In Davos, World Leaders Worry About a Fragmenting Global Economy

From a Wall Street Journal story by Greg Ip headlined “In Davos, Leaders Fret Over Fragmenting Global Economy:

DAVOS, Switzerland—Geopolitical rivalry, technology decoupling and protectionism have increasingly altered the world’s business and political landscape, adding new risks and threats and, for some, opportunity, say executives and officials meeting this week at the World Economic Forum.

“We are very concerned about geoeconomic fragmentation,” said Gita Gopinath, the number two official at the International Monetary Fund, in an interview. In conversations with member countries and in Davos, “this is something that comes up a lot.”

The effects haven’t yet shown up in trade numbers, which are relatively healthy, Ms. Gopinath said. But they can be seen in the technology decoupling between the U.S. and China, tensions between Europe and the U.S. over industrial policy such as electric-vehicle subsidies and war-induced disruptions and inefficiencies in oil-and-gas markets, she said.

In a speech to the forum, European Commission President Ursula von der Leyen complained that the bloc is a victim of both China, which is “openly encouraging energy-intensive companies in Europe and elsewhere to relocate all or part of their production,” and the U.S. There, a recent climate, healthcare and tax package, called the Inflation Reduction Act, will subsidize electric vehicles only if they are assembled in North America.

In Davos in 2017, Chinese President Xi Jinping portrayed China as the champion of globalization, a message welcomed by many. Since then, that reputation has been soured by China’s efforts to displace Western companies from key markets, harsh Covid-19 lockdowns that cut off contact with the world and arbitrary punishment against both private companies and trading partners.

n Davos Tuesday, Chinese Vice Premier Liu He, Mr. Xi’s economic czar, sought to repair China’s reputation. “Opening up to the world is a must, not an expediency,” Mr. Liu said. “We must open up wider and make it work better. We oppose unilateralism and protectionism, and look forward to strengthening international cooperation.”

But there was skepticism about the message and the messenger. There is little evidence that Mr. Xi himself ever believed in the western, noninterventionist model of globalization. Meanwhile, the West-friendly Mr. Liu is retiring soon, and he has been succeeded by a new set of leaders closer to Mr. Xi in his suspicion of both the markets and the West.

For businesses, fragmentation is a reality to be coped with—and possibly an opportunity.

When Australia demanded an independent inquiry into the origins of Covid-19, China retaliated by, among other things, halting imports of coal, a lot of it mined by BHP Group Ltd.

The company responded by developing relationships elsewhere. “We needed to pivot quickly into other markets,” Chief Executive Mike Henry told The Wall Street Journal. With tensions now receding between the two countries, he said, BHP will seek to sell into China again, relying on its long-term relationships with customers there. Yet at the same time, “we have new and dynamic relationships with other customers” in Europe, South Korea and Japan, he said.

BHP, he said, is “hyper aware” that governments now give priority to the security of critical minerals and that many resource-rich countries want to capture more of the value by refining, not just mining, minerals. Part of BHP’s “value proposition is…social partnering” with such countries, Mr. Henry said.

Packaging company Sealed Air Corp. is investing in upgrades or adding additional technology to manufacturing facilities in Vietnam and Thailand. “The old model was to ship everything from China,” said CEO Ted Doheny. “That’s where globalization was going.”

Whereas Mr. Doheny said executives once thought about placing manufacturing in “low-cost countries,” the goal now is to find “low-cost counties close to customers.”

“I think globalization is there, but we’ve got to be locally significant,” he said.

While Europe has complained loudly about the IRA, some companies suggested copying it. “Instead of fighting the IRA, I encourage the EU to take inspiration from it,” said Mads Nipper, chief executive of Danish multinational energy company Ørsted A/S, the world’s biggest developer of offshore wind farms, in an interview.

Technology companies, meanwhile, are dealing with China’s so-called Great Firewall, Russia’s efforts to isolate its domestic internet, and Western regulations that not only don’t align, but sometimes conflict.

The internet is “absolutely getting Balkanized,” said Matthew Prince, chief executive of Cloudflare Inc., a cybersecurity and internet infrastructure company that itself faces rulings in some countries to cut off specific websites or services.

“In Europe, you’re required to content moderate everything, and in Texas, you’re not allowed to content moderate anything,” Mr. Prince told the Journal, referring to a new European Union content law going into effect next year and a social-media law in Texas currently facing court challenges. “How do you then do that for 50 different states and 220 different countries?”

The actual economic impact of deglobalization is unclear. At the start of the forum the IMF released a study warning that fragmentation could shrink global economic output by up to 7%, or as much as 12% in some countries when technology decoupling is included.

In the near term, the inefficiencies caused by fragmentation could add to cost pressures. “All countries are trying to bring inflation down durably. Geoeconomic fragmentation will just make that much harder,” Ms. Gopinath said.

But former U.S. Treasury Secretary Larry Summers predicted the negative impact of policy-driven deglobalization in sensitive sectors will be more than offset by technology-driven advances such as remote videoconferencing in others.

Critics, meanwhile, think a clear understanding of why globalization is in retreat is unlikely to emerge at Davos because it has for so long been seen as a venue for globalization’s champions.

“The Davos crowd prides itself on futuristic thinking, and they generally are good at it,” said Robert Lighthizer, who was U.S. trade ambassador under President Trump, via email. He didn’t attend this year though he has roughly 20 times in the past, he said. “But corporatism, globalism and free trade are so central to their spiritual core that they can’t imagine they could be harmful.”

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