Global reset – Economic decoupling (Part 6: MNCs in a deglobalizing world)

Global reset – Economic decoupling (Part 6: MNCs in a deglobalizing world)

Phuah Eng Chye (26 February 2022)

MNC-led globalisation expanded the power of MNCs at the expense of governments and the working class in developed economies. This trend has reversed as politicians tap into public dissatisfaction to revive nationalism.  Decoupling thus acts as a policy tool to reimpose national boundaries and a means for politicians and governments to recapture power from MNCs.

Initially, MNCs and third countries had hoped the US and Chinese governments would recognise the huge adverse consequences and that decoupling is a transitory phase to future recoupling. Instead, trust has broken down and decoupling is deepening and broadening with prospects for recoupling or détente dim. Decoupling has put a spanner into the MNC-led globalisation and the future global landscape will be reshaped by the forces of deglobalisation as MNCs are forced to curtail or downsize global activities.

Restructuring of international production

The United Nations Conference on Trade and Development’s (UNCTAD) World Investment Report 2020 points out “international production is not only affected by the immediate impact of the COVID-19 crisis. The coming years – and the decade to 2030 – will see more fundamental changes to the system of international production. The slowdown of trade and investment over the last decade was a harbinger of a decade of transformation ahead…international production is affected by megatrends in three areas – technology, economic governance, and sustainability – each of which has complex policy implications on its own…They have led to a trade and investment policy paradox. On the one hand, barriers to trade have increased, inward investment has become subject to greater scrutiny, and outward investment is discouraged in some countries. On the other hand, competition for trade and investment has also increased, with more than 100 countries adopting new trade- and investment-dependent industrial policies over the decade, and an explosion in the number of SEZs. Modern industrial policies are increasingly diverse and complex, including myriad objectives, such as development of the knowledge economy, competitive positioning in industries deemed crucial for future growth (e.g. robotics, bio-tech), and build-up of sectors important for sustainable development (e.g. renewable energy, agri-food, water management)”.

UNCTAD highlighted international production is likely to be restructured along four trajectories.

  • The direction is towards simplification of production processes and use of onshore or nearshore operations. Lower fragmentation and geographic dispersion, and more capital-intensive operations, will generally favour a return to more direct control by MNEs of their remaining overseas operations (insourcing). This model thus reverts the historical trends of international production: from unbundling to rebundling, from offshoring to reshoring and from outsourcing to insourcing. Advanced robotics-driven automation will reduce the relevance of labour cost arbitrage via offshoring to low-cost locations. In higher-technology, GVC-intensive industries, a degree of retrenchment of international production in these industries seems inevitable, with mounting pressure for shorter and more sustainable value chains and more diversified and flexible production systems.
  • When concentration of production and supply chain dependence are the main issues, international diversification may be more effective than reshoring. This means giving up some scale economies by involving more locations and suppliers in the value chain.
  • Regionalization of value chains can result from either a pull-back from GVCs (with global MNEs replicating value chains at the regional level) or the growth of international production on a regional basis (with MNEs structuring their operations near-shore). The pandemic has fuelled momentum for value chain regionalization – by considerations of regional strategic autonomy among developed countries and by regional development objectives among less developed economies. The emergence of regional value chains can break traditional dependencies. The benefits are to stimulate local development, foster local self-reliance and resilience, allow higher participation in value chains; foster specialization and industrial diversification within the region and open opportunities for structural transformation and value chain upgrading. However, regional value chains are not easy to establish. Barriers to regional value chains in traditional GVC-intensive industries include the persistence of economies of scale and high capital costs of machinery, as well as labour cost differentials and the need for specialized labour or suppliers. It requires regional coordination and conducive systemic conditions.
  • Replication is characterized by distributed manufacturing close to the point of consumption and supported by new production technologies such as additive manufacturing or 3D printing. Replication models can be based on centrally coordinated distributed manufacturing characterized by short value chains, with manufacturing production steps bundled together and replicated in many locations. Consequently, geographic dispersion of economic activities is high, with concentration of high-value activities in few locations but broad participation in the manufacturing process. There is stronger control from MNEs of the value-adding design and coordination phase and significant opportunities for local outsourcing of the highly commodified, replicated manufacturing steps. Alternatively, replication models can be based on the bottom-up atomization of production whereby every firm or even household independently produces what is needed.

