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Martin Wolf is a distinguished economist, journalist and author, best known for the columns he writes for The Financial Times from London. Oxford educated, and a former World Bank economist, Wolf has since the 1980s been at the FT, most recently as an associate editor and as the paper’s chief economics commentator. For much of that time, he’s been chronicling the ups and downs of globalization, in his columns and in books like, Why Globalization Works (2004) and most recently, The Crisis of Democratic Capitalism. In this lightly edited Q&A, he was asked about whether there was now pressure to decouple and de-globalize, and whether the U.S. strategy to use economic and corporate sanctions against China is a prudent one.

Q: Let’s start with your recent book, The Crisis of Democratic Capitalism, in which you write about democracy and capitalism in crisis. Why are these pillars of the western world in crisis?

A: I’m arguing that we got to universal suffrage and democracy with very broad franchises after the capitalist revolution and the struggle that we went through in the 19th century and into the 20th century. And, of course, in some places, there was a colossal reaction that ended up in wars. But those ended up being consolidated into the middle of the 20th century. And one of the ways that happened was that once the vote was given to the majority of the population, their expectations and hopes and aspirations were increased by rising prosperity but also political engagement. The people then demanded a package of welfare state measures, and in various countries politicians had to give into those demands. There was an assumption that the job of the state was to ensure reasonable prosperity and standards of living. For the vast majority of the population, this became embedded in our societies, even in the United States after the New Deal. 

My argument is that over the last 40 years a growing proportion of the population [in much of the West] feels that this bargain hasn’t been delivered on; and that has made them angry. In particular, it’s made people in the middle class feel insecure because they fear losing their security and falling into the bottom. There’s also a lot of resentment of the [government] support that is going to those below them [in economic status], which they believe they’re paying for. And this, I argue, was made greatly worse by the financial crisis.

Second, there’s been a clear demonstration that the people in charge are incompetent, and also radically self-interested, since they were all bailed out by the state after the [Global] Financial Crisis. The [economic] recovery took a long time. But that coincided with a slowdown in productivity growth, and slower growth in standards of living across the whole developed world, strikingly so in the U.K. and the U.S.. So together, these things created a dissatisfied middle class. People began looking for new leadership, not the old familiar leadership of the Democrats, or the left or center left, which they saw as having succumbed to cultural fads of various kinds. They also didn’t like the traditional conservative leadership, which they saw as part of the establishment that had screwed them. They were looking for radical new leaders, people we call “populists,” predominantly of the right. 

Some of these people were saying the world is unfair and foreigners are screwing the people; and the elites are screwing the people; or immigrants are trying to screw them. This was seen as a plot against them and their country. And these new demagogic leaders, they trust, will somehow solve their problems. This is what has been happening in quite a number of countries. You can see politicians of the radical right: Trump and [former U.K. Prime Minister Boris] Johnson, and Marine LePen [leader of France’s far-right party] are all different sorts of politicians. But they are gaining a bigger audience in many countries and destabilizing democracy.

This is the global context in which leaders like this have succeeded in seizing power, hollowing out the institutions that protect democracy and civil and political rights, and making themselves autocrats. You can see this in Turkey and Hungary. Putin is an extreme example, given that he is an elected leader. And you see a bit of it in India: How far that will go we don’t know. You saw it under Bolsonaro [in Brazil]. He was forced to accept defeat, but he obviously didn’t want to. And so there’s this global shift towards autocratic rule and what Larry Diamond at Stanford [University] calls “the democratic recession.” 

Left: Hungarian Prime Minister Orban meets with Turkish President Erdoğan, November 11, 2022. Credit: Directorate of Communications Right: Former Brazillian President Bolsonaro meets with Indian Prime Minister Modi, November 13, 2019. Credit: Palácio do Planalto via Flickr

Do you attribute any of this to globalization and the widening of the gap between the rich and the poor, or is that too simple a way to look at it?

Well, there’s been a decline in jobs and in manufacturing throughout the West. And yet for the Western countries, trade doesn’t turn out to be all that important. Productivity growth is a much bigger cause of this. In the U.S. and U.K., trade with developing and developed countries has long shrunk manufacturing. In the U.S., there was a period when this was most relevant, immediately after China joined the WTO in 2001, when there was what was called “the China shock.” There was a significant reduction in manufacturing jobs. But it’s not such a big issue in other developed countries, because they do so much trade in manufacturing, and they are used to running large deficits with one another. So the China shock isn’t so salient as it’s been to the U.S.. And remember, by world standards the U.S. doesn’t do much trade. 

