After globalisation: What's next for a fractured world? With Neil Shearing

The world is in a messy transition, from a globally integrated system to, well, who knows? That was the diagnosis of Singapore's Prime Minister earlier this year, and here's how the Polish Premier Donald Tusk put it not long after. He said, the era of naïve globalisation was coming to an end, with nations turning inward and prioritising their own narrow interests. Everyone doubted those comments were a swipe at America, because it's a truce almost universally acknowledged that President Trump has put globalisation into reverse. But my guest on the show today sees it rather differently. He argues Trump's policies are a symptom and not a cause of the unravelling, or is it the re-ravelling, of the global trading order? Welcome to The Economic Show from the Financial Times. I'm Peter Foster, the FT's World Trade Editor, and my guest today is Neil Shearing, a familiar name to the thousands of executives, policymakers and investment professionals who read his research every week. Because Neil is the Group Chief Economist at Capital Economics, the global research firm, and in another life, he was an advisor to the UK Treasury. Neil, welcome to the show. Thank you for having me. We hear lots of talk, don't we, about decoupling, de-globalisation, and I think you paint a more nuanced picture in this book, which you've called The Fractured Age, and which, like all good economics books in my view, is short, is small, but with big ideas. So why don't we start by you telling us, what do you mean by a fractured age? The genesis of the book, really, came from challenging the consensus. And if you wind the clock back five years or so ago, the consensus was that the world was de-globalising. The globalisation heyday was certainly in the rear view mirror. Trump was putting in tariffs, China was retaliating to some extent, and the world was at risk of de-globalising. Of course, we had Brexit in the UK as well, which played into that narrative. And when we looked at the data at Capital Economics, it became increasingly clear to us, actually, this was not being borne out in the numbers. Indeed, year upon year upon year, global trade volumes were going up. Global capital flows probably peaked in 2008, but that was incredibly high by historic standards. If you look today, they're still very high by historic standards. And of course, despite efforts to restrict migration, migration flows are still very high. We see that in the news today. So this idea that the world was suddenly turning inward, countries were turning inward, really stood at odds with the data. So we asked ourselves, well, what's happening? And our view increasingly, which we started to articulate in our research, and then has come together in this book, is that the world isn't turning inwards. Rather, the underlying driver of what's going on is this intensification of a superpower rivalry between the US and China. And that's the thread that's running through a lot of what happened in the first Trump administration, then the Biden administration, and now is supercharged in the second Trump administration. Obviously, we'll get to the second Trump administration, but you paint this arc about globalisation in its latest phase since the 1980s, deeper integration of capital markets, of capital flows between China and the rest of the world. And then we see the arrival of Xi Jinping, a very different leader, and the beginnings of this strategic rivalry. And you mentioned the Huawei, whether there should be Chinese tech in our communications networks. Do you now see that accelerating under the second Trump administration? Well, I think we're at a really interesting juncture when it comes to technology and technological flows across the globe. And there's a whole chapter on this in the book. Certainly under Biden, there was a push to restrict the flow of advanced US technology to China, and to restrict Chinese technology from entering the US ecosystem. I think that's still essentially there under this Trump administration, but there are certainly some in Washington that are now starting to say, well, some of these tech controls are not necessarily as stringent as you might imagine. Some of the tech's going to get through from the US to China anyway. We may as well embrace this and get as much US technology in the Chinese ecosystem as possible. Not for any other reason, though, that that might then allow the US to exert some strategic leverage over China. So again, it's still speaking to this idea that the two are becoming strategic rivals. The question is, how do you leverage your technological lead if you're the US to maintain the advantage over China? Do you get as much technology into the Chinese ecosystem as possible, exert some leverage, or do you actually say to US firms, no, the most advanced stuff you're not sending there? I think that also speaks to this complexity, I think, where people talk about fencing off those strategically critical areas, chips and semiconductors, etc. But the reality is, economically, it's very expensive and very difficult to do that. So do you see that, actually, for all of the rhetoric, there is a kind of economic constraint at the extent to which actually Europe, as it moves to its green transition, or indeed the US, can really exclude China from these critical sectors? I think green technology is a really interesting one because I think one of the received wisdom, if you like, of China's economy is that it's really great at catching up. It's really good at replicating US advanced technology, but it's not very good at generating its