The New-Old Globalization

Harold James

The European Union is increasingly divided over how best to manage economic relations with an increasingly outward-looking China. On the whole, European governments are probably right to be wary of Chinese investment; but that doesn't mean they should ignore China's vision of cross-border development.

PRINCETON – Once upon a time, everyone assumed that there was a single phenomenon called globalization, whereby cross-border flows of financial capital drove innovation, industrialization, development, and trade. But Chinese President Xi Jinping’s Belt and Road Initiative (BRI) advances an alternative vision of globalization, based on an integrated system of physical infrastructure. The material world of ships and trains will replace the immaterial world of financialization.

But while Xi conceived the BRI as a straightforward way to consign the old, unstable Western-led globalization to the dustbin of history, it is also meant to address a particular domestic challenge: namely, the concentration of economic development along China’s coast, where a wealthy, sophisticated seaboard elite has emerged. Social stability demands that the gains from China’s extraordinary growth be distributed more evenly throughout the country.

This is not just a Chinese issue, of course. Historically, globally significant cities have almost always been littoral, located either on coastlines or navigable rivers. Centuries ago, Amsterdam, Antwerp, Genoa, and Venice – even ancient Athens and Tyre – served as the world’s commercial hubs. Today, metropolises like London, New York, Tokyo, Hong Kong, Shanghai, Dubai, Sydney, and Rio de Janeiro perform a similar role.

In the BRI division of labor, the “road” refers (counterintuitively) to maritime connections, whereas the “belt” describes interconnected projects across the Eurasian landmass. The idea is that inland territories such as Central Asia and Eastern Europe can and should be just as connected to the rest of the global economy as coastal hubs are today.

Outside China, the BRI appeals particularly to countries that fell victim to the 2008 global financial crash and subsequent euro crisis. For example, during the darkest days of its sovereign-debt crisis, Greece attracted Chinese investment by selling 51% of the port of Piraeus to the state-owned China Ocean Shipping Company (COSCO). Similarly, Serbia suffered from a dramatic sudden stop in capital inflows during the crisis years and now hopes to turn itself into a transportation hub, even though it is not a member of the European Union.

Meanwhile, Portuguese Prime Minister António Costa has welcomed Chinese investment, and recently warned against pursuing sweeping protectionist measures against Chinese firms operating in the West. Italy’s populist coalition government has just signed a Memorandum of Understanding with China endorsing the BRI. And even the United Kingdom, mired in the chaos of Brexit, may see Chinese investment and economic engagement as a new geopolitical lifeline.

China’s attempt to link un-globalized regions through infrastructure is not unprecedented. Over a century ago, Britain was the world’s leading power, but Germany was catching up in terms of wealth and technological development. Like China today, Germany wanted to project power both on land and at sea. Yet, to compete with the United Kingdom, it could not rely on its merchant navy alone, so it launched its own equivalent of the BRI: a railroad stretching from Berlin to Baghdad.

Like the BRI, the new German rail links connected remote areas over land and appealed to the losers of that period of globalization. Chief among these was the Ottoman Empire, which had struggled through the nineteenth century as the “sick man of Europe,” proving incapable of reform and financial and economic modernization. Foreign powers controlled the empire’s customs administration and seized the government’s revenue.

Also, like the BRI, Germany’s Berlin-Baghdad infrastructure plan relied on government pressure to secure generous financing by private-sector banks (above all Deutsche Bank). The Ottomans, of course, would have to pay dearly for such borrowing. But at the time, German loans seemed to offer an escape from a debt trap set by Britain and France.

In the event, the railway plan seems to have been informed more by German ambition than by realities on the ground. When it was finished, the last leg through the driest stretches of Anatolia carried little traffic.

The BRI also exhibits the potential for large-scale misinvestment. Its critics have already identified a Chinese-financed bridge over the Moraca canyon in Montenegro as a classic example of a bridge to nowhere. Though it was designed to link landlocked Serbia to the Adriatic coast, it currently doesn’t connect anything at all, nor will it for the foreseeable future. It is, in other words, merely a road into debt.

With French President Emmanuel Macron pushing for a European Renaissance, one can imagine a future in which Europe is integrated not just politically but physically, through high-speed railroads, electricity grids, and oil and gas pipelines. Strictly financial globalization has ignored that kind of connectedness for far too long.

Yet European countries are divided over China. Many governments and corporations are rightly worried about the theft of intellectual property. But others see Chinese investment as a welcome new source of financing, or as a way to counterbalance the influence of northern European countries within the EU.

At any rate, the Chinese approach to globalization should prompt Europe to explore alternative development paths of its own. That could mean going beyond the modest and limited “Juncker Plan,” and pursuing a far more ambitious agenda.

The global financial crisis confronted Europe with the challenge of building a more stable financial system. But that will not be enough to create a durable form of globalization. Xi’s recent European tour pointed to one possible path forward. It is now Europeans’ turn to decide how they will establish connections and channel investment to areas that have been ignored and impoverished for too long. /project-syndicate