I would argue that there have been bigger factors here, some of which I cover more in my previous book, [The Shifts and The Shocks: What We’ve Learned — and Have Still to Learn — from the Financial Crisis,] namely global balance of payments adjustments. The U.S. and U.K. run huge current account deficits, and of course that implies huge trade deficits. That’s because they’re huge capital importers. And some countries, both developed and developing, like China, Japan and Germany, have run large trade surpluses. That’s a byproduct of macroeconomic imbalances. I’m not the only economist who believes that the freedom of movement of capital may well be a bigger factor in these job losses in certain sectors than freedom of trade. And, of course, there’s a link through foreign direct investment, which is that a lot of manufacturing jobs just went to other countries, because our manufacturers shifted production there. So there’s a link between trade and capital through FDI. It’s a complicated set of connections. 

You’ve asked another question linked to this, which I think is very important — that is, the transformation of corporate governance as a result of the increasing role of finance and financial institutions in determining how corporations run; not only because of private equity, which is a direct source, but also the need for companies to take into account shareholder pressure, which is itself articulated through large asset management firms. In significant ways, this has transformed corporate governance and created a network of interest between top management and shareholders, who have extracted most of the surplus profits generated by the most successful corporations. 

In addition, there have been important technological changes, which have favored skilled workers over unskilled workers, particularly workers who’ve been to university; that’s another big factor shifting income distribution. And there has also been, in my view, a decline in competition, which has generated more monopoly profits, partly because of the technological revolution and partly through the collapse of competition policy. So this is a complicated web of things, some of which were the results of globalization as we normally think of it, namely trade competition, and some of it has been due to capital flows, the global balance of payments and FDI. Some of it has to do with corporate governance and the change in the goals of the firm to satisfy one constituency, namely shareholders, above everybody else — and the replacement of long term shareholders with active shareholders, many of them financial firms. 

If you take all these things together, you’ve generated a system in which many people in the middle and lower middle classes who lost job security have experienced relatively stagnant real wages. There’s income inequality, the evidence for that is pretty strong. Altogether, this adds up to a relatively adverse climate for quite a few people. And in this context, immigration has become a potent political issue because it’s a visible way in which competition in the labor market is increasing, and it’s associated with the import of people who existing populations resent. They feel it reinforces a sense of insecurity and a sense that the elites who run these economies are not really concerned about their interests.

So you say the dislocations are not all the result of globalization. Is that right?

Most of this wasn’t due to globalization. Some of it was a bigger problem that we failed to do anything to ameliorate. We didn’t help people who were directly affected by globalization, nor did we support localities in which they lived to bring in new jobs. We need a much more active policy when there are these very powerful local shocks. I know that goes against the American tradition, but successful countries have got to have a more active policy to respond to these sorts of global shocks. 

…recent U.S. policies are not only making China very irritated, and no doubt vice versa, they are now also creating a subsidy war between the U.S. and the EU. That doesn’t strike me as very sensible. 

It’s pretty clear that the globalization era generated rapid economic growth in the world as a whole, and it generated catch-up growth in many emerging and developing countries, particularly China. And you can regard that as a success or failure, depending on what you think is the criteria. If the aim was to ensure that all developing countries never develop, and they remain as poor as they were 40 years ago, then globalization might be seen as a bad thing. Now, I’ve supported it because among other things, I thought it would do exactly what it has done. When I wrote a book in favor of globalization 20 years ago, the principal focus then was not what it would do to us, as it were, but what it would do to developing countries. Most of the critics [at the time] were arguing that globalization was very bad for developing countries. My argument in that book was that’s not true; and I hold to that. 

Now, in developed countries, it’s a more mixed picture. Clearly, there are lots of people who benefit because there are job opportunities. There are lots of people who benefited from cheaper goods — in particular, retired people and poor people. But there were also the losers, and we didn’t do enough to help them. That’s particularly true in America and Britain. Protection is a very costly way of doing this. All the evidence suggests that protectionism is very costly relative to its benefits as a way of supporting jobs. And protectionism is basically a tax on consumers. The proceeds go to producers; not to workers. It’s a very inefficient way of helping people hit by economic change. It’s far better to deal with the problem directly. 