UNCTAD predicts “international production, and especially cross-border investment in productive assets, will come under severe pressure. In some industries this may become a decade of transformation; in others it will look like a retreat. There are significant risks attached to the possible further slowdown or even reversal of international production. First, an abrupt or forced retreat will make the recovery more difficult. A downturn in international production adds a protracted supply shock to the demand shock, slowing down the recovery. It also deepens the crisis in economies least equipped to deal with it…Second, longer term, it will harm the development prospects of lower-income countries…The development strategies of many of the poorest countries explicitly rely on opportunities to attract FDI and to participate in GVCs; a retreat of international production would make their development ladder more rickety. Third, a retreat of international production could have many side effects on prices, competition and innovation”. This could negate the previous significant gains from an open trade and investment system.

“While a policy push towards a degree of self-sufficiency in the production of vital goods, more general pressure for a wider distribution of industrial manufacturing capacity globally, and calls for a partial decoupling of supply chains from factory Asia are likely to grow stronger, policymakers should be aware of the risks involved”. In this regard, “selective reindustrialization will take time. There is no guarantee of success because skills and supplier bases are not always present; high expectations for the number of jobs to be brought back are unlikely to be met; and costs will be significant, including both investment costs associated with restructuring and with capital-intensive production, and economic costs – including higher prices. The cost considerations, in particular, add significant uncertainty about the ultimate direction and speed of the transformation”.

UNCTAD cautions “the directional trend in international production points towards shorter value chains, greater concentration of value added and declining international investment in productive assets…Regionalization will make cooperation with neighbours on industrial development, trade and investment of critical importance. And replication will change the model of investment promotion focused solely on large-scale industrial activities”. Overall, “policy action to make international production more sustainable – which could go hand-in-hand with measures to mitigate the effects of the pandemic and limit future risks – is both necessary and urgent”.

Decoupling and MNC deglobalisation

Decoupling does not occur if MNCs don’t deglobalise. Thus, the brunt of policy actions (tariffs, sanctions, prohibitions, controls and exclusions) covering a broad area – human rights, border disputes, industrial production, technology, data, finance, education and content – ultimately lands on MNCs. As governments pile pressure on MNCs to rip out the other sides’ components from their supply chain and to reduce interactions, MNCs are forced to reconstruct their vertical production chains and organisational structures. It is their reactions that will determine decoupling outcomes.

Decoupling policies exert pressure on OECD MNCs to withdraw from China. But MNCs that give up on the Chinese market risk damaging their global ambitions. They lose the benefits of a cost-efficient supply chain, scale, market share and opportunities; and the ability to keep abreast of trends and innovations. The vacuum, created by their exit, would be filled by home-grown and international competitors who would consequently expand and compete with “leavers” in other markets. In the event of recoupling, “leavers” might not be welcomed back as Asians (government, customers and suppliers) tend to have long memories and hold grudges.

Generally, MNCs[1] have downsized or restructured their China operations to bypass controls or firewall decoupling risks by separating their China operations into a distinct entity. This allows them to retain a presence in China for supply needs or to continue to service the Chinese market. In the meantime, it has proven fruitful to keep a low profile to avoid upsetting either side.

Nonetheless, it is difficult to avoid getting sucked in and collateral damage has been severe in some instances. For example, Supantha Mukherjee notes since Sweden banned China’s Huawei from selling 5G gear, Ericsson has lost most of its share of telecom tenders in China and plans to reduce its operations. As policy actions to block critical technologies from being used in China expanded, Reuters report South Korea’s SK Hynix Inc. was unable to upgrade its largest production facility in Wuxi, China, with the latest extreme ultraviolet lithography (EUV) chipmaking machines made by Dutch firm ASML Holding NV. The Wuxi factory “makes about half of SK Hynix’s DRAM chips, which amounts to 15 percent of the worldwide total”. This puts SK Hynix at a disadvantage to its rivals Samsung and Micron which has plants at other locations that can shift to ASML’s EUV machines. If foreign MNCs are unable to continuously upgrade their plants, this means their plants in China will eventually become obsolete and this will force them to open or upgrade their overseas plants.

