Dr Chris Kotze: The end of easy globalisation

Key topics:End of “easy globalisation” driven by US–China imbalance shiftChina’s state-led export model creates global overcapacity pressuresDollar dominance weakening amid fragmentation and rising protectionism.Sign up for your early morning brew of the BizNews Insider to keep you up to speed with the content that matters. The newsletter will land in your inbox every morning on weekdays. Register here.Support South Africa's bastion of independent journalism, offering balanced insights on investments, business, and the political economy, by joining BizNews Premium. Register here.If you prefer WhatsApp for updates, sign up to the BizNews channel here..By Dr Chris Kotze.The old world: easy globalisation and hidden inflationFor roughly three decades after the Cold War, the global economy operated within a remarkably stable framework—one defined by expanding trade, low inflation in advanced economies, and strong financial-market returns. That stability was not accidental. It rested on a specific configuration of power, policy, and incentives: a dollar-based monetary system that enabled persistent US deficits, and a global production model anchored in China’s rise as the world’s manufacturing centre. Together, these forces underpinned what can be described as an era of “easy globalisation.” That era is now coming to an end.The first was the transformation of the US dollar into what might best be described as “paper gold.” As the world’s dominant reserve and invoicing currency, it allowed the United States to run persistent trade and current-account deficits while expanding money and credit far more aggressively than other economies could sustain. Under normal conditions, such imbalances would trigger currency depreciation and eventual correction. Instead, sustained global demand for dollar assets—particularly US Treasuries—kept the currency stronger than fundamentals would suggest, effectively neutralising this adjustment mechanism. In effect, the United States could “supply” the world with reserve assets simply by issuing more dollar liabilities, not unlike a gold producer increasing supply to meet demand.The second force was China’s emergence as the world’s workshop. Its integration into the global economy brought a vast expansion of low-cost manufacturing capacity. Western consumers benefited from cheaper goods, companies from higher margins, and central banks from subdued inflation. The interaction between these forces was decisive: the United States exported liquidity, the rest of the world absorbed it, and China returned the favour with a steady flow of inexpensive manufactured goods..Read more:.Globalisation is unstoppable – adapt or get left behind: Nicholas Lorimer.The result was not the absence of inflation, but its displacement. Consumer prices remained contained, while excess liquidity increasingly flowed into asset markets. Beneath the surface, deeper imbalances accumulated—industrial decline in parts of the West, growing dependence on extended supply chains, and financial markets sustained by abundant liquidity. For a time, these tensions were masked. That equilibrium is now breaking down.China’s deliberate model: suppressing consumption to build capacityChina’s rise is often explained through cheap labour and World Trade Order accession. While important, these factors no longer fully capture the nature of its economic model. Over time—particularly under Xi Jinping—China has evolved toward a more deliberate form of state capitalism, one that prioritises industrial capacity, technological advancement, and external leverage over domestic consumption.Household consumption remains unusually low as a share of GDP. This reflects both a relatively small household share of national income and an incomplete social safety net. Uncertainty around healthcare, pensions, and education encourages precautionary saving, resulting in an economy where households remain cautious despite rising national wealth.At the same time, financial repression channels household savings toward state and corporate objectives. Low deposit rates and restricted investment options limit returns to savers, while banks are directed to provide cheap financing to state-owned enterprises, local governments, and strategic sectors. In effect, households subsidise investment through reduced income, allowing the state to mobilise large pools of low-cost capital.Policy priorities reinforce this pattern. Industrial development, technological self-reliance, and the expansion of “productive forces” consistently take precedence over boosting consumption. While stronger domestic demand is acknowledged as desirable, it remains secondary to the objective of building a globally competitive industrial base.The result is an economy characterised by high savings, heavy investment, and persistent overcapacity. Supported by subsidies, directed credit, and state coordination, Chinese firms can sustain production and exports at price levels that would be difficult in a purely market-driven system.Exchange-rate policy has played a critical supporting role. Through sustained intervention, large-scale reserve accumulation, and strict capital controls, China has prevented the renminbi from appreciating in line with its trade surpluses, preserving export competitiveness and reinforcing the broader model.Exporting the imbalanceChina’s model does not remain contained within its borders; it transmits outward in ways that reshape the global economy. State-backed firms, supported by cheap capital and scale, can operate with extremely thin margins—and at times below cost—for extended periods. This has placed sustained pressure on competitors across both advanced and emerging economies, gradually eroding manufacturing bases and, in some cases, dismantling entire industrial ecosystems.As Chinese producers establish dominant positions in sectors such as solar energy, batteries, and parts of the electric-vehicle supply chain, a second dynamic emerges: strategic dependence. What begins as a period of low prices and rapid adoption can end with reduced competition and limited alternative supply, leaving countries exposed under less favourable geopolitical conditions.A third channel has become increasingly visible as the United States responds more assertively. Tariffs, investment restrictions, and industrial policies do not eliminate excess Chinese capacity—they redirect it. Europe, Africa, Latin America, and parts of Asia are increasingly absorbing this spillover, often without the policy tools or industrial depth to respond effectively. What was once a bilateral imbalance has become a systemic global challenge—one that is structural rather than cyclical, and likely to persist as long as China prioritises capacity over consumption.Why the system is breaking downThe sustainability of this system depends on the willingness of the rest of the world to absorb China’s surpluses while accepting the erosion of its own industrial capacity. That implicit bargain is now under strain.Economically, the simultaneous suppression of both major adjustment mechanisms—the dollar’s role in sustaining US deficits and China’s management of its exchange rate—allowed global imbalances to grow unusually large and