living standards. What it does mean is that new objectives are emerging.

The standard of measure used throughout the 1990s and up until the early years of this century, was economic prosperity equally how much a company sold or how much a government imported and exported. While those factors still are important, they are no longer the very top priorities. Those now include economic security side by side with technology and data flows.

Data has taken its place on center stage – responsible for linking the world in ways that are both challenging and filled with opportunity to lead to creative solutions to truly existential problems like climate change and global health. It also brings challenges, including regulatory challenges. Who regulates the data? How do we regulate data when it moves across borders; hostile territories? When it comes to the relationship between government and its citizens, who owns the data? How is it stored?

There also are issues around equality and more equitable distribution than we have now.

This brings me to my closing point. The Three "C"s pose challenges but they also present opportunities. To realize those opportunities we need leadership in governments and in the private sector and civil society. The world will benefit when the leaders of the two richest economies talk with one another.

Realizing opportunities also requires people to people conversation on matters of shared interests. We saw the promise of conversation this past week during California Governor Gavin Newsom’s trip to China. At the end of the week, Gov. Newsom toured the Great Wall with US Ambassador Nicholas Burns. They also conducted a forum on climate issues with Chinese dignitaries in the shadow of the Great Wall.

This was prior to Gov. Newsom - who has a stellar list of legislative and executive accomplishments on climate matters - signing an MOU on the climate with China’s National Development and Reform Commission. He also met with President Xi.

During his visit to the Wall, Gov. Newsom was asked about decoupling as a result of US and China frictions. Gov. Newsom who has a stellar list of executive and legislative accomplishments on climate matters, didn’t hesitate.

“Some view the world from the perspective of scarcity. I don’t. I view the world from the perspective of abundance. The more successful China is, the more successful the world will be.”

Subsequently, he and US Ambassador Burns offered a friendship toast from the observation deck that overlooks the Great Wall to symbolize “the need to move beyond walls of the past to the bridges of the 21st century”.

While the world economy is changing, influenced by dynamics specific to our times, there are opportunities to advance prosperity and quality of life all around. Let’s encourage their successful outcomes.