Ciel Qi notes the US and China are dependent on Taiwanese chipmaker TSMC as it accounts for 53% of global foundry and 92% of the world’s advanced chips production. “While Taiwan undoubtedly enjoys its current semiconductor dominance and the leverage that gives it over both China and the U.S., neither feel comfortable with the status quo – and both have taken measures to make the situation more favorable to themselves. The U.S. has persuaded TSMC to build chip factories in the country while China has hired more than 100 veteran engineers and managers from TSMC to boost its own pursuit of cutting-edge chip manufacturing…Amid all this uncertainty, at least Taiwan’s position seems secure in the short term: Its nearest competitors in both China and the U.S. are still years behind, and even if they did catch up, fabs famously take years of planning and investment to get running”.

In my view, this is reflective of the battles in restructuring GVCs. TSMC has taken advantage of its “temporary indispensability” and negotiated for incentives to establish plants in several countries. In the meantime, China, EU and US are exploring possibilities of creating national semiconductor champions. Longer term, Taiwan could find its geographical importance shrink as new plants come onstream in other countries while TSMC could find itself squeezed by over-capacity and having to fend off national champions backed by their governments.

There are difficulties for allies to maintain a united front though due to their competing interests. Spengler notes “Washington’s restrictions on trade and investment with China…provide pretexts for dodgy deals that favor US companies” at their expense. For example, “US authorities grant exceptions to American companies trading with China while denying them to Europeans…Many European businesses that produce chips and chipmaking equipment are affected by American sanctions because they rely on US intellectual property…But the market for the components was quickly filled by US vendors selling through middlemen.” “The Trump administration declined to mobilize American resources to create a competitor to Huawei, and also refused to put money behind the number two telecom equipment maker, Sweden’s Ericsson…European telecom experts view the software-based solution as another feckless American welfare program for the world’s richest tech companies. That is why Europe is forging an independent path and budgeting $30 billion on a European initiative on processors and semiconductor technologies.”

Rules for cross-border technology and data flow will also have a critical impact on decoupling. In their report, the European Union Chamber of Commerce in China and the Mercator Institute for China Studies[2] expressed concern that “direct market access barriers, like negative lists and national security measures, are increasingly joined by indirect ones, like national standards or licensing requirements, to prevent developing technology ecosystems in the US and China from overlapping. Whether it’s the US’s Clean Network proposal or measures by Chinese authorities aimed at creating autonomous and controllable technology, it is all part of the same slippery slope: the technologies that are defining the future, and which are increasingly integrated into every sector of the economy, are being divided between two of the world’s three largest economies, each of which has a growing firewall separating itself from the other. The US is moving towards a world in which Chinese technology should be purged from supply chains servicing Americans, while China is creating state-sponsored national champions to dominate a self-reliant ecosystem of indigenous technology integrated across its entire market”.

This puts US allies like the EU in a dilemma. “The present and future tech quagmire: preventing digital dilemmas, tech autarky and a weaponisation of interdependence. Taken in isolation, decoupling dynamics within each layer are causing at least some suffering to European companies, but when these layers intersect the pain becomes excruciating”. In this regard, “the EU and China look likely to mutually decouple on the data front, with their different data-governance systems pushing an agenda of extensive data localisation requirements and erecting barriers to cross-border data transfer…A growing number of firms across all industries, are unable to integrate their digital solutions in China, in large part due to market access barriers to the provision of both basic and value-added telecommunications services”. “China’s push to expand its influence in the setting of global quality standards was also cause for concern…Beijing had slowed the adoption of international norms while promoting its own domestic standards internationally. Foreign companies had also complained about a lack of access to standardisation activities within China…Beijing had looked to promote Chinese standards in third countries through its Belt and Road Initiative, which could lead to tech dependency and a squeezing out of European business…urged Beijing to address concerns over data and cybersecurity regulation, saying half of the companies polled had already delayed or dropped projects or services, or were considering doing so, because of China’s restrictive approach to personal information. China needs to give foreign actors more confidence that its evolving data management regime is governed in practice by a level of transparency and predictability adequate to protect foreign interests”.