own, developing its own technology. Actually, that could not be further from the truth, particularly when it comes to green technology. If you look at China's lead in things like battery technology, it's at the global technological frontier, it's pushing the global technological frontier. I still think that there's going to be a big debate within the US about the wisdom of getting Chinese battery technology and green technology to integrate it into the US economy. But in Europe, where there's more of a push towards meeting climate goals, achieving that without some Chinese green technology is going to be incredibly hard, I think. Indeed, and that raises another question, which is whether or not in this strategic competition, where you have two very strong leaders now with Trump and Xi Jinping, but actually the populism of politics, both in Europe and America, do we see a world where on things like rare earths and critical technologies, we can silo those bits of trade? We've seen recently, haven't we, China pressing on the windpipe of the West in terms of rare earth metals, which it controls the vast percentage of production and processing of. Do we think that those battles on the very strategic technologies can be kept in a silo and then the bulk of the trade underneath just carries on? Or is there a risk that that strategic competition then bleeds into the wider trade piece? So the central thesis in the book is essentially that yes, what we'll see is a kind of bifurcation of the global trading system, if you like, where there will become increasing frictions between these two blocks in certain areas of trade, particularly around advanced technologies, but also things like dual use goods that have applications in civilian and military purposes. For the most part, everything else will continue to trade as normal. The toys, the furniture that fill our houses will continue to be bought from China. And indeed, we're starting to see that in the data. If you look, we're talking a day after Nvidia just released its Q3 results, that revealed a collapse in sales of chips to China. We can start to see this not just in the economic data, but in the data that are being reported by firms. So my sense is yes, that's the way that we're going to head towards is an increasingly bifurcated global trading system where there are quite stringent walls in place in some parts that are deemed to be strategically important, that threaten things like supply chain security, or national security, or technological leadership. But in other parts, and indeed in perhaps the vast majority, life goes on pretty much as usual. In the book, you paint this world of two blocks, really. A China block with Venezuela, Russia, Iran, bits of sub-Saharan Africa on the one hand, and then a US-led block with the EU, South Korea, Japan, Australasia on the other. And I think a lot of us felt that when Trump came in, he would use tariffs in a more strategic way than he has. But actually, what we've seen is Trump just using tariffs to narrow trade deficits. And he's gone after, you know, arguably his friends harder than he's gone after his enemies. I wondered, I presume you wrote this book actually before Trump II began, and I wondered whether Trump's very, kind of, you're going to pay the rent whoever you are approach to global trade, had challenged that thesis about these two blocks emerging. Well, I think it's certainly the case that Trump's re-election has posed some challenges to, not necessarily the thesis in the book, but the form that fracturing takes, right? You could have a much bigger divide, not just contained to these strategic sectors between the US block and the China block. Another way that you could have a different form of fracturing is if the US block itself fragments and fractures, which is what you're alluding to. Now, I think that's arguably the greater risk here, frankly, but there are some early evidence, I think, that the economic gravity pulling all the binding together, all these parts, complex parts of the US block, still holds. So if you think about, for example, the trade tariffs that have been imposed, far higher on China than, for example, on the EU, on Japan, on the UK. Goods that are still compliant with the USMCA agreement, that's the free trade agreement across North America, they're still tariff-free into the US from Mexico and from Canada. Now, the rejoinder to that is that India, which before a few months ago, I would have said, lent more towards the US than to China, has been hit with sky-high tariffs by Trump, ostensibly over-purchases of Russian oil. But let's see how that goes, how that plays out. But I think, take a step back, and we've done some work on this at Capital Economics, tariffs imposed by Trump are higher in general on the China block than is the case on US allies. And what's more, the deals that have been done by the Trump administration with, for example, the UK, with Vietnam, they include explicit provisions to push back against China. In the case of Vietnam, to prevent some re-routing, to push back on re-routing of Chinese exports via Vietnam to the US. And in the case of the UK, to put pressure on the UK to exclude the provision of Chinese goods in geopolitically sensitive areas. So still one eye on China. Let's talk about Europe and how Europe fits into this fractured age of yours. Clearly, you know, right now, things are very choppy with Trump, and there's talk about how Europe becomes more independent, less reliant on America, not just in areas like defence, where they're being encouraged to spend more, but also in technology, in cloud, and other areas where Europe now