The retreat from globalism.

After three crippling shocks – the GFC, the pandemic and Trump’s war – globalisation has gone into reverse.

For three days towards the end of 1999, thousands of radical and determined demonstrators battled police in the streets of Seattle. The event was a ministerial meeting of the World Trade Organisation and the issue was the effect of globalisation on poor countries in the developing world. In an excessive response by authorities, troops were called in, hundreds arrested and tear-gassed apparently at random. Those three days became known as the Battle of Seattle.

It established a pattern of angry mass protests at international financial conferences in several countries: Sweden, Italy, Canada, Switzerland, Australia, the Czech Republic, Mexico and others. Eventually, the protests became smaller and moved their focus from globalisation to inequality.

But were those protests justified? The overwhelming evidence is that that they were not. The greatest negative impact of global free trade fell on lower-income citizens of developed western nations, not on those in the developing world. The most obvious examples are China, which has done spectacularly well, and the United States, which (except for the top 1%) has not.

“Where, now, are the jobs?” asked American voters. “Detroit or Shenzhen?” And so they elected Donald Trump for his promises to bring those jobs back. As it happens, it’s more complicated than that. Most of those old-manufacturing jobs would have vanished anyway as robots replaced people. Trump didn’t have the answers after all.

But nations of the west have good reasons for falling out of love with globalisation. They have begun to think again about the unobstructed flows of goods and money which characterised the neoliberal period from which the world is now emerging. Those flows of trade and finance, upon which globalised economies depend, have turned out to be critically fragile.

Globalisation was based on  a neat, plausible idea. But, neat, plausible theories tend to be rather more complicated when you put them into practice.

A man with an idea

As with so much, the origins of the globalised economy can be traced to the insights of thinkers in the late 18^th century Enlightenment.

In The Wealth of Nations, published in 1776, Adam Smith documented the advantages of specialisation in manufacturing. His example was a pin factory in which production was much more efficient when tasks were broken down and performed by specialist workers, rather than making every worker responsible for all stages of the process.

In 1817 David Ricardo expanded the idea of specialisation from individual workers to entire nations. He produced an ingenious model showing how trade between nations improves the prosperity of all. Under his model even if Portugal was more efficient at producing both wine and cloth than England, it is still best for Portugal to specialize in the product in which it has the highest relative advantage (wine) and to import the other (cloth).

So it began. If each nation concentrated on those things it produced most efficiently, and relied on others to supply the things they produced most efficiently, productivity and prosperity would soar and the whole world would be better off. The rising tide would lift every boat.

It took quite some time for the theory to be tested in practice. There had to be enough industrialised countries producing an immense variety of items, and there had to be free trade and cheap transport between them. In the absence of those conditions, Britain was able to become the workshop of the 19^th century world. Globalisation – as we know it now – had to wait.

An integrated world

For most of modern history, trade was essentially local. Commerce happened within nations and, usually, within localities. Transport was expensive and risky, trade barriers existed everywhere. Any goods passing through Germany in the early 19^th century had to pay tolls and tariffs at each of the 1,800-or-so separate states. Reform was slow and even when many of those barriers came down, problems remained. Imperial conquests were justified by the claim of increased trade and greater prosperity, but the fruits of this are difficult to see in the statistics.

It was not until the 1960s that serious change began, and it took another couple of decades for global trade to assume the spectacular growth that has so transformed the modern world. And it was not fully realised until much later, when Deng Xiaoping’s Four Modernisations brought one-fifth of humanity into the global economy.

In 2024, the value of world trade (adjusted for inflation) was 2,257 times as great as it was in 1800, and 45 times greater than in 1950.

Trade, whether measured by value or by volume, continued to rise, only momentarily knocked off course by recessions caused by the GFC and the pandemic. But how long can it go on like this?