The European Chamber of Commerce notes firms have several options. One is to adopt dual systems: “One supply chain and R&D system to exclusively serve China and one to provide for the rest of the world. For digital systems in China, this would necessitate either building an entire digital stack for the local market, or partnering with/outsourcing to Chinese providers”. Another is to build flexible architectures: “Everything that can be supplied in a neutral manner in either market is developed and built for both systems, with other parts being developed separately for each market with the capability of being swapped out”. However, “every step taken down the path of decoupling inflicts further damage on innovation, efficiency, cost-saving and economies of scale”; hurt small companies and “this translates into lost investment and jobs, as well as higher costs and fewer choices for end-consumers”.

Chinese MNCs face pressure on two fronts. One from Western decoupling policies to stymy their expansion or deny them access to OECD markets; and another from internal socialism-driven reforms[3] and policies aimed at addressing national security concerns over their international operations. Chinese MNCs appear to be restructuring their domestic operations to align with national policies and moving up the value curve to maximise domestic opportunities (such as in semiconductors, software, cloud, IOT and branded consumer products). Internationally, their attention appears to have shifted from OECD markets to Africa, Latin America and Asia (Eurasia and Asean).

Competition is thus intensifying in emerging markets. Alicia García-Herrero and Jianwei Xu notes “since 2002, the EU’s share of Russia’s imports has dropped from 53% to about 40%, while China’s share has risen from less than 3% to 21%…The share of domestic content in the goods China sells to the world has been increasing, and Chinese exports are increasingly substituting EU exports on the Russian market, especially in capital-intensive sectors. Notable overlaps are vehicles, industrial machinery, electronics and metal components”. Similar trends are evident in Africa and Latin America. The major setback for Chinese MNCs is in India which has pivoted to the West.

There are two aspects relating to MNCs as vehicles for deglobalisation. One is a deglobalization of firm diversity due to the withdrawal or regionalisation of operations and the screening of nationalities and background of technologies and employees (especially technical staff). Decoupling is likely to affect the diversity of investments, suppliers and partners, management and shareholders. At the organisational levels, deglobalisation will be reflected in business models, corporate cultures and branding strategies, and reinforced by firewalls to separate businesses along geographical and technological lines.

Another is a deglobalisation by geography. MNCs are increasingly finding themselves under pressure to confine their operations within spheres. The pressure is less intense for most consumer goods due to protection afforded by multilateral trade agreements. The split is most apparent for technology and critical goods. Some MNCs may consider the decoupling challenges too much trouble and choose to confine their operations within a sphere until conditions change. Others will look for reconfiguration solutions to allow them to continue to operate across different spheres. There will be changes to product and branding strategies with increasing adoption of multi-sphere identities and facilitation of inter-operability across spheres.

Macro effects of decoupling and deglobalisation

At the moment, there is complacency regarding the dangers of decoupling and deglobalisation because the initial data trends, such as resilient global trade and buoyant US asset markets, indicate minimal impact. Yet, it is likely the damage from decoupling on global economic activities was masked by the massive pandemic-related government stimulus. However, as decoupling deepens and the pandemic prolongs, the situation could well change in 2022 with the macroeconomic damage from deglobalisation becoming apparent. There are several developments to watch.

First, deglobalisation will increase the frequency and magnify the intensity of supply shocks. In this regard, the pandemic induced massive shifts in demand patterns. But the innate ability of markets to respond to shortfalls was badly impaired. The pandemic itself contributed to production shutdowns, reduced labour mobility and logistical bottlenecks. But government policies related to decoupling (sanctions, export controls) and other agenda (e.g. climate change, anti-competition) also had a major impact. In the geographical restructuring of production chains, the transition between closure of existing facilities and the coming onstream of new facilities posed a major disruption to supply dependability.