suddenly starts to wonder whether it wants to be as reliant on an America that no longer seems to buy into the post-war consensus. And I don't think that's purely a Donald Trump thing. Barack Obama was pivoting to the Asia-Pacific. A lot of things that Trump did in his first term weren't undone by Biden in his second. Where does Europe fit into this piece, even if they're loosely in the Western block? It struggles to fit in, I think. It's still trying to work out exactly its role within this fractured global economy. Now, one response to the various pressures that we're seeing and challenges that we're seeing within the global economy at the moment is the idea that Europe should emerge as a third block in this fractured world, around which other liberal economies could coalesce. That's certainly the idea that Macron has pushed, for example. However, take a step back. Europe is still a fragmented region of its own, a group block of its own. It still struggles to talk with one voice. It moves very slowly and by consensus, which are laudable qualities, but they sit quite awkwardly in this new geopolitical reality where you need leaders in certain areas like technology, for example. So in that sense, Europe has tended to follow rather than lead within this fractured world. A good example of this is it's been dragged kicking and screaming into cutting out Huawei from its telecommunications networks in the same way that, for example, the US, Australia have led the way. So my sense is that, yes, the relationship between Washington and Brussels is going to become strained. It is strained. It's going to remain strained. Yes, Europe is going to have to take greater responsibility for the provision of its own defence and security. In part, by the way, that's because the US wants to dedicate more resource to combat in China and the Asia-Pacific. But by and large, the strength of economic and financial ties and also for that matter, societal, cultural, historical ties between the US and Europe is so strong that I find it difficult to believe that there's going to be a big schism, a lasting schism between the US and Europe. Indeed. I mean, let's look at it from a trade and economic perspective. Let's take cars. Now, there's legislation coming up in the US, isn't there, to exclude Chinese tech from autonomous vehicles and then all Chinese tech from all vehicles in the fullness of time. When you look at the EU's relationship to China and its triangulation with the EU's relationship with America, how do you see that playing out? Because on areas like solar, on batteries, etc, Europe is not in a strong position to be autonomous from China and yet, you know, the current European Commission is having a pretty difficult relationship with Beijing. How do you see that relationship playing out? Where does Europe come down? Does America make Europe choose between Chinese inputs and Chinese tech over time? How does that play out? That's the key question to my mind, is the extent to which the US puts pressure on Europe and for that matter, Beijing puts pressure on Europe. A lot of people that I talk to about this idea of a fractured global economy, they talk about the idea of the appeal of neutrality. That if only you can be kind of Switzerland in this fractured world, then you can have the best of both worlds. My point back to them is that it's not for other countries to choose. The US and China will choose where the fault lines of this fractured world sit and Huawei is a really good example of this. Europe really didn't want to, Germany in particular, really didn't want to cut Huawei out of its telecoms network but ultimately was forced to do so by the US. ASML, the big manufacturer of advanced lithography machines, critical technology into producing advanced semiconductors, Dutch-based company, didn't really want to stop sending equipment to China because they make quite a lot out of it, thank you very much, but was pressured into doing so by the Dutch government, which was pressured into doing so by the US government. It's America and China that are deciding where the fault lines of this fractured world sit. Electric vehicles, I think, is going to be one of those where there will be a real battle because for Europe in particular, not only is there the imperative to try and meet targets around climate change and emissions reduction, but also of course the German car industry is in an existential crisis, absolute pillar of the German economy, and is now facing this enormous threat from Chinese EVs, a big competitive threat. So maybe there's a pressure there too, not just to try and cut out Chinese electric vehicles from a security perspective, which is what's driving the action in the US, but also from an economic perspective. It's interesting, we started this conversation with you, you know, alluding to the gap between the kind of political narrative about de-globalization and the reality in the trade numbers. There's another big sort of popular, I hesitate to call it popular conversation, but there's another conversation going on among analysts, isn't there, about de-dollarization, about the extent to which the exorbitant privilege of owning the world's reserve currency is now under threat. We see Trump going after the Fed, confidence in the kind of institutions of investment and business in the US undermined or under threat from Trump. You talk in the book about the extent to which this latter phase of globalization, the big change between this and previous phases of globalization, was that, you know, the dollar becoming so much part of the plumbing of global trade. What's your view about the risk