Neil Shearing: The World Isn’t Deglobalizing; It’s Fracturing

Episode Summary

Executive Summary: Neil Shearing argues that globalization has not simply reversed but is fragmenting into US- and China-aligned blocs, driven by geopolitics, especially rivalry over technology, supply chains, and critical minerals. He sees trade still near record levels, limited reshoring, a resilient dollar, more volatile but not necessarily higher inflation, AI as a major productivity boost, and Taiwan as the key tail risk.

Main Topics: From globalization to fracturing: Shearing explains that the world is not broadly retreating into autarky; instead, it is splitting into geopolitical blocs centered on the US and China, with fault lines most visible in strategic sectors. Why globalization changed after the GFC: The post-Cold War era of hyper-globalization slowed after the financial crisis due to economic vulnerabilities, weak recoveries, and China’s shift under Xi toward strategic competition with the US. Huawei as a symbol of the new era: Huawei’s rise from Chinese openness and export success to Western security concern mirrors the transition from integration to strategic decoupling in telecoms and advanced technology. Tariffs, reshoring, and supply chain realignment: Shearing argues that full reshoring of manufacturing is unrealistic because demand has shifted toward services and global supply chains remain more efficient; production is instead moving to other low-cost countries. Dollar, capital flows, and inflation: He expects some erosion in dollar use and more inflation volatility from supply shocks, but not a collapse of dollar dominance or structurally higher inflation. AI, productivity, and geopolitical limits: Shearing is broadly optimistic about AI’s productivity potential, but warns that US-China fracturing and domestic US policies could slow diffusion and reduce adaptability. Taiwan and the risk of severe disruption: Taiwan is the key geopolitical flashpoint because any conflict would likely hit global chip supply and could impose enormous economic costs, far larger than current trade frictions.

Key Arguments: The world is not deglobalizing in a simple sense; trade, capital, and migration flows remain near record highs, but they are increasingly reorganizing around geopolitical alignment. The central driver of change is US-China rivalry, which is reshaping trade, technology, capital flows, and access to critical minerals. Globalization’s end was accelerated by the GFC and by China’s rise under Xi, which turned economic integration into a security problem for the West. Western countries, especially Europe and advanced Asian economies, are still more likely to align with the US than with China, though tensions with Washington could weaken that bloc. China’s industrial policy can build champions and technological capacity, but it also depresses productivity by sustaining unproductive firms with subsidies and soft loans. Reshoring manufacturing is politically appealing but economically constrained by service-sector demand and comparative advantage; supply chains are more likely to re-route than to return home. The dollar’s role may diminish at the margin, but network effects, trade patterns, and China’s own asset needs make a serious challenge to dollar supremacy unlikely. Inflation effects from fracturing are more likely to come through intermittent supply shocks and price spikes than through a sustained higher inflation regime. AI could raise productivity materially, but its gains will depend on development, diffusion, and economic adaptability; the US currently leads on all three. Taiwan remains the most dangerous scenario because a conflict could disrupt semiconductor production and create global economic costs on the order of a major crisis.

Data Points: China’s share of US goods imports: About 1 in 5 in 2015; about 1 in 10 now - Illustrates the shift in US import sourcing away from China toward other Asian suppliers Services share of global trade: About one quarter - Shows how globalization involves more than goods trade China’s industrial policy spending: About 5% of GDP per year - Used to support national champions and advanced manufacturing China bloc share of global trade: About 5% - Used to argue that RMB settlement demand is limited by the size of the China-aligned trade bloc Dollar share of cross-border transactions: Just under 90% - Based on the BIS triennial survey, showing the dollar’s dominant starting point AI’s potential productivity boost: About 1 to 1.5 percentage points per year - Estimated lift in productivity growth after widespread adoption Potential economic cost of Taiwan conflict: Potentially as much as 10% of GDP - Estimated impact if conflict disrupts global chip production Trade focus under fracturing: Strategic sectors: supply chain security, national security, technological leadership - Describes the main battlegrounds of US-China economic separation

Pivotal Quotes: "What was really going on was not a pullback from openness to trade necessarily, but an intensification of a superpower rivalry between the US and China." — Neil Shearing: Explaining the core thesis behind his book "The global economy is fracturing, splitting into these two blocks, rather than countries are turning inwards, trade flows are falling, and we're going back to the 1930s." — Neil Shearing: Clarifying the distinction between fracturing and deglobalization "Reshoring is a populist pipe dream." — Neil Shearing: Describing why manufacturing will not broadly return to high-income economies

Implications: Investors should expect more regional supply-chain shifts, selective decoupling in strategic sectors, and episodic inflation shocks. The biggest risks are US-China escalation and Taiwan, while the main beneficiaries are likely to be Mexico, Vietnam, India, and parts of Eastern Europe.