Second, supply rigidities and geopolitical mistrust will contribute to cost-push inflation. Policy uncertainties and rising costs makes it disadvantageous to invest in extracting or manufacturing widely used low-value and low-margin products. A sudden surge in demand will cause prices to spike. Prices cannot correct unless demand softens because it is unlikely new capacity will come onstream (unless there are government incentives). The cost-push inflationary pressure will be compounded by the reversal of “spliced efficiencies” – which I would define as the business efficiencies gained previously from arbitraging regulatory costs (labour, welfare and tax), wait times, inventories and spare production capacity. In a rising cost environment, neither suppliers[4] nor employees would be willing to absorb these hidden costs. In particular, Eamon McKinney points out diminishing goodwill between US manufacturers and Chinese suppliers is leading the latter to pass on, rather than absorb, rising costs from inflationary pressures and shortages and, given decoupling tensions, to prioritise shipments to other countries.

Third, there are questions relating to the consequences of government intervention and how it is to be unwound. As governments revert from being market-friendly to becoming interventionist, the private sector has taken a step back to let governments do the heavy lifting. It now seems that governments need to instruct and provide incentives to solve supply shortages, promote industrialisation and underwrite the economic recovery. Typical unintentional consequences associated with government intervention includes increasing private sector lobbying for handouts, misallocation of capital, impeding the creative destruction of legacy industries and damaging private sector innovation and renewal. In the long-term, policy-driven expansion of industrial capacity will intensify competition downstream (making raw materials more expensive) and upstream (pressuring product prices) and dampen potential return on investment. Governments cannot sustain their interventions on a permanent basis. At some point, they need to withdraw fiscal and monetary stimulus but can governments exit if the private sector is not positioned to pick up the slack. Once stimulus ends, it is unlikely that domestic MNCs and markets will have the capacity to drive an economic recovery. I don’t think a global recovery is possible without a return to MNC-driven globalisation. However, given rising geopolitical tensions and jurisdictional conflicts, there is unlikely to be a recovery in cross-border intermediation and direct investment.

Fourth, deglobalisation points to increasing fiscal and monetary policy divergence between US and China. There are two aspects. Monetary decoupling[5] points to the end of the global savings glut and the Goldilocks economy of low global interest and inflation rates. The collapse of the global savings paradigm of using Asian export earnings to finance deficit-financed consumption in West is already leading to an environment of higher inflation to be followed by higher interest rates. Monetary decoupling tensions imply savings will be increasingly recycled within geopolitical spheres. In addition, the absence of policy synchronisation means the benefits of expansion on one side could be negated by tightening on the other side. Decoupling is thus likely to impede policy coordination for a global recovery and impose more severe limits on deficit spending. In this regard, the diverging monetary policies are part of the broader competition between powerful nations to reshape financial ecosystems around their currencies and to compete for monetary policy dominance. It also presages a competition to be the world’s biggest consumer and importer of resources.

Fifth, deglobalisation will give rise to cross-border deleveraging, liquidity congestion and assist the spread of liquidity trap conditions. Rising geopolitical risks is elevating compliance costs (multi-layer tracing requirements) and increasing risk aversion among MNCs and intermediaries. Coupled with the threat from digital currencies, global financial intermediaries are finding their cross-border intermediation franchises are becoming less profitable. In tandem with this, intermediaries’ balance sheet capacity has been relatively constrained and they are unable to intermediate the excess liquidity created by central banks. As a result, there has been liquidity congestion[6] with massive QE liquidity in the US and EU largely trapped within their own jurisdictions. The trend favours cross-border deleveraging in favour of domestic leveraging.

In the meantime, central banks are signalling preparations to exit monetary stimulus. However, they face Japanification or liquidity trap risks where attempts to exit QE programs are abandoned for fear of triggering depression[7] dynamics; where a collapse in asset prices triggers market dislocation or if fiscal stimulus and debt forbearance wears out and becomes unbearable. If, like in Japan, the private sector never fully recovers its confidence and liquidity is unable to flow to where it is needed to stimulate growth, this would amplify the forces of contraction and hasten a return to depression economics. The dilemma for Western central banks is that they may have reached the limits of balance sheet expansion.