of de-dollarization? Well, I have to say I'm pretty skeptical about it, to be honest. Now that's not to say that all those points that you just made about the risk posed to institutional integrity in the US are not important, that they are, that they are real risks. It's just that I think it's going to take an enormous amount to unseat the dollar from its central position within the global financial system and therefore the global economy. Let's just think about the starting point. Let's look at the numbers. The latest numbers from the Bank of International Settlements suggest that just under 90 percent, 90 percent of all transactions globally were denominated in dollars. So it's starting from an enormous position of strength. Now that's not to say that more transactions won't be denominated in renminbi, for example, over the coming years. But, you know, if China's share goes up by five percentage points and it takes that away from the dollar, then the dollar is still accounting for 80 to 85 percent of global transactions. The second point is that think of the characteristics of any currency that was going to unseat the dollar from this dominant position within the global economy. It would need to be backed by similarly strong institutions. You'd need an open capital account. You would need... Which the renminbi doesn't, right? Exactly. So you have a closed capital account. You have just as many concerns, if not more, about Chinese institutions. More, in fact, about Chinese institutions. What's more, China has an enormously high domestic savings rate, which tends to cause it to run a current account surplus. And if you're going to be supplying all this liquidity to the global financial system, you need to be accepting capital inflows, not pushing capital out. So I'm deeply skeptical of the idea that the dollar is going to be unseated. And of course, there's enormous network effects as well, supporting the dollar. It's much cheaper to hedge dollars than euros. And that's because these systems and payment systems and settlement systems have grown up around it. I mean, going back to China and going back to the question of whether we can stop arguments over strategic technology spilling over into other areas. I mean, as you say, the basic truth remains that China has large trade and current account surpluses, and they need to go somewhere. And the US is still a massive repository of those outflows. And that puts a flaw, arguably, under how far the decoupling can go with that. I think that's right. Certainly in a financial sense, yes. I think one of the points about Donald Trump is that he doesn't necessarily articulate the arguments in the same way that one might if they were an economist, for example. But there's a certain truth to what he's saying about China's trade surplus. It is unsustainable. There's one thing running a trade surplus that size when you're the world's 10th largest economy or 15th largest economy. When you're, by some distance, the world's second largest economy, it creates pressures in the system. And one of those pressures is that you're accumulating an enormous amount of external assets all the time. And those have to go somewhere. And when you're the world's second largest economy doing this, external assets are the first. Stuff that China owns. Yeah, exactly. Hotels and things it owns. Exactly. Financial instruments and whatever it might be. So it has to go somewhere. And because of the size of China, it's going to flow into dollar markets. Is that a kind of mutually, we talked about mutually assured destruction, didn't we, when the nuclear weapon arrived? And that ultimately stopped everyone blowing each other up because we'd all be blown up. Is there a kind of mutually assured destruction on global trade, given the surpluses you talk about from China? I think it does limit the extent to which you'll see a big fracturing or splitting, splintering of the US-China relationship. Because for as long as I've been doing this, and I've been an economist now for more than 25 years, there's been a discussion about China's accumulation of US treasuries and what would happen if it dumps those treasuries, quote unquote. Well, the answer is the price of them would collapse, and therefore the value of China's assets would, the remaining assets would collapse as well. So it becomes mutually, as you say, kind of mutually assured. This is a kind of Faustian pact. I mean, it's a devil's advocate. You know, there were lots of very sensible economists who wrote between the wars that there could never be another world war because the European economies were so integrated. It would be Harry Curie to have another world war. And sure enough, we had another world war. And we see time and again where the perfectly sound and sensible economic realities to which you allude, and which are the bread and butter of your world, are exploded, if that's not an unfortunate word, by geopolitics war. I mean, what happens if the Chinese economy runs out of gas, Xi Jinping ends up in a corner, and the dreaded T word, Taiwan gets invaded? What are the black swans that might end up with more than a fractured age, but no kind of properly exploded age? Indeed. And there's a whole chapter in the book about how things could go wrong. So if you're feeling particularly sunny and upbeat, that will bring you down to earth. There's a couple of ways in which I think it could play out slightly differently with more adverse consequences. The central scenario, as we've just been discussing, is that this fracturing is contained to geopolitically sensitive sectors. But what if it's not? What if actually there's a