Staying the course

China is determined to uphold multilateralism and the vision of a shared future

Globalization gathered extraordinary momentum during the 1980s, reshaping the world through the rise of global supply chains, the integration of global finance, and the strengthening of global governance.

After World War II, the international division of labor was characterized by inter-industry vertical division of labor among countries at different development stages — a pattern referred to as the "flying geese formation" by East Asian economists.

Since the 1980s, trade liberalization and technical progress — including modular design, digital connectivity and logistics innovations — have made real-time coordination, sharp cuts in transaction costs and operational agility possible. Consequently, production processes are fragmented, with components of a final product sourced, produced and assembled across continents. Global supply chains have become the dominant form of the international division of labor.

The gains from the globalization of production through global supply chains are enormous. However, these gains are never evenly distributed among countries or across different social strata within each nation. Multinational corporations take the lion's share of the profits, while manufacturing and assembling countries earn only a meager proportion. Additionally, profit-driven multinational corporations relocate production to lower-cost countries, hollowing out industries in their home countries and leading to job losses. As governments have failed to fairly distribute the benefits of globalization, blue-collar workers have been left behind — resulting in growing class tensions, the rise of populism and mounting anti-globalization sentiment within developed countries, particularly the United States.

With China's rise, the US has pursued a "small yard, high fences" policy, seeking to exclude China from global supply chains for key products. Given China's formidable manufacturing capacity and its resolve to pursue national rejuvenation, decoupling would mean breaking existing supply chains and creating parallel ones.

The US' anti-globalization policies conflict with the global free trade system enshrined in the World Trade Organization. By abusing the "national security exception" clause, the US has paralyzed the WTO's regular operations. At the same time, "economic blocs" based on geopolitical alliances are increasingly emerging as replacements for the previously integrated global trade system and global supply chains.

In response to the US' anti-globalization policies, China's position is clear.

First, China remains firmly committed to multilateralism and defending the authority of the WTO. Second, while upholding multilateralism, China also actively promotes bilateral and regional trade liberalization. As of October, it had signed 23 free trade agreements with 30 countries and regions. Third, China stands ready to retaliate reciprocally against US escalations in import tariffs and other trade restrictions. Fourth, backed by its formidable manufacturing capacity, the world's most comprehensive and sophisticated industrial system, a deep pool of technical talent, and a unique capacity for national mobilization, China is prepared to build self-reliant supply chains as necessary.

It is worth mentioning that the trajectory of deglobalization is nonlinear. China and other supporters of multilateralism must work together to advance trade liberalization and improve the governance of global trade, whenever it is possible.

As the global trade system moves toward fragmentation, the global financial system is also confronting serious challenges.

First, the US has provided global liquidity by running current account deficits. By the end of 2024, its net foreign debt had climbed to $26.54 trillion due to persistent current account deficits. A further rise in the net debt-to-GDP ratio in the future, which is almost certain, could trigger both a balance-of-payments crisis and a dollar crisis.

Second, the weaponization of the dollar has further eroded foreign investors' confidence in holding dollar assets.

Third, the Donald Trump administration's high tariffs have stoked inflation within the US, which in turn will erode the dollar's purchasing power and weaken its position as the world's reserve currency.

The current post-Bretton Woods system is facing three possibilities: abrupt collapse, persistence, or evolution into a tripolar structure centered on the dollar, the euro and the renminbi. However, due to network effects and path dependence, the dollar's dominance is likely to persist for the foreseeable future.

The bubbles in international financial markets are also arousing significant concern. With the rapid development of information and communications technology, financial liberalization, securitization and global financial integration, the gap between the real economy and the financial economy has widened significantly. This disconnection between the real and financial economies has become a major source of instability in the world economy.

In the mid-1980s, US economist Peter Drucker observed that along with the evolution of the financial market, finance was beginning to chase profit for its own sake. Historically, the virtual and real economy used to move in tandem, with international finance supporting trade and investment. That is no longer the case today. Since the early 1980s, speculative arbitrage across financial markets has become the core of financial activities. "Finance for finance's sake" now defines the sector.

Derivatives markets have expanded far beyond the size of the underlying assets, and high-frequency trading now dominates. Innovative financial instruments and activities have made asset bubbles more frequent and the global financial system more fragile.

In both the trade and financial spheres, stronger global governance is essential. China will continue to uphold multilateralism and the vision of building a community with a shared future for humanity, working to counter deglobalization and ensure that globalization truly benefits all.

The author is an academic member of the Chinese Academy of Social Sciences. The author contributed this article to China Watch, a think tank powered by China Daily.

The views do not necessarily reflect those of China Daily.

Contact the editor at editor@chinawatch.cn.