In this edition of Author Talks, McKinsey Global Publishing’s Raju Narisetti chats with Rana Foroohar, a CNN analyst and associate editor at the Financial Times, about her new book, Homecoming: The Path to Prosperity in a Post-Global World (Crown Publishing, October 2022). Even before worldwide geopolitical conflicts of recent years highlighted vulnerabilities in the global supply chain, some companies were already beginning to deglobalize trade. Now, between a resurgence of homegrown manufacturing and a rise in stakeholder capitalism, Foroohar says regionalization will be the new economic order. An edited version of the conversation follows.
What does a values-based technology and trade policy look like for America?
My book looks at where we’ve been with globalization in the last 50 years and why, going forward, the world is not going to be flat but bumpy, and what the challenges and opportunities of that will be, not only for the US but for the world.
When I think about a values-based framework for trade, I would step back a little bit and look at what trade policy has been over the last 40 years or so. If you go back to the Reagan administration, there was certainly a deregulation of finance and capital, but you didn’t see trade being so de-linked from foreign policy and national interests. In fact, Reagan, contrary to popular belief, was a fan of industrial policy. He very much thought about trade in the national interest.
When you move into the 1990s, you start to see a neoliberal swing in the trade paradigm. When I say “neoliberal,” I define it the same way the IMF [International Monetary Fund] does, which is as a free movement of capital goods and people wherever they want to go across borders, with the assumption that they will end up where they are most productive.
The Clinton administration, in particular, really embraced that framework. They said NAFTA [North American Free Trade Agreement] was great for everybody and that having China in the World Trade Organization by 2001 was great for everybody. The truth is that even though globalization and free trade have lifted all boats at a global level, there have been major hollowing-outs within countries.
In particular, there have been regional pockets that have really suffered. That’s why you began to see, I think, the Far Left and Far Right populism that is a hindrance to trade and to business. When I think about a new framework for trade in the US—and, really, in any country—I think you have to have a re-mooring of national interest and the global economy. You have to make sure that those two things don’t move too far apart.
In the US in particular, what this is going to mean is much more focus on labor and much more focus on buffering labor from any shocks that might come from trade—also, more focus on community, the environment, and sustainability.
There has been a sense in the last 20 years or so that as long as share prices for companies were increasing, that was the be-all and end-all of what was good in terms of cross-border trade. Now, there is a sense that there needs to be a broader group of stakeholders that companies and governments are looking after.
That’s how I would frame the idea of a shared moral framework for trade: it has to be about stakeholders—not just shareholders. It can’t be just about enriching multinational companies, which can fly 35,000 feet over national interests. It has to be enriching at both the global and the local level.
What is ‘patriotic capitalism’ and how does it play out in a tripolar world?
It’s really interesting when we think about the framework for capitalism today. It has to be said that there’s not one kind of capitalism. Geographically, there are many forms of capitalism, and, historically, there have been many forms of capitalism.
The term “patriotic capitalism” is used today to set the stage for the idea that companies have to be operating somewhat in the national interests of the countries where they are located. That gets really tricky, as I explore in my book, for very global companies.
In this new world, where you have a bipolar digital-tech and trade framework between the US and China that is going in different directions—it could be multipolar depending on where Europe, India, and other large regions end up—how do big, global multinationals operate? The answer is: very carefully.
When I think about a new framework for trade in the US—and, really, in any country—I think you have to have a re-mooring of national interest and the global economy. You have to make sure that those two things don’t move too far apart.
I think there is going to be a lot more consideration of the “political” in political economy. In some cases, particularly in strategic sectors—like high tech, semiconductors, electric vehicles, and rare-earth minerals—companies may be forced to make choices about where and how they operate. That’s a very new notion, and it’s going to have a big impact not only on how global business functions but on markets.
If you look at globalization over the last 40 years, it’s been predicated on three things: cheap capital, which is now ending; cheap energy, which is also largely ending, particularly cheap energy from Russia to Europe; and cheap labor. Costs are rising everywhere at the moment. We are in a totally new world, and companies are going to have to reconfigure how they think about their operations.
Regionalism versus nationalism: How do they fit into your postglobal world?
When I think about nationalism, I think about trends that involve deglobalization, populism, and things that are politically problematic and generally negative. You see a lot of Far Right, Far Left, xenophobia, and protectionism, the kinds of deglobalization that are really problematic and worrisome.
When I think about regionalization and regional hubs—or “friend-shoring,” as Treasury Secretary Janet Yellen put it to me—I think about those things as positive because they’re about asking, “What are our values as a nation? Who else shares our values, and how can we trade with them? How can we do business with them?” I think that’s appropriate and welcome.
I also think that, in the context of the deglobalization that we’re seeing, there are certain kinds of regionalism and even localism that are actually good. Even before COVID-19 or the war in Ukraine, a lot of companies went, “You know what? The wage and energy arbitrage of complicated supply chains through the South China Seas doesn’t make sense for me anymore. When I think about the cost of energy, when I think about the cost of emissions, maybe I want to hub production and consumption more closely together in different regions.”
Companies were doing that already, and it’s just sped up. The McKinsey Global Institute has done a lot of interesting research on that, some of which I quote in my book.1
How should America look at Europe these days?
Europe, as always, has this dynamic of wanting to be an economically integrated region without necessarily being a politically integrated region. I think that we’ve reached the end of pure economic globalization.
Countries are going to have to decide if they share each other’s values. If we don’t, it’s going to become more and more problematic to form trade and business alliances.
On the periphery of Europe in general, you were already seeing—even before the election of a Far Right leader—Italy, Greece, and other parts of Southern Europe being pulled into the Chinese orbit via One Belt, One Road.