much bigger push towards... just cutting out all Chinese inputs, whether it's toys and furniture or smartphones and electric vehicles from US supply chains. Then the economic costs become much greater for both sides, particularly for China, but for both sides. Some estimates in the book might be somewhere between two to 3% of global GDP. That's a bit smaller than the global financial crisis, but it starts to put a scale on it, right? That's significant, that's serious. The other way in which this plays out in a more adverse fashion is if the two blocks come into conflict. Now, in some sense, the economic costs of that are neither here nor there, because if China and the US are going to war over Taiwan, then there's a hit to global GDP is probably not our greatest concern, but there are lots of ways in which it would have really fundamental effects on the global economy, both through impact through financial markets, the supply of chips and semiconductors. It's very difficult, very, very difficult to put an estimate on this, but some people say it could be up to 10% of global GDP. So an enormous two global financial crises. Right, we're going to take a break. And when we come back, I'm going to ask you about who are going to be the winners and losers in this new uncertain fractured age, which we've been describing. This FT podcast is supported by Range Rover Sport. The old adage goes, it isn't what you say, it's how you say it. Because to truly make an impact, you need to set an example, you need to take the lead, you need to adapt to whatever comes your way. And when you're that driven, you drive an equally determined vehicle, the Range Rover Sport. Blending power, poise and performance, it was designed to make an impact. With a dynamic drive, refined comfort and innovations like cabin air purification and active noise cancellation, the Range Rover Sport is built to be as uncompromising as you. Explore Range Rover Sport at rangerover.com slash US slash sport. Hi, I'm Darina, co-founder of Open Phone. My dad is a business owner and growing up, I'll never forget his old ringtone. He made it as loud as it could go because he could not afford to miss a single customer call. That stuck with me. When we started Open Phone, our mission was to help businesses not just stay in touch, but make every customer feel valued, no matter when they might call. Open Phone gives your team business phone numbers to call and text customers, all through an app on your phone or computer. Your calls, messages and contacts live in one workspace, so your team can stay fully aligned and reply faster. And with our AI agent answering 24-7, you'll really never miss a customer. Over 60,000 businesses use Open Phone. Try it now and get 20% off your first six months at openphone.com slash business. And we can port your existing numbers over for free. Open Phone, no missed calls, no missed customers. Welcome back. Right, before the break, I set you a little task. Tell us the winners and losers. You know, as world trade editor, I love ferreting around supply chains, finding out where all these Chinese goods are now highly tariffed into the US, where they're going to end up, etc. There are going to be winners and losers, presumably. Where do you see yourself in the future? Well, take a step back. I don't think as a global economy, anyone's going to be better off. Right? I think as a global economy, we're going to be worse off. Globalization was fundamentally about bringing down barriers to trade, to capital flows, to people flows, to technology flows, making the global economy work more efficiently, so the global economy as a whole was better off. So you start to put barriers up to in parts of those areas at a global level, at an aggregate level, where we become worse off. But like you say, there's winners and losers within that. Let's start with the losers first, because I think we can end on a sunnier note at the winners. The losers, I mean, it really depends on what form this fracturing takes. But I think China at this stage, I'm not saying that the US holds all the cards like Trump would like to, would say, but I think China does stand to lose more. It's facing an enormous challenge at home with strains in its economic model, this high savings, high investment growth model, large current account surplus that's increasingly finding it difficult, that the rest of the world's finding it difficult to absorb. And in a fractured world where it's being cut off from flows of advanced technology, for example, it becomes more difficult for China to start to challenge the technological frontier. And if you look at the makeup of the different blocks, the US block, much larger from a GDP sense, but also much more economically diverse. I mean, 65 odd percent of global GDP. Two-thirds of global GDP, but also it includes Mexico, it includes Vietnam, the Philippines, Japan, Korea, the European Union, whereas China's block mainly commodity producers and autocracy. So China's going to have to do this on its own, whereas the US, the strength of its allies are its key strength here. I don't think, and I say this in the book, and we've written about this at Capital Economics, I don't think it's implausible that economic growth in China could slow to as little as 2% by the start of the next decade, 2% a year, which would mean that it would never really overtake the US as the world's largest economy. So China, I think, has the most to lose in all of this. The US too could really shoot itself in the foot. I said earlier that it's kind of key advantage in this fractured world is the diversity of its allies. Well, if you have a more