Globalization continues—the widespread predictions of its death were wildly premature.
But this is nothing to celebrate. The current round of globalization is in fact largely the product of “unhealthy” phenomena including the persistence of transfer pricing games resulting from wholesale corporate tax avoidance by global multinational firms, and a Chinese economy that has lost its domestic growth engines and now relies excessively on exports. Really, export volume growth in the Chinese data so far this year is running about at about 12 percent when global trade is growing by more like 1 percent.
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Rather than reflecting a balanced expansion of trade, in which all parties specialize in what they do best and enable everyone to produce and consume more, much of today’s globalization is unhealthy. That at least is the thesis of my new paper for the Aspen Economic Strategy Group.
Why Has Globalization Been so Resilient?*
Well, in part because tariffs have stayed low (this could change after January depending on the outcome of the U.S. election) even if political rhetoric has shifted against further integration (Trump might change that; he has said that he loves tariffs). Raising tariffs on electronics made in China doesn’t do much to global trade if tariffs on goods assembled in Vietnam, Thailand—and, for that matter, Taiwan—are still zero.
There isn’t a Chinese content test for imported electronics. The China tariffs on their own—or the failure of the U.S. to ratify the Trans-Pacific Partnership—were moreso political than economic shifts. The U.S. still imports a ton from Asia, and runs big trade deficits that, in aggregate, offset Asia’s surplus.
But globalization has persisted also because the Trump-Ryan reforms to the U.S. corporate tax system, implemented through the Tax Cuts and Jobs Act (TCJA), did not end tax-related incentives for U.S. firms to offshore production and profits.
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That is why measures of “globalization” for the pharmaceutical industry are still up—U.S. imports of pharmaceuticals have more than doubled since the approval of the TCJA, and, unsurprisingly, the offshore profits of U.S. pharmaceutical companies have also soared.
U.S. pharmaceutical companies—the top six, at least—didn’t pay any federal income tax in the U.S. in 2023 despite making over $70 billion globally, and only paid $2 billion or so in 2022 on over $100 billion in pandemic profits. Their U.S. tax bill has gone down after the TCJA—which presumably was not the intended goal. U.S. “Big Pharma” does pay a bit of tax outside the U.S., but still has overall effective tax rates well below 21 percent.
Pharmaceutical companies are not alone. The U.S. tax code has encouraged, for example, U.S. semiconductor equipment manufacturing companies to produce (and pay tax) in countries like Malaysia and Singapore rather than the U.S. That certainly seems like a big own goal.
Yet the biggest reason why the world isn’t deglobalizing is, paradoxically, China. The initial China shock—together with the weak recovery from the global financial crisis in the U.S. and Europe—did more than anything to sour the politics of trade.
But the recent growth in global trade has in fact been driven by China. Folks don’t believe it, but it is clear in the numbers. Exports are up as a share of China’s GDP.
The trade surplus (customs basis) is up as a share of China’s GDP.
The trade surplus is up as a share of world GDP.
The manufacturing surplus is way up as a share of the GDP of China’s trading partners.
Put simply, China is again growing on the back of exports, not internal demand, as its own economy is pulled down by the drag from its slow-motion real estate crisis.
China’s rising surplus is fundamentally the result of a Chinese economy that consumes too little and relies on either exports or investment for growth. However, as Chinese industrial (sectoral) policies help push Chinese firms into new manufacturing sectors, the global impact of China’s internal imbalances only expands. Jay Shambaugh of the U.S. Treasury talks of Chinese production and investments in a capacity that are unfettered from global demand.
An unbalanced Chinese economy generates global integration, but of an equally unbalanced kind—one that makes the world economy more, not less, reliant on Chinese supply (despite policies designed to generate the opposite outcome) and China’s own economy more, not less, reliant on global demand.
What can be done to make globalization healthier? The paper puts forward three big ideas.
One, unsurprisingly, is to end the de-industrialization policy in the U.S. corporate tax code and put in place provision that makes it much harder for big U.S. firms to shift profits abroad (into the 10.5 percent GILTI bucket) by producing abroad.
Another proposal is to harmonize the U.S. and EU industrial policies which were respectively designed to insulate each partner’s economy from Chinese policies. Too often, policies motivated by concerns about Chinese competition have complicated trade among allies. One concrete idea: “subsidy-sharing” agreements with allies that would allow U.S. production to qualify for buy European provisions (for electric vehicles) and European production to qualify for “buy American” provisions (this would be easier if European countries would adopt explicit “buy European” provisions in their own subsidies).**
The third proposal is to be willing to maintain and even expand efforts to counter Chinese industrial policies while putting pressure on China to address the underlying macroeconomic imbalances that forces its economy to rely so heavily on exports. Chinese industrial policies throw money at sectors where China traditionally has relied on imports, and in the process often create competitive Chinese firms that ultimately become new exporters. Directly challenging the underlying macroeconomic policies that lead to China’s massive surplus is difficult; pushing back on their effects in specific sectors is a bit easier.
Of course, it would be helpful if the IMF’s recommendations for China pushed China toward a more balanced domestic economy, and explicitly recognized that China’s central government has the fiscal space needed to help facilitate that transition. But ending counter-productive IMF advice is only a start; the countries of the G7 and those who share their concerns (India, Brazil at times) need to be clear that China is simply too big to export its way out its domestic trouble—and be ready to develop forms of integration that exclude China if China isn’t able to be the kind of trading partner that can generate demand as well as supply.
Do take a look at the paper; it tries to synthesize a lot of my recent work.
* A lot of the evidence of “deglobalization” hinges on studies of greenfield FDI, which never was all that significant a fraction of FDI (most FDI is from mergers and acquisitions and/or the creation of new subsidiaries to shift paper profits to low-tax jurisdictions—Apple’s ownership of Apple Ireland is the biggest single U.S. investment abroad, and Apple Ireland just collects the profits on Apple’s non-U.S. operations.
** “Buy Europe” would be a symmetric response to China’s own “buy Chinese” policies, which ensured that no imported car ever qualified for China’s EV subsidies (in the early stages, no car that didn’t have a battery made in China by a Chinese company qualified). But China’s “buy China” preferences were implicit, not explicit (the list was determined based on many different criteria…) and France has adopted a similar approach rather than risk WTO sanction. Cooperation would actually be easier if the preference were explicit.