Movers and shapers

Next phase of economic globalization will be fashioned by changes in geography, innovation and governance

Even before the disruptions to global trade and travel caused by the COVID-19 pandemic, questions were being asked about the prospects for economic globalization. A number of developments prompted these, among them a combination of the return of geopolitics and great power competition, political disruption and populism in the United States and other Western countries, and shifts in the global competitiveness of industries and economies.

The pandemic has increased the sense of uncertainty and flux in global affairs. In the short term, talk of economic globalization inevitably gives way to the need to manage the pandemic as well as possible. But beyond this, what are the longer-term prospects for an open world economy?

There will not be a return to the world as it was. But neither should we assume that economic globalization will come to an end as a phenomenon which structures much of the global economy. Instead, we could see a new phase of economic globalization. This will be shaped differently from the previous phase, in at least three important ways.

The first way is its geography. The phase of globalization which began in earnest after the 1970s was primarily led by the United States and other developed, Western economies. Major corporations invested in developing transnational production networks spanning multiple economies, bringing new parts of the globe into what political scientist Edward Steinfeld described as "complex production hierarchies that once existed only within the firm". China's economic rise from the 1980s was a central part of this story.

But the Western-centered economic hierarchies that shaped this phase have gradually been undermined, not least as the result of domestic companies in places such as China moving up the value chain and emerging as the sources of capital investment rather than merely recipients of it.

Looking forward, the continued growth of dynamic developing economies beyond the West is likely to play a growing role in shaping economic global interactions. This is not a new trend, as can be seen in the steady growth of trade between China and the Association of Southeast Asian Nations, which has surpassed that between China and Europe and reached $410 billion in the first half of 2021. The pandemic is unlikely to reverse this. The latest data from the United Nations Conference on Trade and Development show greatest short-term resilience in trade growth in East Asia. Put that together with the underlying economic and demographic dynamism of Southeast Asia, for example, and we can see the potential for this region to further enhance its role in economic globalization in the future.

A second related factor driving economic globalization is innovation. This is increasingly taking the form of the application of artificial intelligence, the internet of things and the development of new technologies such as quantum computing. Together, these have the potential to deliver what the World Economic Forum has called the "fourth industrial revolution".

The basic research behind many of these innovations has－like production－already shaped global innovation networks, and no longer resides in one country or region. Although the US remains particularly strong in many areas, in the commercialization and application of these technologies, Chinese companies are playing a leading role, and dynamic and young markets across Asia are fertile ground for their application and further development.

There are constraints. The hawkish turn in international politics is making genuine global collaboration in innovation more challenging. One consequence is that the implications of the fourth industrial revolution will not be evenly felt across economies. But growth in global data flows has been robust and the benefits of many innovations will continue to diffuse globally. There are other new platforms that could drive these trends－for example, the launch of the new Data Exchange in Shanghai indicates the potential for the exploitation of data to drive economic growth.

In sum, whereas the globalization of production drove the previous opening of the world economy, it will be innovation and its implications for consumers and business that will dominate the next phase.

The final factor shaping the next phase of globalization and prospects for an open world economy will be governance. We are already seeing divergence in domestic regulation across economies, and this is likely to increase further under the influence of international political tensions and the rise of protectionist tendencies in many places.

This will exacerbate governance challenges at the global level. Against the backdrop of domestic political dislocation in the West and international political tensions, cooperation in global governance has weakened, and contestation increased.

China has a role to play here in encouraging collaboration in global governance, in a way that takes account both of the significant developments in China's own governance capability and of the differences in the political and regulatory systems elsewhere, including across Asia. Developing some mechanisms of issue-specific or regional governance coordination is one way forward, and could support the sort of policy coordination envisaged in the Belt and Road Initiative.

Put together with new geographic and regional focuses, and the fast-changing innovation landscape, mutually-beneficial collaboration in global governance could help shape a new phase of economic globalization. Preserving an open world economy remains challenging, but rather than calling an end to economic globalization, we should think about the ways that it will be shaped differently in the future, reflecting new sources of dynamism in the world economy during a period of global change not seen for many decades.

The author is an assistant professor at the Centre for China Studies at the Chinese University of Hong Kong and an associate fellow with the Asia-Pacific Programme at Chatham House.