Modern Globalisation and the Nation State – The Evolving International Political Economy

Unresolved political economy contradictions are becoming more evident – between a national manufacturing narrative versus actual technology-led globalisation, balancing open trade versus protection, old industries like steel against the new like AI, and whether governments or major corporates are primarily driving these developments.

Leaders face the huge challenges to acknowledge today’s complex inter-dependent world, define essential national interests against special interest pleading, and work with others to deliver their objectives. Not doing so will only exacerbate uncertainty prevalent across countries.

Introduction – Interlinked Globalisation

Perhaps the least told story in modern politics is this – never before has such abundant production been delivered by companies in such a resilient fashion globally. Pandemic, wars, and natural disasters have barely affected availability, in a manner astonishing to believe even a generation ago.

Globalisation is here to stay even as we forget what has been achieved. President Trump’s attempts to change this are failing. In smaller countries the usual issues in domestic politics have not evidently derailed the global economy or even in most cases the performance of the nation state.

This story is hugely at variance with mainstream opinions – on how governments made globalisation and will now reverse, on fragility, on the power of the nation state to bring back manufacturing. Even Artificial Intelligence is probably just the latest development of a technology driven transformation that accelerated fast after 1990 rather than something wholly new and disruptive.

Established dialogue ignores or mislabels (‘China shock’) genuine issues brought forward by corporates building new models based on vastly enhanced communications. The nation state can seem somewhat powerless in a world of such flows, the consumer may be happy but the citizen feels loss of control. Uncertainty spreads, for localities that could be rendered poorer by global decisions, individuals often struggling for regular work, and governments not finding levers for growth.

There is a new dialogue emerging, in which economic security is a framework to answer these issues. Government focus is starting to move from “signing trade deals” to identifying their policy space in the new world while considering the impossible demands to return to the old. At stake is more than the prosperity of countries, but also a political narrative to rebuild belief in democracy.

Defining Economic Security Against Clientelism

Global production demonstrably proved superior to self-sufficiency during the covid pandemic. Greater resilience than the past is not however completely reassuring, not least given that no one individual fully knows how this happens or whether other countries can undermine your own.

Every day millions of supermarkets around the world are filled with fresh produce, but the systems that make this happen are rather mysterious. Energy systems fail for a time and few really know why or what to do, cyber-attacks cause whole businesses to almost cease functioning and seem not to be preventable, we all rely on data flows that few understand. Public confusion isn’t a surprise.

Ben Chu’s well-timed new book “Exile Economics” carries the intriguing story of the number of de facto monopolies in the chip making process, including Taiwan’s TMSC making the most advanced chips, ASML from the Netherlands the lithography machines, Zeiss in Germany the mirrors, all the way back to the raw material coming from North Carolina. This all appears to have happened almost by accident, with little obvious role for governments or trade policy.

Prosperous self-sufficiency is not realistic, but openness is also vulnerability. Governments must play a role in how globalisation affects their countries far beyond the signing of trade agreements or investment in infrastructure. Economic security, of meeting essential needs and maintaining a stable standard of living now and in the future, is the obvious concept, but over-reach an ever-present risk.

Most basically, countries need diverse inputs and markets, and different private sector operators, avoiding dependencies. Finding such a balance isn’t new, but today’s challenge in a global economy is systemic, answering fundamental questions of what elements of supply chains should be in the country and how government can support this when delivery is mostly within corporates. Similarly, to think about international communication and financial networks, or the vulnerabilities of internationally connected national infrastructure, not least given worries about particular countries.

Unsurprisingly no country has yet mastered all of this, and governments are understandable fearful of revealing the surprising mix of fragility and resilience in a modern economy. However not to do so means continuing public confusion, and easier demands from companies already claiming to be essential if only the government would support them in some way. However challenging, more has to be said starting with a better explanation of the world than a few conspiracist YouTube clips.

Acknowledging the Modern Economic System

People, ideas, goods, and services travel across borders almost seamlessly, and production of most things can now happen in most places. Collectively this has changed almost every pursuit compared to the late 1980s, at a pace almost certainly unrivalled in human history. International agreements helped, similarly political sentiment in support of openness, but this was mostly about companies fundamentally re-engineering supply to produce better consumer product at a cheaper price.

Such changes are not easily reversed even as crises come with regularity. Manufacturing is unlikely to return to where it no longer has to be employing the numbers it did, jobs have changed dramatically, and everyday social interactions arguably even more. In such circumstances individuals feeling lost and wanting the comfort of simple solutions is understandable, not least when politicians suggest they can easily bring back such a safer past or otherwise regulate away all risk.

What governments need to say is that globalisation is as much a fact as the earth being round. Deniers of both should be treated equally. This doesn’t mean the nation state is powerless, but that it has to think about options differently, and on much will decide not to intervene. Some reassurance that there is some control or at least coherent though somewhere, even if partial, would be helpful.

Then politicians and commentators should also think about what just happened, where we are now, and what may be possible. For if the world’s economic system is a series of continually evolving black boxes about to become even more complex with artificial intelligence then this also steadily reduces the chances of understanding the global and national economy in the future.

Policy Continuity in Changing Times

Open markets, strong infrastructure, stable regulatory and tax regimes, and support for open trade continue to support prosperous countries. There’s no obvious alternative to any of these even while acknowledging that they don’t by themselves bring economic security, and that large companies will work around trade barriers and invest according to where they believe countries comparative advantage to be. They are also no longer guarantors of growth in mature economies.

As someone suggested on social media “Modern governance is akin to flying a jumbo jet. It’s all about the economy. A skilled pilot can improve things a little, perhaps steer around some turbulence, but they can’t really transform the flight. An unskilled one can cause chaos, though safety systems often kick in and limit real damage.”