America first agenda under Trump that is sustained, not just through Trump, but through successive administrations, then I think America risks cutting its allies off and this core strength that it has in a fractured world starts to be eroded. Plausible estimates and America first agenda might reduce US GDP growth to 1% a year. So if it was to go down that route, then that then becomes the US being the biggest loser. So the form of fracturing, I think, really matters in terms of thinking about the economic costs to the US and to China. And who are the winners? Again, it depends upon the extent to which countries can maintain good relations with the US. But my base case is that when Western firms are thinking of moving production outside of China for security reasons... Which we saw in the first Trump administration, the plus one strategies, Vietnam and other ASEAN countries in Southeast Asia, sucking up some of that capacity. Trump's guarding against that now, but... Starting to, but if you look at Mexico, for example, still seeing enormous increases in exports from Mexico to the US. And we're still seeing Apple until very recently talking about moving manufacturing to Vietnam and to India and so on. Turkey is a manufacturing hub for the EU. Turkey is a manufacturing hub for the EU. Turkey and Poland is the other one I think I would look at. So if you look at the periphery of the European Union, and I'll include Turkey in that for these purposes, there's some extremely productive, low cost manufacturers that could emerge as beneficiaries. And we've seen more Asian investment going into Eastern Europe, haven't we? Into Hungary, into Poland, Slovakia, Romania, I think last year. Indeed. And I think there's going to be an increasing combination of those. Indeed. And I think there's going to be increasing conversation about the wisdom of accepting Chinese investment into those countries by those governments, meshing themselves too far into Chinese supply chains. The counterpart too is that yes, some of these countries might be the recipients of Western investments to try and build out supply chains as they move from China to serve, say, Europe. But also when it comes to that flood of exports from China that was going into the US but is now being cut off, some of these countries are going to face increasing competition. So why don't we finish with a very big picture question. We in the West have been fretting over the last couple of decades about our relative decline. But to your point about Chinese GDP growth flatlining at 2% etc, never overtaking the US economy. In that world, what does the world look like in 2040? So that's 15 years from now, that's not an implausible time horizon. Your thesis, if your thesis in the book is correct, and black swans may or may not come along, just describe to me the world in 2040. Let's get into the numbers first, then we can step back and think about what that means for our everyday lives. Just in terms of the numbers, we've been through a period where China and economies that align with China have grown from something accounting for about 5% of global GDP in 1990 to about 25% of global GDP now. And we've seen a corresponding decline in the share of global GDP accounted for by the US and economies like Europe and Japan that align with it. And that's fed this big political narrative about the rise of China and emerging economies and the decline of the West. My big bet would be that the share of global GDP accounted for by the so-called West, the US and its allies, now starts to stabilise and maybe even inch up a bit. That's pretty non-consensus and contrary and I accept. But I suspect, it wouldn't surprise me if the fears around the decline of the West, insofar as you can measure it through a share of global GDP, we're kind of at the peak. In terms of how we live our everyday lives, if the central thesis in the book plays out, then I'm pretty confident that the shirts we're currently wearing, the seats we're currently sat on and the curtains that currently line this room in 15 years' time will not be produced in the US, nor will they be produced in the UK, nor will they be produced in Europe. They're going to be produced in some low-cost manufacturing centre that may well be China, actually. But the smartphones that we use in our everyday life, the cars that we drive, the technology and communication and telecoms that are being used to record this podcast, I think there's no chance that that comes from China. I think that's where the fracturing comes down. Well, we'll have you back in 2040 to check on that. The next edition of the book. The next edition of the book. A mildly encouraging note to end on. Neil Shearing, thanks so much. Thanks for having me. That's all for this week. Before we go, a heads up that the FT Weekend Festival returns for our 10th edition on Saturday, September the 6th at the Kenwood House Gardens in London. If you're coming along, do come and find the podcast team to say hello. Some of my FT podcasting colleagues, including Lucy Fisher and Mark Filippino, will be hosting a breakfast event at the festival talking politics, economics and podcasts and much more from just before 10 a.m. So do get there early. You can book your festival ticket and find all the details on the FT Weekend Festival website, and there is a link to that in the show notes. And if you can't make it, do get in touch or email. The address is economics.show at ft.com. You've been listening to The Economic Show from the Financial Times. If you enjoyed the show, please do rate and review us wherever you listen. 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