The key to all this growth is the demolition of trade barriers around the world. After World War 2, the General Agreement on Tariffs and Trade (now the World Trade Organisation) was established to reduce trade barriers such as tariffs, quotas and financial controls. A plethora of multilateral and bilateral trade deals followed, bringing average tariff rates down from around 22% in 1950 to 2.5% by the beginning of this century.

That, together with declining transport costs and massive technological change, drove the globalisation era and created the world in which we now live. Then, though, progress stalled. Trump made it worse but did not cause it. This is not a phenomenon likely to end with his chaotic reign in January 2029.

The decline of tariffs no longer means trade is free. They have instead been replaced by another trade barrier: huge and pervasive subsidies. China is perhaps the most notable practitioner: its overall subsidy levels, already high, rose by a further 27% in just three years between 2019 and 2022. Support includes direct financial aid, tax breaks, preferential loans, and discounted electricity.

Agriculture gets the most, with CNY40 trillion ($US5.83 trillion) over 21 years. And in 2022 alone, some $US billion was given to 5,260 listed industrial companies, much of it going to solar and electric vehicle firms.

Other subsidy programs are long-standing, most notably Europe’s Common Agricultural Policy. It accounts for 46% of the EU’s budget, or over €50 billion ($US58.5 billion), mostly in the form of direct income payments. An analysis by Australia’s Productivity Commission shows global effects:

“The additional farm and food output in the European Union is estimated to depress world prices for these goods by between 1% and 4%,” the Commission concluded. “World prices for manufactured goods and services increase. These price movements induce a contraction in agriculture and food processing in non-EU regions, and an expansion in the manufacturing and services sectors.”

It also depresses the European economy by 0.3% per cent, or $US52 billion (€44.5 billion) annually.

These subsidy programs have been remarkably resilient and, as tariffs fell, have tended to expand. Subsidy is now the trade barrier of choice. It is a potent element in a widespread move away from globalisation and free trade.

Free flow of capital was a centrepiece of the globalisation idea. The aim was for investors to be able to put their money into a country, and take it out again, at will – and without any consideration of the interests of the country involved. The result was that enormous amounts of capital sloshed around the world, chasing the highest short-term returns. When too much money flows into an economy, it artificially and temporarily boosts activity. Inflation rises. Projects and entire enterprises begin which would not normally be viable. Unemployment falls and wages rise.

When the money flows out again, the reverse happens: projects and firms go bust, unemployment soars, wages collapse and the country goes into recession. The damage to that nation’s economy, politics and society may take decades to remedy.

Maynard Keynes opposed free capital flows for reasons which became repeatedly apparent: for instance, in the Asian Financial Crisis of 1997. When the hot money flowed out after Thailand was hit by massive speculative attacks on the baht, an economic boom turned to bust. The “contagion” spread to its neighbours, when panicky investors withdrew cash from there too. Solutions proffered by the neoliberal International Monetary Fund backfired: raising interest rates to crippling levels did not work. Eventually – and most notably in Malaysia – capital controls were brought in. It was too late to avoid many of the problems, but it helped to limit further damage.

“Unfettered markets designed along neoliberal principles have effectively robbed these countries of their political freedom,” Joseph Stiglitz, who was chief economist of the World Bank at the time, wrote later.

“Restrictions on free capital mobility, shying away from investment agreements, closely regulating financial institutions, preventing the accretion of excess economic power – these are all ways that the economic system must be constrained “

Globalised finance made many huge fortunes on Wall Street, the City of London, Frankfurt and Paris. It had different effects elsewhere. But the world is still yet to fully understand: what’s good for Goldman Sachs tends not to be good for anyone else.

Who got hurt?

Globalisation made some people very rich. Many more stayed poor.

The uneven benefits of increased growth are seen most clearly in the United States. If the benefits of economic growth had been shared equally, everyone’s wealth would have increased by 255% between 1945 and 2022. Some did much better than that; most did much worse.

