“Not everything that is faced can be changed. But nothing can be changed until it is faced.”
Globalization 1.0 began at the end of the Second World War, and accelerated following the collapse of the Soviet Union in 1991. It bound the world together and unleashed prosperity on an unprecedented scale and rate. Over the last three decades, we saw an integration of global markets, as the Soviet Union fell, and China was admitted to the World Trade Organization.
Nationalism, authoritarianism, and mercantilism gave way to trade, democracy, and capitalism, which have dominated and shaped the world over the past generation. Supply chain outsourcing restructured the global economy. Motivated by cost efficiency and working capital optimization, that global supply chain grew in complexity, interdependence—and opacity.
Consumers benefited from secular price disinflation, fed by cheap labor from the transition of manufacturing to low-cost labor environments, by the flood of cheap commodities as the Soviet Union fell, and by the miracle of exponentially improving information technology. World trade and finance became dollar-denominated. From Breton Woods to the end of the Gold Standard in 1971, the U.S. dollar became the global reserve currency, and the U.S. came to dominate and project power through the global financial system. Finally, the world was brought online, led by the U.S. technology sector. Humanity was connected through vast, borderless social networks, which shrank time and space accordingly.
Globalization 1.0 delivered countless benefits. It lifted billions from extreme poverty, democratized access to information, and created a global supply chain network that swept up the majority of the world’s population in a system of trade and mutual benefit.
But, it also generated side effects and unintended consequences which precipitated its downfall. On the date of this publication, October 6th, 2022, it is apparent that Globalization 1.0 has come to an end. Russia wages an imperial land war on its neighbor; inflation is cratering financial markets; COVID-19 has cost trillions of dollars in economic losses and tens of millions of lives; climate catastrophes are roiling Pakistan, Florida, the Western U.S., Europe, and China; and, the return of Great Power competition between the United States and China is eroding the international order that shaped economies, financial markets, and geopolitics over a generation.
This is a hopeful essay about what comes next - what the world that emerges from this transition will look like in a new phase of globalization - “Globalization 2.0.” Altana’s mission is to power this new phase of globalization, enabling more resilient, secure, sustainable, and inclusive supply chains to be built and managed through our platform, the Altana Atlas.
But, in order to chart the course for the future, we must first grapple with the past.
The Excesses and Unintended Consequences of Globalization 1.0
The collapse of Globalization 1.0 was ultimately the result of its excesses and unintended consequences. Five themes principally define this collapse.
The first is wealth inequality. Globalization 1.0 exacerbated wealth inequality to a degree that now tears at the social fabric, delegitimizing the governments, financial institutions, and businesses that have caused and presided over it. Wealth inequality was driven by outsourcing to low cost labor markets, and by runaway money printing associated with the exponential increase in government indebtedness and financialization of the real economy.
The opening of, and outsourcing to, low-cost labor markets held median wages in developed economies flat for two generations. The collapse of the Soviet Union, the offshoring of supply chains, and the admission of China into the World Trade Organization were powerful disinflationary forces that suppressed wage growth in the West. On a purchasing power-adjusted basis, median wages in the United States peaked in 1973 and stagnated for the next 43 years before rising only modestly in recent years through labor shortages.
At the same time that wages stagnated for most people in developed economies, wealth inequality exploded in favor of a global elite. This was principally fueled by runaway money printing. Through tens of trillions of dollars in monetary expansion, central banks inflated the value of real estate, stocks, bonds, venture capital, art, and all other financial assets—to the overwhelming benefit of the wealthy who hold these assets.
This money printing was inextricably linked to mushrooming global debt in Globalization 1.0. The Gold Standard was ill equipped for the high-velocity, cross-border trade and financial flows generated by globalization. Since the termination of the Gold Standard in favor of fiat currency in 1971, total global debt grew from $2 trillion to more than $305 trillion. By contrast, world GDP grew only from $3 trillion to $96 trillion during the same time period. In other words, through Globalization 1.0, total debt levels grew roughly 5 times faster than economic output. Today, government debt levels in developed countries are 10 to 20 times greater than their tax receipts, or annual income.
To finance and refinance these burgeoning debts, central banks employed interest rate suppression and outright monetization of government debt to forestall the inevitable reckoning. The side effect was an epochal inflation of financial asset prices, as capital was crowded out of low-risk government debt securities and into other riskier financial assets. Serial asset bubbles, in favor of the rich, were the result. Wealth disparities across developed nations now stand at levels last observed in the Gilded Age and on the eve of the Great Depression.
Environmental and Social Externalities
The harmful environmental impacts and labor practices of unconstrained globalization accumulated and reached a tipping point. Consumer, investor, and regulatory requirements for sustainability action demand a fundamentally new way of doing business globally.