Another development to watch is how geopolitical tensions and the principle of reciprocity shape the new geography of economic relationships. The US already has North America firmly in its grasp and has embarked on resurrect the Anglo-Saxon belt comprising countries with a common English-language heritage. The main goal seems to be to pull India firmly into the US sphere and to position it as the new engine of industrial growth to challenge China and its BRI threat. To some extent, this strategy reflects pressures on the Anglo-Saxon capitalism model[8] practised by former British colonies such as US, UK, Canada, Australia, New Zealand, Hong Kong and Malaysia. In the recent decade, the hinterland economies (from EU, East Asia, BRICS) have advanced strongly and closed the gap on the English language advantage – in terms of law, culture, entertainment and finance – and the allure of the Anglo-Saxon model is fading. While India is positioned as a foil to China, this could backfire as it is more likely India will adopt China-type policies rather than Western-type policies.

The decoupling-driven geographical patterns has redirected economic growth and interrupted China’s growth and the expansion of its MNCs. In response, China is accelerating expansion in Eurasia, Africa, Middle East and Latin America as well as hosting a loose alliance among US-sanctioned countries, particularly with Russia. Hence, China is strengthening consumption and currency linkages to build an international ecosystem insulated from US long-arm reach.

However, the extent to which China will be displaced depend on the success of the “decoupling-bred tigers” – such as India, Vietnam, Indonesia and Mexico – in overcoming structural impediments to displace China as an industrial production hub. On the other hand, the success of “decoupling-bred tigers” might generate new competitive pressures that increases rather than relieve the pressure on Western economies and make them the next geopolitical target. There is also intense competition for the allegiance of EU, Asean and East Asia which have significant economic relationships with both superpowers. At the moment, these regions are struggling to maintain their strategic autonomy. The balancing act tensions are likely to persist throughout this decade.

On a collective basis, economic growth in the hinterland economies will likely outpace the financial centers and incumbent export-led economies. The hinterland economies in Euro-Asia, South Asia, Africa and Latin America have little to lose and much to gain from geopolitical competition. In contrast, superpower bickering and retaliatory actions will weigh on growth prospects in the West and in East Asia. The deglobalising world thus augurs a geographical transition in economic opportunities, growth centers and drivers.

Future of MNCs in a deglobalizing world

Decoupling, and the policies on climate change and inequality, represents a backlash against globalisation, against free markets and ultimately against MNCs. While governments are taking aim at rival nations, the blows ultimately land on MNCs. Recent policies are aimed at effectively forcing MNCs to choose sides and to deglobalize. MNC deglobalisation, depending on how it occurs, will drive deglobalisation of the world economy.

There have already been winners and losers from decoupling. In the short-term, some MNCs benefitted from new opportunities, reduced competition, stronger pricing power and government incentives. Others suffered collateral damage from government policies and public boycotts. But long-term, the costs are mounting up. The pandemic, decoupling, and climate change are accelerating the pace of creative destruction. This will likely result in higher capital write-offs for stranded assets belonging to legacy industries or business models. Existing plants in China could find themselves mothballed due to decoupling while new plants in the West face the challenge of achieving scale if they can’t access the China market. Government-bred start-ups will emerge and challenge incumbents. These pressures are already causing the global operating environment for MNCs to deteriorate.

MNCs face a quandary planning their future in a deglobalizing world. They need to anticipate the direction of future government policies. How are they to square their global ambitions with government and public demands that MNCs pledge their allegiance to a flag? They can choose to ignore government dictates and public sentiment but it may be at their peril if more government coercion is forthcoming to discourage MNCs from “engaging with the enemy”. On the flip side, geopolitical victories are never complete nor eternal. Hence, MNCs (particularly neutrals) should hold their ground and wait for governments to increase their incentives to stay or defect. At the end of the day, MNCs are likely to seek to optimise benefits and will vote with their feet.