So my view is that de-globalization will not directly help the people hit by this. Our societies will probably see low economic growth worldwide. In many countries, resources will be pulled in less efficient directions. The point is that we’re at a very early stage of deglobalization. You can’t really say the world is radically deglobalizing. The second thing, of course, is how targeted this deglobalization will be towards specific concerns. There are legitimate concerns, for example, about supply chain stability and security, about technology independence and military security. There are legitimate security interests. And if policy focuses on these intelligently, that’s perfectly reasonable. It’s also reasonable to focus on a green transformation policy that can help with climate change, although I’m not convinced that it requires deglobalization. 

What I fear is that this is going to become an open-ended race for industrial subsidies and protectionism, which will lead to a very messy and anarchic outcome for world trade, and will create an immense amount of international friction. I’m very struck by the fact that recent U.S. policies are not only making China very irritated, and no doubt vice versa, they are now also creating a subsidy war between the U.S. and the EU. That doesn’t strike me as very sensible. Once you’re in this nationalistic and protectionist interventionist mode, it becomes very difficult to contain. It feeds upon itself. There’ll be cycles of retaliation. And some companies will say, “Well, you’re protecting [that] industry. Why don’t you protect me?” And once you start, this is really hard to contain.

Are we now entering a period of protectionism and deglobalization because of various political forces at work across the globe? And aren’t we also seeing a concern that the West is now too dependent on China for certain goods, such as advanced semiconductors?

Well, targeted measures are very difficult, and rarely what governments do to protect something. Take an extreme case: nobody would want to be dependent on one plant in Taiwan for so many sophisticated semiconductors. I mean, that is a problematic situation; it’s going to be very difficult to change because they seem to be so far ahead of anybody else, which is a remarkable and tremendous achievement by this company [TSMC]. We would probably pay a large price to try to catch up and we might not succeed, but I understand the desire to have supply chains in essential goods or inputs reasonably diversified. 

I think a degree of mutual interdependence between China and the U.S. is in the interest of both sides and not just economically, but also politically because it raises the costs of conflict. There are real problems in [the West] effectively telling Beijing that our objective is to prevent China from developing. And that’s how many people in China will view what we are now doing. I understand some of this, but there are tremendous dangers in turning all Chinese people into the enemy. Of course, the reverse is also true, and I understand that. So I would like to preserve relations. And part of that comes through commercial relations, if possible. 

I don’t see any way we can neatly divide the world into a Chinese bloc and a Western bloc. There are too many important countries that wouldn’t want to choose one or the other. The costs of forcing everybody to make that choice could be very large; many countries might not make the choices we want them to make. The world doesn’t divide up geographically into an easy U.S.-centered bloc and a China-centered bloc. 

The big problem is Asia. The Western world would be insane to let Asia become all Chinese-led. That would be a geostrategic calamity. On the other hand, pushing China out of Asia sounds crazy. How do we push China out of Asia? It’s the biggest country with one of the biggest populations in the world, and the biggest economy in Asia. I think, ineluctably, we end up sharing Asia, which is half of the world, in population terms. These ideas of dividing the world into different global blocs strikes me as difficult to understand. I don’t see how that would work. And to hand Asia to China would be a terrible disaster.

So you see interdependence and global integration as crucial. Does that mean you oppose the new sanctions regime the U.S. has been rolling out? And are sanctions even effective?

There’s no doubt that one can impose a lot of pain through sanctions. But their effectiveness depends on whether the society you’re sanctioning is one in which the pressure you put on ordinary people is also placed onto the elite. If you look at countries where we’ve imposed very heavy sanctions, Iran for example, where we have got ‘maximum sanctions’ from the Trump administration, that hasn’t achieved anything compared with the previous policy of engagement. This is because the Iranian regime isn’t affected by the sanctions, and their ability to control the population remains very strong. Sanctions also didn’t really affect Saddam Hussein: What did affect him was nuclear inspections, which we didn’t admit until after we invaded. As for Russia, the Russian people are being told that the pain they’re suffering is the result of the malevolence of the West. And whether they believe this or not, it doesn’t affect what Putin and his gang are doing. 