The stampede toward low-cost goods that characterized Globalization 1.0 connected global markets to parts of the world with fewer worker protections and even, in some cases, forced labor. Forced labor is now endemic across supply chains. Goods produced by forced labor touch nearly every industry, making their way into our clothes, electronics, food supply, cosmetics, medicines, furniture, and more. The interconnected and opaque web of supply chains under Globalization 1.0 hides forced labor from downstream buyers. Forced labor is found in, but by means limited to, Xinjiang Province in China, West African cocoa plantations, fishing vessels evading scrutiny in international waters, Malaysian palm plantations, and cobalt mines in Africa.
Forced labor imposed by the Chinese government on the Muslim Uyghur population in Xinjiang Province, China bears special examination. Our Altana Atlas reveals roughly 800,000 direct trading relationships between entities tied to Uyghur forced labor and the rest of the global economy. At the next tier, this figure balloons to 7 million trading relationships. At each tier of the supply chain as these goods are transformed through global value chains into finished goods, the number of connections grows by an order of magnitude. Uyghur forced labor’s impact is global. 183 countries received direct shipments from companies that the Altana Atlas identified as being involved in Uyghur forced labor since the beginning of 2019. This includes the United States, Canada, India, the United Kingdom, Australia, Brazil, and France. Altana estimates that roughly 10% of all companies buying and selling physical goods worldwide are utilizing inputs (largely unwittingly) from the cotton, aluminum, polysilicon, and other Xinjiang-based industries using Uyghur forced labor.
Climate change, meanwhile, has accelerated dramatically through Globalization 1.0. Land use change, industrial agriculture, and the burning of fossil fuels have pushed the world to - and likely over - the precipice of calamity. According to the United Nations and World Meteorological Organization, climate-related disasters increased five-fold over the last fifty years, accounting for more than 2 million deaths and nearly $4 trillion in economic losses. The IPCC estimates that over the next 30 years, 143 million people are likely to be displaced by the effects of anthropogenic climate change, including rising seas, drought, searing temperatures, and other disasters.
Labor and environmental opposition to Globalization 1.0 is now reshaping domestic politics and global trade policies. The true costs of “efficiency at all costs” are now plain to see, portending a total refactoring of supply chains along environmental and labor rights dimensions.
Outsourced, just-in-time supply chains grew fragile. When the COVID-19 pandemic hit, the supply chain failed across multiple tiers of production, from raw materials through manufacturing to the delivery of finished goods. Container transport costs quintupled in price. Sub-tier manufacturing facilities shut down and were revealed to be single points of failure across the supply chains of the world's biggest businesses and product lines. Port congestion plugged logistics networks. These disruptive effects cascaded through commodities, durable goods, and consumer goods, revealing the fundamental fragility of our globalized supply chain.
According to McKinsey, just 48% of companies worldwide know the identity and physical location of the factories from whom they directly procure goods. At the upstream, “Tier 2” level, or the supplier’s supplier, that number declines to 21%, and is just 2% at the Tier 3 level. While these highly opaque, interconnected, outsourced supply chains may be efficient in terms of working capital and “return on equity,” they are undeniably vulnerable to massive disruption in the face of proliferating global risks and regulations. McKinsey estimates that $4.4 trillion worth of goods, or roughly one quarter of all global trade, flow through global value chains that are highly exposed to acute climate, geopolitical, and cyber risks.
The costs of this fragility are not hypothetical. The COVID-19 pandemic triggered hundreds of billions in supply chain disruption losses to businesses worldwide, and contributed significantly to the inflation megatrend now sweeping the world at the conclusion of Globalization 1.0.
National Security and Law Enforcement Vulnerabilities
The fourth side effect undermining Globalization 1.0 was the challenge to national security and law enforcement across our interconnected and interdependent business networks. The supply chain is now a principal theater of geopolitical competition. Strategic trade lanes, ports, rare earth metals, semiconductors, 5G, and even data are the battlefields in the new Great Power competition. Control of strategic supply chains in an interdependent world is now both an offensive and defensive imperative.
It follows then, that in just the last ten years, more than ten thousand trade restrictions and tariff provisions have been introduced worldwide, reversing a multi-decade trend of trade liberalization. The private sector now faces a costly and risky restructuring of supply chain networks along geopolitical fault lines.