The term “patriotic capitalism” is used today to set the stage for the idea that companies have to be operating somewhat in the national interests of the countries where they are located. That gets really tricky, as I explore in my book, for very global companies.
Europe may not operate as a single bloc anymore. There may be multiple Europe’s. I suspect that there will be a core Europe led by Germany and France that will align with the US in many things, as they have aligned with the US over Putin’s war in Ukraine. However, you may see countries, smaller countries in particular, start to go in different directions or side with another global bloc.
What makes you optimistic about a resurgence of manufacturing companies in the United States?
Manufacturing is an area that I have focused on for years, and I think about it deeply. I grew up in a manufacturing family. My father is a Turkish immigrant, he was educated in the US, and he formed a small manufacturing business in Indiana, which is where I grew up.
I saw the effects of trade policy in the 1980s and ’90s and moving forward, and the hollowing out, frankly, of a lot of the US industrial base. There is a flip side, however, and it’s a very interesting flip side. The industrial companies—particularly small and midsize companies—that ended up surviving the last couple of decades of “Schumpeterian Creative Destruction” are Darwinian case studies of how to run a business.
In the US, there are already a lot of highly efficient midsize or smaller manufacturing and industrial companies that are almost Germanic in the way that they run. I look at some of these companies in my book. They’re often private and tend to be family owned or community based. They’re often working as collaborators and competitors within an ecosystem.
I looked at this in the textile industry in the Carolinas, and it’s quite fascinating. These companies plow about 80 percent of their profit margins back into productive capital expenditure. They don’t have the pressures of the public market so they’re able to do a lot more in that way without a shock to share prices, and they’re highly efficient.
For example, when the pandemic struck, you saw textile makers in North and South Carolina saying, “OK, nobody’s buying T-shirts anymore, maybe we’ll make masks.” That was useful at a time when China was, understandably, keeping a lot of its own domestic production of masks at home. Suddenly, regions like the US and Europe that are used to buying three-cent masks from China are asking, “What are we going to do?”
I think that we’ve reached the end of pure economic globalization. Countries are going to have to decide if they share each other’s values. If we don’t, it’s going to become more and more problematic to form trade and business alliances.
A mask in the US had cost 30 cents to make, but industrial hubs working together in areas like textiles, cotton, and retail were able to drive down the price of masks from about 30 cents to ten cents over the course of a year or so. There’s still a gap, of course, between what you would see in more of a developing country—if you can still call China a developing country—in Asia versus a rich country in terms of production, but the fact that we were able to close the gap that quickly shows that there is more industrial strength in the US than one might imagine.
When you begin to nudge that a bit with industrial policy—as we are seeing with the Biden administration’s push around things like electric vehicles—suddenly you start to be able to connect the dots. An electric-vehicle production facility in South Carolina could perhaps connect with a textile maker in North Carolina, who then might be able to move from making clothing to making upholstery for an electric vehicle or, potentially, a cloth to cover wind turbines. I see a lot of potential there, and I think we’re only at the beginning of it being realized.
What is a ‘resiliency czar’ and why does the White House need one?
I’ve argued that one of the things that we could do in the US to help industry, government, and citizens would be to appoint a White House–level resiliency czar: someone with a logistical background, possibly a business-continuity background, who could connect the dots.
The truth is that we have a lot of talent in manufacturing and industry. We have a lot of deep thinking in the private sector and in the public sector around how to localize growth and how to create a more inclusive economic ecosystem, but the dots are sometimes not connected. If you think about what companies are doing to locate talent, for example, oftentimes companies are starting their own educational programs. They may be copying best practices of other firms elsewhere in different states.
There are things being done in trade policy that may negate other things being done in, say, financial policy or in the Commerce Department. We need someone that can cut through all of those silos and quickly help government and the private sector to understand: Where are the assets? Where are the liabilities? Where are things needed in terms of talent, infrastructure, and assets?
The resiliency czar is someone who can connect all that quickly. That would be a great way to move forward with this more inclusive economic agenda.
What do you see emerging and sticking from the pandemic?
One thing that is definitely going to stick is the move away from efficiency toward resiliency. That doesn’t mean it has to be either-or, but for the last 20 or 40 years—wherever you want to put the marker—we’ve definitely had a just-in-time business culture focused on driving down costs and moving production, moving IP [intellectual property], and moving assets to the cheapest location. That’s been the way business did things.
Not only due to the pandemic, but because of climate change and because of geopolitical strife, this is not always a resilient model. At the same time, there are a lot of interesting new technologies—like additive manufacturing and 3-D printing—right at the top of that list of things that are emerging. There are also decentralized currencies, sovereign-backed digital currencies, and decentralized technologies that are allowing countries and communities to produce things and trade things more locally—in some cases, even in local currencies.
3-D printing is something that has just been growing gangbusters: over 20 percent year-on-year for the last few years. That’s something that played a big role in increasing resiliency during the pandemic in Europe, in Asia, and in the US. And I think that that’s absolutely going to stick.
An electric-vehicle production facility in South Carolina could perhaps connect with a textile maker in North Carolina, who then might be able to move from making clothing to making upholstery for an electric vehicle or, potentially, a cloth to cover wind turbines. I see a lot of potential there, and I think we’re only at the beginning of it being realized.
The idea of multiple currencies is something that we’re going to hear more about. The dollar is still the global reserve, but you’re seeing China, for example, wanting to do more trade in its own currency. You’re seeing other countries say, “We want to have a little more flexibility.” Digital sovereignty is going to be a bigger deal, financial markets will become more decentralized, and I think that there will be bumps along the way to this new, more heterodox world.
Ultimately, it’s about creating resiliency and redundancy in order to reduce risk in the system, particularly in inventory. Inventory in our current moment is a bit like liquidity in 2008: if you don’t have it, the whole system breaks down.
