Summary.
There was a time, not so long ago, when globalization seemed to herald the arrival of a new world order. As David Brooks pointed out, many assumed that greater prosperity, the adoption of more Western values, and a convergence among nations were given outcomes.
This was wrong. The Economist suggests why. The 2008 recession led many to question the benefits of globalization. Brexit was an example of devolution. World trade, relative to global GDP, fell by 5 percentage points between 2008 and 2019. Tariffs are no longer the third rail of international trade relations. Indeed, despite traditional policies that are opposed to discriminatory tariffs, popular opinion is no longer opposed to tariffs against countries like China. Long-term investment across borders fell by half between 2016 and 2019.
What all this suggests is that the presumption of a rules-based global order that facilitates greater prosperity for all participants is no longer being taken for granted, and that individual players are now seeking to alter the system in their own favor.
Famed investor and economist Ray Dalio believes that globalization is dead. He argues, “We’re no longer in a world where producing most efficiently wherever it can be done is the primary goal.” The message? Stop being nostalgic. The old rules-based form of globalization is indeed dead. It is not coming back any time soon.
Companies should prepare now for a new, fragmented, non-system that looks more like mutually convenient bilateral arrangements — or trilateral or quadrilateral arrangements — with durations that are mutual and subject to mutations. Such arrangements are subject to being interfered with by geopolitical tensions and by countries who control other countries’ supply chains. So we’re in for a bumpy ride.
The Radical Reshaping of the Global Order
Conventional views of globalization were built on some widely shared assumptions. Comparative advantage theory, originated by British economist David Ricardo in the 1800s, suggested that countries should specialize in producing goods and services that they could produce more efficiently than other countries, and that they should align their trade policies accordingly. A second assumption was that firms could benefit from economies of scale and scope by extending their operations across borders. A third was that communication and transportation technologies had so reduced the costs of far-flung supply chains that the world was basically “flat.” A fourth was that foreign direct investment benefitted both firms and host countries by allowing firms to take advantage of new markets and other resources and companies in host countries to gain valuable capabilities.
These views led to new policies and practices: Countries lowered trade barriers and enforced agreements via the World Trade Organization (WTO). The WTO concerned itself with establishing the ground rules for membership and for trade agreements that consisted of five core principles: nondiscrimination, reciprocity, enforceable commitments, transparency, and safety valves.
Against this backdrop, companies proactively globalized their supply chains, which ultimately led to disastrous disruptions during the Covid-19 pandemic.
Subsequent experiences have offered sobering lessons. We are now seeing that parties to trade transactions do not adhere to a common set of rules. Many operate with a different logic. For many business leaders and boards, this is a “deer in the headlights” moment.
What Are the New Drivers?
China is a huge part of this story. Its 2001 accession into the WTO was its signature transition into a global trade juggernaut. Western countries believed that membership would lead to economic development for China (which meant large potential markets for Western goods and services) and political liberalization as a population freed from extreme poverty would expect a greater say in consequential national decisions.
Things didn’t exactly work out that way. Stories such as “How the West Invited China to Eat Its Lunch” and “What Happened When China Joined the WTO?” outline just how wrong Western expectations were. Chinese leadership quickly figured out how to use trade agreements to the country’s own advantage.
Recent events have alarmed even the most complacent executives. For example, the 2021 unilateral decision by China’s State Council that all edtech companies need to operate as nonprofits wiped out billions in market cap and caused steep investor concern. Some investors lost billions. Earlier this year, the European Union Chamber of Commerce in China reported that “business confidence in China is pretty much the lowest we have on record,” according to Chamber President Jens Eskelund. The United States finds itself facing a counterparty under huge stress at home, likely to try to negotiate agreements without much intention of honoring its side of those agreements, according to the Brookings Institute.
Governments and companies are seeking to reduce their dependence on China. The U.S. government has created incentives to produce semiconductors, electric cars, and solar panels domestically. Many companies, including Intel, Microsoft, Nike, and Dell are considering moving their facilities elsewhere. Global electronics manufacturer Samsung has already relocated large parts of its production apparatus.
CEOs are finding themselves unable to avoid geopolitics. The devolution, as we call it, could reshape the global system. The CEOs we interviewed for this article are finding that their organizations are now enmeshed in political and social issues such as LGBTQ rights, support for Ukraine, voting restrictions, and immigration. They are now facing an active role in forming labor, environmental, and intellectual property rights policies. Further, the lines between civilian and military activities are becoming blurred as much of the critical U.S. infrastructure, such as the provision of communications services, the supply of energy, and access to safe, clean water is in private hands, and attempts by international entities to inflict damage is a real concern. [Note: Our interviews were conducted before recent events in Israel and Gaza.]
In short, the world is shifting from a global trade order to a devolved one in which bilateral agreements, multiple spheres of influence, and self-interested government policies are likely to loom large.
Toward Permissionless Ecosystems
A devolved global order will require an equally devolved organizational response, for both large organizations and their supply ecosystems. We call this operating in a “permissionless” manner. The core concept is that modern technologies allow decisions to be made as close to the “edges” of an organization as possible. As we move into this devolved world order, companies will need to:
Define the ecosystem they’re operating in, as well as its orchestrator and governance practices.
Any ecosystem requires a common platform and operating guidelines. These can be pure-play platforms such as the XOM platform for materials trading. Or, for example, in the case of Samsung Galaxy or Apple iPhone ecosystems, a central producer creates and maintains a platform, but leverages the power of partners to create a superior customer experience. It’s critical in designing such orchestration practices to agree on the overarching purpose and benefits that the ecosystem serves.
Leverage technology to coordinate among suppliers and customers.
Permissionless organizations leverage technology to provide coordination amongst stakeholders. Technology allows both suppliers and their customers to self-coordinate and operate on a common basis of the truth. At Amazon, for instance, a number of systems help coordinate their global supply chains, including:
- Real-time, automated warehousing management systems
- Order management systems to route orders that send delay alerts and communicate about inventory levels automatically
- Outsourced geographic warehousing, especially during peak sales cycles
- Predictive analytics managing streamlined inventory ordering
Such systems can also contain granular information about risks at a hyper-local level, facilitating a coordinated response from all players in real time.
Embed modularity and redundancy in systems.
Tightly integrated systems (such as the pre-2020 global supply chain) are vulnerable to unexpected shocks. Loosely coupled, modular systems, in contrast, can wall off parts of the system under stress so that the rest can continue to operate. While this may require some additional investment up front, the benefit in terms of resilience is more than worth it.
A best practice, for example, might include requiring multiple sources of supply for critical components. For example, global fast fashion retailer Zara embedded modularity in its system, leveraging hundreds of suppliers connected by a common global system.
Adopt “discovery-driven” leadership practices.
Operating a permissionless, non-hierarchical structure will demand more of leaders, not less. They will need the courage to obtain information from the far-flung “edges” of the organization, and they need to be willing to change course as new information is revealed. Building rich information flow from the edges to the C-suite has never been more important.
The Easy Days of Globalization Are Over
The view of globalization as an arm-in-arm march forward has officially been shattered. As companies navigate the reality of new spheres of influence, bilateral trading agreements, and rules-based versus other forms of trading agreements, those who can build organizations that are resilient and permissionless will benefit the most.