Meanwhile, non-state threats, from transnational criminal organizations, have blossomed in the underbelly of globalization. They erode the safety and integrity, and therefore the legitimacy, of the sovereignties they straddle. Transnational criminal organizations generate illicit flows on a massive scale and form gigantic business conglomerates and distributed networks alike. They include drug-trafficking cartels, terrorist networks, cyber-hacking operations, and other illicit organizations. The total proceeds of transnational organized crime are estimated at $8 trillion annually, or nearly 10 percent of the gross global product. Bribery of corrupt officials is estimated to involve up to $1 trillion. These non-state threats, functioning in the shadow world of globalization, outstrip the capacity of both national and international law enforcement agencies and organizations to control that dangerous space. Governments cannot successfully fight cross-border crime from behind national borders which transnational criminals do not recognize or even physically cross.
The Decline of Nation-States
Ultimately, Globalization 1.0 drove the decline of nation-states. It dramatically accelerated the cross-border flows of capital, labor, cargo, migration, goods, services, ideas, images, data, electrons, and disease. Today, these non-stop transnational flows are directed principally by actors independent of nation-states. These include multinational corporations, transnational criminal organizations, financial institutions, and social networks.
Economics, information, and security are increasingly subject to transnational forces. Transnational companies and global flows of capital shape the distribution of wealth and resources; transnational criminal organizations operate beyond the reach of national law enforcement; and, cross-border migrations strain the politics and infrastructure of nation states.
The collapse of nation states, rather than war between them, now accounts principally for war-related death and refugee migrations. Internal breakdown and civil war have caused the large majority of the 9 million conflict-related deaths since 1989. State collapses have produced a record 80 million displaced people and refugees in the world today, as compared with 40 million in 1945 in the aftermath of the Second World War.
With limited means or jurisdiction to manage globalization, nation-states now struggle to assert political authority, levy and collect taxes, protect public health, defend cybersecurity, reverse inequality, and enforce legal and regulatory requirements. This diminished capacity of nation-states to cope with globalization led to political, social and economic dislocation. As Rana Dasgupta notes: “The most momentous development of our era, precisely, is the waning of the nation state: its inability to withstand countervailing 21st-century forces, and its calamitous loss of influence over human circumstance. National political authority is in decline, and, since we do not know any other sort, it feels like the end of the world.”
The Demise of Globalization 1.0
The demise of Globalization 1.0 has been upon us for some time. It finally came to an end on Thursday, February 24, 2022. This was the day that Russia invaded Ukraine. On this day, the dream of a rising tide of Liberalism, capitalism, and democracy binding the world together in peaceful commerce finally ran out of gas.
So, what comes next?
It will not be as simple as “de-globalization,” or “re-shoring,” or “friend-shoring” - concepts that are being advanced today which acknowledge the end of an era but do not offer a sufficient framework for a new one. We have built a highly interconnected and interdependent world, and our world will remain so. The logic of comparative advantage will prevail. Our economies, social networks, information exchange, and finance will continue to be characterized by global networks.
The structure, rules, and operation of these global networks, however, must change fundamentally in order to adapt to the generational challenges that we face. The current arrangement of sprawling, indiscriminate, efficiency-seeking, financialized, insecure, and opaque global economic networks must be replaced by transparent, collaborative, and trusted global networks. Altana Technologies exists to power this new phase of globalization. Our vision for Globalization 2.0 is Trusted Networks, which span and connect governments, businesses, and civil society to shape a more resilient, secure, inclusive, and sustainable world.
Globalization 2.0: Trusted Networks
Definitions of trust are subjective, of course. Trusted Networks will be stipulated according to the nation states, businesses, financial systems, and citizens bound together in these myriad, dynamic networks. In many ways, but by no means all, they will form and align to the geopolitical aims and agendas of the United States, China, and the European Union. Regardless of these differences, Trusted Networks will be organized across the following dimensions: (a) network visibility; (b) sustainability; (c) security and compliance; (d) data governance; and (e) money.
Supply chains are the primary nexus linking the security, sustainability, resiliency, and economic equity concerns that animate Globalization 2.0. While Globalization 1.0 was driven by outsourcing - the decentralization of supply chains - Globalization 2.0 will be driven by Virtual Vertical Integration. How will this be accomplished?
Globalization 2.0 will bring today’s opaque and hidden multi-tier supply chain networks into the light. Moreover, these multi-tier networks will engage in explicit coordination, rule-setting, and collaboration beyond direct buyer-supplier relationships. In Globalization 1.0, supplier relationships were jealously guarded out of fear of competition or disintermediation. In this new world of proliferating data, it is no longer possible – or even valuable – to obscure the existence of buyer-supplier relationships. Instead, competitive advantage will be a function of visibility, coordination, and collaboration across a multi-tier supply chain network through a shared source of truth.