persistent. When correction comes, it is therefore more likely to be abrupt and disruptive.China itself faces mounting internal pressures: high and rising debt levels, an ageing population, and structurally weak household demand. As other sources of growth have weakened, reliance on exports has increased, intensifying external tensions.In the West, the consequences have extended beyond trade balances into the structure of the economy itself. As manufacturing has declined, a growing share of income has shifted toward capital and high-end services, contributing to a more “K-shaped” pattern in which asset owners and highly skilled professionals advance, while large parts of the workforce stagnate. The interaction between global imbalances and domestic financialisation has amplified inequality, eroded middle-income job bases, and fuelled political polarisation—pressures that are now feeding directly into policy responses.At a more fundamental level, no economy can indefinitely sustain a model in which it consumes far more than it produces in tradable goods and services without eventually encountering financial or political constraints.At a geopolitical level, the logic is even simpler. No major power can accept long-term dependence on a strategic rival for critical technologies and industrial inputs. As concentration rises in key sectors, resistance becomes not just likely, but inevitable.The dollar’s evolving roleAt the same time, the monetary foundation of the system is gradually shifting. While the dollar remains dominant, its share of global foreign-exchange reserves has declined from around 70% two decades ago to the high-50s today. Central banks are diversifying incrementally into other currencies and gold, while initiatives among BRICS countries aim to expand the use of non-dollar systems.A more striking signal has emerged beneath the surface. For the first time in decades, global central banks now hold more gold in aggregate than US Treasuries. This shift has occurred quietly, but it reflects a deeper change in behaviour: reserve managers are no longer optimising purely for yield and liquidity, but increasingly for resilience and political neutrality.Gold’s role is also evolving. It tends to perform best not simply when inflation is high, but when trust in monetary and geopolitical arrangements weakens—when institutions are questioned and reserve assets are no longer seen as entirely risk-free.This shift is gradual rather than abrupt, but its direction is clear. Over time, it implies tighter constraints on the United States’ ability to finance persistent deficits on exceptionally favourable terms. For investors, it underscores the growing importance of currency diversification alongside traditional asset allocation.Institutions under strainThe institutions designed to manage global economic relations are struggling to keep pace. The World Trade Organization was not built to accommodate the complexities of a large, state-capitalist system, and its dispute-resolution mechanisms are increasingly impaired. Limited transparency around subsidies and state support further constrains oversight.More broadly, the global system is fragmenting into overlapping “clubs” of cooperation—regional agreements, strategic alliances, and selective trade partnerships—rather than a single, coherent rules-based order. Countries continue to endorse free trade in principle but increasingly pursue it in practice through politically aligned blocs, or subtle coercion from dominant global actors, such as evident from China via its Belts and Roads Initiative.As a result, countries are acting more frequently outside multilateral frameworks—through tariffs, industrial policy, and strategic subsidies—further weakening the credibility of the system.The inevitability of a responseIn this context, a more assertive response from the United States has become unavoidable. The issue is no longer ideological but structural. A combination of security concerns, social pressures, and political realities is driving a shift toward policies that defend domestic industrial capacity and reduce strategic dependence.This reflects a broader realisation: the assumption that open markets alone will produce efficient and stable outcomes is increasingly difficult to sustain in a world where major economies operate under fundamentally different systems.The result is a shift toward hybrid models—markets supported, and at times corrected, by industrial strategy and state intervention. Similar pressures are emerging in Europe, Japan, and many emerging economies. While responses differ, the underlying dynamic is shared: the need to balance openness with resilience.A hybrid future—and implications for South AfricaThe global system is evolving toward hybrid models that combine market mechanisms with more active state involvement. This transition is likely to bring greater volatility, as trade disputes, policy interventions, and geopolitical considerations play a larger role in shaping outcomes.For lower-margin manufacturing, the environment will remain challenging—shaped by both Chinese capacity and technological change in advanced economies. At the same time, sectors linked to energy transition, critical minerals, defence, and advanced services are likely to benefit from sustained policy support.For countries such as South Africa, the risk is not simply marginalisation, but compression. On one side lies subsidised Chinese industrial capacity: on the other, increasingly protectionist and state-supported industries in advanced economies. Navigating between these forces will require far greater strategic clarity than in the past.While South Africa remains a price-taker in a larger global contest, it retains agency in how it responds. Strengthening logistics, energy reliability, skills, and export capacity will be critical to building a viable tradable sector. Regional integration offers a pathway to scale, while a balanced approach to global partnerships can help avoid excessive dependence on any single bloc..Read more:.The weak dollar is making Europe’s bad economy worse: Marcus Ashworth.For investors, the message is straightforward: the next phase of globalisation will be less stable and more politically shaped. Diversification across regions, currencies, and asset classes becomes more important, as does a focus on quality—balance-sheet strength, pricing power, and the ability to navigate shifting policy environments.Closing thoughtFor much of the past three decades, a combination of dollar dominance, China’s export engine, and a broadly functioning rules-based system created the conditions for what, in retrospect, was an unusually forgiving global environment. That configuration is now giving way to something more complex: a world of competing systems, active industrial policy, and greater geopolitical friction. The era of “easy globalisation” is ending, replaced by one in which economic outcomes are shaped as much by strategy and politics as by markets. For investors, the implication is clear. Success will depend not only on financial discipline, but on a deeper understanding of the shifting global system in which that capital is deployed.

Dr Chris Kotze: The end of easy globalisation

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