The full damage from decoupling have thus yet to materialise because generally MNCs are taking incremental steps to downsize their global exposure. Deglobalisation is like the tide going out. As the waters ebb, it reveals the harsh realities of the ground beneath. There is real damage to the global economy caused by the costs from government intervention, the fragmentation of production chain and markets resulting in loss of scale efficiencies, and diminishing financial and non-financial cross-border intermediation. The biggest damage is perhaps being caused by from the poisoning of global relationships, painstakingly built over decades. MNCs will increasingly treat MNCs from other countries with greater suspicion – as less trustworthy partners, suppliers, employees, shareholders and even customers – as they all undergo a restructuring of business and supply relationships. Decoupling is thus a political wedge that alienates governments and MNCs; and that puts them all on a path to conflict.

Critically, is there be an end-state for decoupling and what will happen to globalisation in the post-decoupling phase? In other words, the end-game for decoupling is not complete deglobalisation. This raises the question of whether decoupling, and therefore deglobalisation, is transitory, reversible or permanent? In this context, MNC deglobalisation (withdrawal) creates a vacuum that prompts the need for even more government intervention. At this point, it is evident some aspects of decoupling (factory relocations, component substitution) cannot be undone. At best, there can be selective recoupling; leaving gaps in market coordination unaddressed. At this stage, governments will need to face up to the disorder they unleashed by messing around with the economy. As the global economy goes into a tailspin, would governments halt decoupling or would this likely lead to more military conflicts. In other words, would governments be willing to relinquish power if and when the economy gets into deep trouble?

Thus, governments will eventually reach a cross-road when they should consider restraining their attack on globalisation. They should bear in mind that as governments start to withdraw interventions (stimulus), domestic capabilities will not be sufficient to sustain an economic recovery. A sustainable economic recovery is dependent on a reinstatement of globalisation where the private sector, and not governments, will have an essential role in reviving globalisation. But will countries cooperate in fostering a conducive environment for MNCs to lead the economic recovery. This suggests the policy pendulum needs to swing back from government intervention to markets – not immediately but maybe at some stage when governments sober up. Hence, MNCs need to be positioned at the forefront of leading recoupling initiatives to rebuild the cross-border relationships and activities that act as the springboard to the next global economic recovery.

In a deglobalizing world, MNCs will react by adjusting their business models, strategies and cultures and reorganising around new growth drivers and centers in a deglobalizing world, possibly vertically integrating within an economic sphere. But rather than let MNCs struggle to cope with the dynamic uncertainties, governments should provide clarity on the long-term policy direction and find ways to accommodate MNC globalisation. The success of modern society, regardless of ideology, is determined by how governments and MNCs are able to work together to achieve both public and private goals.

One critical area for governments to address will be to reduce the high levels of policy uncertainty and compliance costs. At the moment, MNCs are affected by a patchwork of national policies and rules and by bilateral and multilateral agreements. There is very little coherence and countries seem to be moving in different directions and impeding global inter-dependency. There is a need for mutually-agreed restraints on national rules and jurisdictional reach that are inhibiting cross-border activities from the perspective of MNCs. This will involve clarifying the scope of various national laws affecting MNCs in areas relating to national security, labour laws, climate change, anti-competition, self-reliance or self-sufficiency, tariffs, subsidies, taxes, fines and other necessary safeguards.

In this regard, it would help to clarify the global role of MNCs. Decoupling and deglobalisation serves as a reminder that the traditional ideals of a global MNC – based on the free movement of goods, services, data and capital and labour and knowledge or dedicated only to shareholders – is no longer acceptable to most nations. MNCs should be sensitive to the needs and aspirations of stakeholders in across countries. It would be useful to think about establishing a global code of conduct for MNCs. The framework should be neutral (non-discriminatory in terms of country or ownership) and be based on generic and autonomous principles and criteria. The global code of conduct should establish consensus on good behaviour for MNCs, seek to promote rebalancing between public and private objectives, mitigate domination by any single country or firm and provide exemptions for small companies. Towards this end, the code could encourage MNCs to disclose and track how their corporate activities are aligned to the needs to countries they operate in; their contributions in terms of tax revenues as a proportion of revenues it earns and their efforts to improve the working conditions of their direct and indirect employees. Compliance with the code should be provide MNCs with a “free pass” to operate in many spheres.