To create a shared source of truth for businesses, governments, and consumers, it is necessary to organize the world’s supply chain information and clear away the fog of Globalization 1.0. Valid concerns over privacy, intellectual property, and sovereignty have until now prevented that data from ever being assembled in one place. Today, though, with the advent of federated learning, it is possible to bring machine learning computation directly to siloed data - rather than the other way around. This privacy-preserving approach enables learning across previously inaccessible data to create a dynamic, intelligent model of the world’s supply chain network. Altana is pioneering a federated learning approach that is transforming the world’s public and non-public supply chain information into an intelligent map, through which stakeholders across the supply chain gain visibility, set rules, collaborate, and build trusted networks.
We are making it possible to coordinate demand and supply, to build resilient supply chains, to surface and mitigate sustainability and compliance concerns, and to share and validate supply chain behavior with regulators. This degree of supply chain visibility and coordination previously required vertical integration. In Globalization 2.0, new technology will enable the best of both worlds: the efficiency of distributed production and comparative advantage coupled with the security, resiliency, safety, and compliance of integrated supply chains.
Today, two different bottles of the same shampoo product can have a 2,000% difference in greenhouse intensity depending on whether the palm oil ingredients in the shampoo were sourced from trees planted on degraded land, or from plantations on burned-down natural rainforests. In other words, it is impossible to know or address the sustainability impacts of our products without creating visibility upstream into multi-tier value chains, to the factories and fields producing raw materials and intermediate goods. This visibility can then support collaboration across trusted supply chain networks to credibly measure, govern, and reward sustainability.
Businesses are being compelled toward sustainability across multiple fronts. The U.S., U.K., Australia, and Germany recently passed bans on the import and/or financing of goods tainted by forced labor production in their upstream supply chains. Trillion-dollar asset allocators, including Blackrock and the Pension Fund of Japan, have required that all publicly traded companies report on their environmental, social, and governance metrics in order to be eligible for inclusion in their indices, ETFs, and direct investments. The US Securities and Exchange Commission issued a proposal in May of 2022 to mandate climate impact disclosures on public company financial reporting. The U.S. and E.U. have clearly signaled that they intend to implement carbon tariffs on imported goods to distinguish and reward more sustainable supply chains. China has in many ways been the most aggressive in building trusted networks of renewable energy, electric vehicle manufacturing, nuclear power, and energy storage production, having now amassed domestic and international supply-chain control over the majority of the world’s low-carbon energy and transportation capacity.
The inexorable, if querulous, march toward sustainability will define our globalization in the years to come. The ability to measure and demonstrate sustainable production will amount to a license to do business in the world’s major markets in our near future. Control of sustainable production itself will prove to be an enduring competitive advantage as our species grapples with the dislocations of climate change, and unshackles itself from hydrocarbon-rich dictators.
Security and Compliance
The vulnerabilities of our interdependent but insecure global business networks will be aggressively corrected. Security and compliance will take precedence over the cost efficiency motivations that dominated in Globalization 1.0. In particular, we can already see these priorities changing today in critical supply chains, software, and cyber infrastructure. These include bans on technology usage, such as Huawei’s 5G technology, export restrictions on advanced technologies to competitive nations, controls on foreign investment, and software and data domiciling obligations. A dramatic lockdown has only just begun.
The issue of forced labor clearly illustrates the coming paradigm. On December 23, 2021, President Biden signed the Uyghur Forced Labor Prevention Act into law after its unanimous approval in Congress. This legislation took effect on June 22, 2022. The underlying principle of this legislation is the concept of rebuttable presumption. U.S. Customs and Border Protection, as the nation’s border management agency, is mandated to presume that any product originating in the Xinjiang region of China will be considered as having been grown or manufactured using forced labor. Importers will have the opportunity to rebut this presumption and will be required to provide extensive evidence to show that the goods were not made using forced labor. In other words, if their products are to enter the U.S., importers must now take steps to gain visibility into their extended supply-chain networks, all the way upstream to the raw materials. For the first time, importers are required to share this information proactively with the government in order to establish trust between the government and the extended network of companies and shipments that comprise an importer’s supply chain. Failure to do so can result in a blanket ban on importing goods into the U.S.