My impression is that sanctions only work in one of two ways. One, they just weaken the country in the long run. And that might be to our benefit, though it can also make it dangerous, because it might mean that they’re more prone to conflict and to war because they fear being weakened. The other way it works is if you’ve got a society where the people have political influence, and they want to be part of the world system — then sanctions can be quite effective. The most important example of that in recent history was the sanctions on the white regime in South Africa, which certainly played a role in persuading them to change their policy. 

But probably the longest standing sanction regime is the U.S.’s sanctions on Cuba; and you haven’t overthrown the Cuban regime. I tend to believe we impose sanctions because we want to feel good about doing something. But in most circumstances, especially when dealing with authoritarian regimes, they’re really not very effective.

With geopolitical tensions as they are, particularly between the U.S. and China, what does this mean for multinational corporations? What should they be doing? 

The broad answer is pretty clear: the risk of decoupling, and the risk of costs to them from breakdowns in trade or capital flows have unquestionably risen substantially. This is not the environment anymore of 10 years ago. Those risks must be very clear. 

The question of what they should do depends on the costs of the risks. There is a risk of political unpopularity, of hostility among consumers at home, and hostility among workers at home. There are also the costs to being seen to do something that’s politically unpopular and socially unpopular. Those have to be taken into account. But on the other hand, there are going to be costs to pulling out, and that depends on how big the losses are, if you do pull out. Companies should do a cost-benefit analysis, [acknowledging] a high level of uncertainty. 

Americans increasingly see China as a peer competitor, an ideological competitor, and a power competitor across all domains. And if the American people see this, and the politicians see this, it’s very difficult for American businesses to avoid reacting to it.

There are lots of businesses whose dominant markets are in the West. They may have some business in China and may have done very well, though they may believe it’s never likely to be very important. In that case, it would be perfectly sensible to leave. There are also lots of businesses that are dependent on imports from China, where it might be relatively cheap to diversify to other suppliers as a backup, or instead to try to ‘plus one’; that would seem a reasonable insurance policy. There are other companies for which their Chinese business is an enormous part of their total. I believe there are a number of American automobile producers — certainly there are European ones — which have huge businesses in China. Now, abandoning those businesses altogether will be very painful. China is the biggest motor vehicle market in the world, and it’s likely to remain so for a very long time. There are many other examples. So it’s a cost benefit analysis. 

But clearly, the costs have risen and in multiple ways, and the benefits, given the state of the relationship, may not have risen. So multinationals might well consider reconfiguring. I wouldn’t be terribly surprised, for example, if businesses decided to completely separate their Chinese businesses from their western business. They might make the Chinese business a free-standing business and hold shares in it. There are many things businesses might do, but the reality is quite clear, particularly for Americans. It’s less true in Europe that the world has changed. Americans increasingly see China as a peer competitor, an ideological competitor, and a power competitor across all domains. And if the American people see this, and the politicians see this, it’s very difficult for American businesses to avoid reacting to it.

But it sounds like confronting China or decoupling with China is a bad idea, from your vantage point? If so, what policies would you advocate for dealing with the geopolitical and economic challenges that have arisen?

In my view, we’re going to have to confront China on many things that matter to us: national security, values, [political] interference and free speech. But we’re also going to have to cooperate with China in a whole range of areas, such as climate development issues. We certainly are going to be competing with China in many ways, with our businesses, our economies, etc. But we have to avoid conflict. We have to avoid a head-on military conflict, if at all possible. That could be absolutely catastrophic. For obvious reasons, nuclear conflict among nuclear powers is very threatening to the world. So we have to manage all this now, making clear where we are defending our interests. 

What are our core interests? That comes back to our earlier discussions about globalization, our security interests, defining them and updating them, making absolutely clear to China and explaining what the demands are in a very clear way. I have no problem with defending our values, and putting together alliances of democracies because I want to support democracies. But I also want to have working relations with China and a full exchange of information on military matters. [There should be] no military surprises, there should be a form of detente, and close cooperation when needed; the ability to talk to one another easily, so that we understand what’s going on. 

I was very encouraged by Biden’s conversation with Xi [last February]. We need more of this. I believe in interdependence when there’s no fundamental security interests — importing lots of clothing and tools and other things the Chinese make… and by tools, I mean hammers and screwdrivers and colossal quantities of stuff that is traded in both ways, none of which is high security. I think we should be visiting one another, if at all possible, we don’t want to get into the situation with China that we’re now in with Russia. That’s pretty obvious. And I am worried that the paranoia about China will lead to that outcome.

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