Openness does not have to mean full endorsement of the ‘neoliberal’ agenda. Many countries with very different approaches to issues like minimum wages and trade unions succeed economically, and governments need to find the approach that works for their countries. Equally countries can still balance regulation between different interests though this will always have wider consequences.

Governments should however pay far more attention to the whole of the new economy. In particular the entire logistics and distribution sector is probably as crucial today as manufacturing was in the past. There is no inherent reason why this should be considered less important work and enhancing its status could increase the acceptability of modern globalisation.

Supporting changing employment patterns and small businesses should also be emphasised more than is currently the case, not least when evidence mounts that modern risk-averse regulatory states diminish competition. Equally, as anchors of communities are no longer factories, countries should do more to think what can come in their place, with universities and other skills providers obvious candidates notwithstanding having become part of the populist backlash.

New Domestic Approaches to Economic Security

Such foundations of a successful domestic economy are not sufficient in an inter-connected world. External threats are real, and populations feeling at the mercy of larger forces is dangerous not least when it appears to lead to governments avoiding hard decisions, populist meddling, or both. All leaders are going to be expected to take more than tokenistic action however difficult that is.

In economic security terms, a minimum will be a strategy showing priorities. In some areas this will mean emphasising domestic protection, in others work with other countries, and much of the time following the global market while regulating in domestic interest to the extent possible. For the most obvious critical national infrastructure, like energy, there is an obvious state interest in at least oversight however private firms may be operating.

For productive sectors there won’t be easy answers. Even for governments to fully understand how the economy operates is difficult when this means asking large companies to reveal much of their intellectual property. Stockpiling is also challenging, a theoretically good answer that won’t be realistic in many sectors even if politicians may want to demonstrate action. Subsidies appear here to stay. There will almost certainly be different answers depending on country and industrial structure.

Decision-making processes should probably be somewhat public in order to build confidence and prevent a strategy that is essentially a response to demands. Whether this allows a government to make difficult decisions to not support symbolic but less valuable sectors like steel or fish is one of the crucial questions, since priorities do have to be made but that means saying no sometimes.

One interesting possibility is agreements between countries and companies supplementing those between countries. These could cover stockpiles and emergency situations, but could also include issues like subsidies, regulations, and investment. In many respects this would simply recognise de facto arrangements, of crucial relations for economic functioning, even if they may also inhibit challenger entry. Corporate interests rest upon being good citizens at least to a degree, but equally they want to protect their own positions and finances.

Taking a wider view, governments also need to rebuild the measurements of activity that this phase of globalisation has broken in many ways. Understanding the economic contribution of localities and services may help rebuild confidence in areas previously dominated by manufacturing sectors.

With debate under-developed and issues complex, these feel like provisional thoughts in need of development. In particular the interplay of countries, companies, and globalisation appears to be a crucial issue that has received insufficient thought in the rush to proclaim deglobalisation.

Setting New Global Rules Will Take Time

Economic security cannot be defined as national security, not least as to do so means providing every country with an automatic opt-out to WTO rules. Yet some actions may breach core principles, for example if a country restricts imports only from a dominant player to avoid competitive destruction. Regulating global trade to counter climate change has already been difficult for the EU and partners.

There is already a considerable amount of talk between governments about the issues of working within modern globalisation, and this can be expected to continue with flurries of at least Memoranda of Understanding. Such work to lower the risk of dependencies or manage issues like raw material investment jointly is clearly different to prevailing trade agreement models.

New rules covering economic security will be important, though thinking is far too immature to suggest immediate treaties. What could happen now is to think of countries at least notifying and discussing their exceptions in Geneva. Stretching WTO rules to suit national preference is hardly new, but was always controversial, and if this is to happen more it will undermine them further.

Substantive co-operation with like-minded partners on economic security is likely to be more difficult than widely assumed since specific interests will differ. While new approaches may replace an FTA agenda close to its natural limit in many countries, this again has to be fully defined. Given that populists reject supranational institutions and often any treaties it is often difficult for countries to reach meaningful agreements, and companies have in some cases filled that gap as in e-commerce.

What we may see is countries having a number of strategic partners, but a changeable list of who to cooperate with on what, and indeed some work with those who are not in general like-minded. Indeed, fear of China’s rise plays a part across these discussions and is also something requiring fresh consideration, its growth having already ended Europe and North America’s leading role in the global economy. Ultimately at political level there will need to be new economic security understandings.

Conclusion

In essence there is now one global market, whether that is for sport or medicines, universities or cars. That happened largely without much government intervention, ironically during a time when many were trying to eliminate economic risk. Our resulting economy is a puzzling tangle of the global and local, the resilient and insecure, the plentiful but with low growth, that needs working out.

Given few easy choices denial has become the uncomfortable default allowing difficult decisions to be avoided, but leading to a skewed debate and the comfort of the simplistic but wrong. Populism is a free hit while technocratic parties make promises they can’t deliver about a world they don’t understand. A first obvious change is thus in some way for governments to publicly acknowledge modernity, develop wider understanding, and consider the compromises that will be required.

On the upside, governments always had to balance openness and protection, different company interests, alliances and rivals, subsidies and private investment, and never did so perfectly. While the scale of these challenges may now be different, there is much that can be drawn upon more effectively given a better diagnosis of the situation.

Political leadership centred on the concept of economic security feels like a good way to reset public expectations and provide a new framework for choices. Breaking out of a negative political cycle that is starting to consume too many countries is the prize on offer.

Perhaps it will take the failures of populists to demonstrate that these are new times needing new answers, or perhaps a pressing question like climate change will demand greater action. As globalisation isn’t going away, one way or another there has to be such an adjustment based on far better analysis than we have seen to date.