But the benefits flowed overwhelmingly to those who were already rich. The following chart shows the changes in the shares of wealth going to the richest 1% and to the bottom 50%. The richest people’s share remained as dominant as it was at the end of the war. That’s not the case with the bottom half. Nor is it the case with those at the very bottom, who have negative wealth: they owe more than they own.

These are the people who have borne the burden of globalisation and technological change. It’s almost impossible to unravel which – overseas competition or machines – has caused the most social and economic carnage in the blue-collar areas of the western democracies. But the people affected see globalised free trade as the most visible and easily-understood villain; so when hucksters like Trump and Farage promise to bring the past back to life, they are believed.

Joseph Stiglitz, the economist, believes trade agreements have benefited the US and Europe, but that in the absence of strongly redistributive tax and transfer systems, that benefit remained with those who were already rich.

Flint, Michigan ... a devastated community

“Globalisation has affected both jobs and wages,” he wrote. “It’s simplest to see the effects on low-skilled workers. When an advanced country like the US imports low-skilled, labour-intensive goods, the demand for low-skilled labour in the US falls, simply because we produce less of those goods here. If there is to be full employment, wages for low-skilled workers – adjusted for inflation – have to fall. And if wages don’t fall enough, unemployment increases …

“Even if the country as a whole is better off, it just means that everyone could be better off; the winners could share their gains with the losers so all would benefit; but it doesn’t mean they will share their gains – and in selfish capitalism American-style, they don’t.” 

Self-reliance is back in style

Well before the end of the last century, global free trade had peaked. The failure of the Doha round of trade talks in 2001 marked the end of half a century of trade liberalisation. Since then, most “free trade” deals have been about restricting trade, not freeing it. American and European corporations, led by the pharmaceutical giants, have successfully pushed for major restrictions on intellectual property, reducing competition by extending patent periods, forbidding foreign importers from sourcing products (particularly drugs) from third countries where prices are lower, and bullying foreign governments into accepting adverse trade provisions.

The ultimate expression of globalisation was in just-in-time manufacturing. It costs money to keep inventories stocked up, so companies reasoned that they could cut costs by running down those inventories and relying on suppliers to deliver at the last moment. When it worked, it did save some money. But when those supply chains were disrupted – as they too often were – entire factories had to either slow production or shut down, waiting for those just-in-time supplies to arrive. And those losses vastly outweighed the gains.

The pandemic disrupted the supply chains as seldom before, hitting hardest at the companies relying on just-in-time.

“The disruption of the global supply chain has rocked the US manufacturing industry over the past two years,” noted the Michigan Manufacturers’ Association in 2022. “Millions of consumers felt the effect as products were delayed, never showed up and in some instances, were delivered with downgraded features.

“But in 2022, after much of the country reopened and began operating as normal, manufacturers still faced a massive problem. There was still a shortage of supplies and components, which continued to make it difficult to keep up with pent-up consumer demand. With no end in sight, manufacturers now need to adapt to shortages in the supply chain and future-proof their operations so they can overcome further interruptions.”

Supply chains are always potentially vulnerable. Many things can go wrong: sudden disruptions in far-away countries, shipping delays, political interference, price spikes and – as we have seen again – wars.

The rise of China – the clearest result of globalisation – has brought yet another set of reasons for reversing course. The west has only recently begun to understand how vulnerable it has become from the world’s over-reliance on cheap Chinese production.

The most obvious example is in rare earths. Without these elements, a vast range of items cannot exist – but China has established an effective monopoly. China mines 59% of the global supply; when Laos and Myanmar, its satellite states, are added, that rises to 80%. It refines 91% and produces 94% of all the essential magnets used in everything from MRI scanners and electric vehicles to fishing reels and roller-coasters.

Then there’s solar energy. China produces 92% of the world's polysilicon, 97% of wafers, and over 86% of photovoltaic modules. Its costs are 10% lower than India, 20% lower than the US, and 35% lower than Europe. According to the International Energy Agency, this has created over 300,000 jobs – which, in other circumstances, could have gone to the US and Europe.