The global economy of today was largely shaped by MNCs over the past three decades. Now by governments are taking over the reins and pursuing decoupling. There are differences in a world shaped by MNCs and governments. MNCs shaped a world driven by profit and efficiency motives. Governments will shape a world driven by power and geopolitical motives. These features are polarising and the divides will be reinforced by military hostilities, pandemic policies (differentiated by zero-covid policies) and other policy and legal differences.

Further down the road, there will be a shift from a transitory to a permanent state. In the post-pandemic and post-decoupling era, some features of the pandemic and decoupling will become permanently embedded into society but some are reversible. Overall, the retreat from globalisation will likely to fragment the world into spheres and does not augur well for the world economy.


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Phuah Eng Chye (23 November 2019) “Information and organisation: China’s surveillance state growth model (Part 2: The clash of models)”.

Phuah Eng Chye (7 December 2019) “Information and organisation: China’s surveillance state growth model (Part 3: The relationship between surveillance and growth)”

Phuah Eng Chye (5 June 2021) “Global reset – Two whales in a pond”.

Phuah Eng Chye (17 July 2021) “Global reset – Monetary decoupling (Part 3: Consequences of diverging policies)”.

Phuah Eng Chye (11 September 2021) “Global reset – Monetary decoupling (Part 7: Currency wargame scenarios)”.

Phuah Eng Chye (18 December 2021) “Global reset – Economic decoupling (Part 1: China’s socialism big bang)”.

Phuah Eng Chye (1 January 2022) “Global reset – Economic decoupling (Part 2: China’s global discourse for the 21st century)”.

Phuah Eng Chye (15 January 2022) “Global reset – Economic decoupling (Part 3: US decoupling – Costs, flaws and revising the strategies)”.

Phuah Eng Chye (29 January 2022) “Global reset – Economic decoupling (Part 4: US in the 21st century)”.

Phuah Eng Chye (12 February 2022) “Global reset – Economic decoupling (Part 5: Growing divergence between governments and MNCs)”.

Reuters (19 November 2021) “US-China tech war clouds Hynix’s plans for a key fab”.

Spengler (4 January 2021) “Two-faced US trade policy erodes Atlantic alliance”. Asia Times.

Supantha Mukherjee (19 October 2021) “Ericsson plans cut in China ops on Huawei backlash, flags supply chain issues”. Reuters.

United Nations Conference on Trade and Development (UNCTAD) (2020) “World Investment Report 2020: International production beyond the pandemic”.

[1] provides a list of MNCs that are downsizing or moving out of China.

[2] See article by Wendy Wu summarizing highlights from the report.

[3] See “Global reset – Economic decoupling (Part 1: China’s socialism big bang)”.

[4] See Paul Ericksen on the fraying supplier goodwill toward OEMs.

[5] See “Global reset – Monetary decoupling (Part 3: Consequences of diverging policies)”.

[6] The hypothesis that QE liquidity is increasing congested in the home market rather than diversified globally. This is because QE liquidity is short-term funding which results in a funding mismatch with long-term investment needs. See “Global reset – Monetary decoupling (Part 7: Currency wargame scenarios)”.

[7] See Policy paradigms for the anorexic and financialised economy: Managing the transition to an information society.

[8] Joe Lauria suggests “the new U.S.-U.K-Australia pact can be seen as a further indication of the nervousness in Washington, London and Canberra over the further decline of Anglo-Saxon power, which has dominated the world for the past four centuries. The United States took over the mantle of running the English-speaking empire after World War Two, when Britain formally ended its empire and hitched its disappearing hegemony to U.S. global dominance. The writing is on the wall for the Anglo-Saxon powers, as it sees the world slipping through its fingers, prompting ever greater aggressiveness, rather than face economic and geo-political reality. Instead of seeking to peacefully join a multilateral world as equal partners, it is turning to ever greater military alliance to desperately try to hold onto its fading power”.