The Chinese government has been prepared to use its dominance in rare earths to promote its political and military agendas. A wide variety of export controls give China a unique level of power over adversaries and competitors: nobody gets these essential minerals unless the Chinese Communist Party wants them to. Enterprises across the world are vulnerable, including makers of electric motors and electric vehicles, semiconductors, smartphones, computers, wind turbines, weather and climate monitoring, radar, jet engines, military aircraft, missiles … and so on.

It is an indictment of western capitalism and governance that this situation was allowed to reach this point. Now, there is panic: America, Europe, Canada and Australia are rushing plans to build their own capabilities, but even the most optimistic timelines show it will take at least seven years to produce anything useful, and more probably ten or more.

Tankers in the Strait of Hormuz

The realisation that overseas suppliers cannot always be relied upon has caused governments to reconsider their strategies. For the first time in decades, self-reliance is the buzzword. Talking about it, though, is a good deal easier than achieving it.

But there are serious moves in that direction. Perhaps the most notable is the US Chips and Science Act, signed into law by President Joe Biden in 2022. It authorised $US280 billion in new funding to boost research and manufacturing of semiconductors in America. It includes $US174 billion for a range of research and development areas including quantum computing, biotechnology and experimental physics. Donald Trump’s State of the Union speech in 2025 called for the Act to be repealed but his administration’s actions differed from the president’s rhetoric. It has since become convinced that these measures are necessary to meet competition from China, so it has added a further 10% to the semiconductor tax credit.

So far, Britain has been left behind. But a parliamentary committee – among many other voices – have called for a renewal of government involvement in manufacturing.

“The global economy has become a new frontline ,” the report concluded, “where supply chains, technologies, capital flows and chokepoints are increasingly used as instruments of strategic competition. The UK’s adversaries are learning to weaponise interdependence while its allies are racing to build resilience. Britain must do the same.

“Managing new risks will require remaking the way government and the market work together … The UK [must] now establish a new Economic Security Doctrine to guide the national effort in defending prosperity.”

The Australian government, with its Future Made in Australia project, has gone much further. According to the Treasury, it plans to spend $A22.7 billion ($US16 billion) over a decade to “boost domestic manufacturing, secure critical mineral supply chains, and accelerate the transition to net zero. It aims to turn Australia into a renewable energy superpower by attracting private investment in green technologies, hydrogen, and sustainable industry.”

These initiatives, and others like them, have two things in common: they embody a pivotal move away from globalism; and by putting government at the heart of a new approach to economic security, they represent a further step in the decline and fall of neoliberalism.

The process of pulling back from the extremes of international dependence has been happening for at least the whole of the current century. Even before Trump’s war on Iran, the pace of change was accelerating. But that war has shown the world how quickly and easily essential supply chains can be severed, with devastating results. Governments are now beginning to understand they cannot rely entirely on those supply chains and, for the most critical materials, greater self-sufficiency has become a matter of survival.

Global trade will continue and will grow. The world is too interconnected ever to return to the era before specialisation. Comparative advantage is real and has produced massive gains, helping millions of people out of poverty and delivering cheaper, high-quality goods to consumers everywhere.

The jobs that have been lost will, mostly, never return because they no longer exist. Free trade has been blamed for the depredations of technological change, but even if the shuttered factories of Flint, Michigan or Elizabeth, South Australia were to open again, they would be populated by robots and not assembly-line workers.

The retreat from globalisation will not revive the past, but it can shape the future. New industries, despite needing far fewer workers, cannot be allowed to become the domain of one or two nations.

None of this is good news for employment anywhere. We are entering an era in which labour is replaced by machines at a level and speed that has not been experienced since the early 19^th century. Artificial intelligence is more than disruption: it is shattering the world of work in ways we have barely begun to understand and for which we appear quite incapable of managing.