This is a sea change in supply chain security and compliance, and a precedent that will be built upon. In the old paradigm, governments defined what was unacceptable and then engaged in enforcement efforts to “catch” the private sector in wrongdoing. In the new paradigm, governments set the rules and declare that all supply chains are guilty until proven otherwise. In effect, the government obligates the private sector to create and share network visibility and evidence that no forced labor is used if they wish to have a license to do business. The burdens of both effort and proof are shifting irrevocably to the supply chain. A similar transformation occurred in the wake of 9/11. The mandate to protect against terrorist attacks and insulate the international financial system from terrorist financing upended global finance. Starting with the 1999 repeal of the Glass-Steagall Act and then the passage of the Patriot Act following 9/11, financial service providers were for the first time held accountable for ensuring that no financial transactions flowing through their systems were unlawful. The service providers were enlisted in shared oversight - alongside the government - of global financial compliance. Over two decades, the scope of these oversight obligations grew, as did the penalties for failure. The world’s largest financial institutions are now in many ways an extension of government in ensuring financial compliance. What seemed impossible at the time quickly became the standard.
Just as Globalization 1.0 was characterized by a free-for-all in supply chains, so too was it a free-for-all across the internet. Backlashes against big tech, debates over censorship, fears of surveillance and state control, and the rush to shore up cybersecurity vulnerabilities make certain that data governance and information sharing frameworks will feature centrally in a future of Trusted Networks. There will be two competing models for “trusted” information networks - centralization and decentralization.
In the centralization camp, there are two variants: total state control of information, as modeled by China, and total corporate control of information, as modeled by the Western technology platforms. In the centralized model, censorship, discovery, and algorithmic promotion and suppression of content are exercised by authorities with the platform power to do so. Control of infrastructure, ownership of user data, and network effects through both carrot and stick incentives are the keys to this centralized control.
At the same time, decentralization is being driven by data privacy regimes like GDPR in Europe and the CCPA in California, which seek to limit tech platforms' control of user data and to empower users with choice over how and where their data is used. The more transformative decentralization paradigm is the wave of development in blockchain technologies and Web3 projects. This bottoms-up movement toward decentralized information management and governance aspires to sidestep and subvert central authorities altogether.
The opposition between and within these two camps will animate and shape Globalization 2.0, and will transfigure the internet itself.
There is a potential third way, which might enable the best of both worlds. Through federated computing and federated machine learning, it is possible to connect to and learn from sensitive, siloed information across a federated network, without needing to pool and centralize data. In this model, many of the platform benefits of information search and discovery, insight generation, and network connectivity can be achieved while preserving data privacy, security, and sovereignty across a federated network. Altana is pioneering a federated learning platform for the world’s supply chain by building a federated learning network across government, logistics, and enterprise data that could never be directly pooled. Through our Altana Atlas platform, insight can be derived across federated data sets without commingling any of them. We can benefit from shared intelligence while maintaining data control and integrity.
Finally, Globalization 2.0 will not be dominated by the U.S. dollar. China, Russia, Brazil, and OPEC nations have taken dramatic steps over the last decade to effect bilateral trade agreements under direct currency swaps, sidestepping the dollar as a medium for settlement. China launched in 2015 its Cross-Border Interbank Payment System to facilitate direct payment and settlement with counterparties outside of the dollar, and with a messaging system designed to bypass the SWIFT financial rails through which the U.S. extends its hegemony across the global financial system. The freezing of Russia’s foreign currency reserves in the U.S. and Western central banks broke a long-standing scripture - that foreign reserves of any central bank were fully redeemable under any circumstance. This will surely accelerate the trend underway to establish parallel, non-Western financial infrastructure and to diversify currency reserves outside of the U.S. dollar.
At the same time, the rise of decentralized cryptocurrencies and the arrival of state-sponsored digital currencies – including the digital Yuan most importantly – will further diminish the U.S. dollar, obsolesce the SWIFT financial rails, and undermine Western financial sanctions in this new era. We should regard these trends with great caution and advance preparation. If the Global Financial Crisis of 2008-09 taught us anything, it is that disequilibrium in our over-leveraged, financialized, and highly interconnected global financial system can cascade dangerously and swiftly into calamity. We should also approach this financial future with optimism. New systems of money and payment technologies hold the promise to simplify and accelerate world trade, root out illicit activity in the financial system, and include more of the world’s poor and its small businesses in the financial system.
A Better Globalization
Throughout time our species has responded to survival pressures by organizing into larger groups that can muster a more capable survival response when threatened. Our progressions from hunter-gatherer circles to cities, to nations, to nation states, and to supranational organizations like the E.U. and United Nations, reflect this tendency. Even in today's fracturing world, if an alien species appeared in our orbit to threaten all of Earth, it's difficult to imagine humans wouldn't dispense with rivalries and band together in collective defense of humanity. In other words, global threats require - and will eventually elicit, in spite of ourselves - a globally cooperative survival response.
The survival pressures of the 21st century are inherently global and transnational in nature. In response to these global threats, Globalization 2.0 will necessarily come to be built around Trusted Networks, which span and connect nation states, businesses, and civil society in new, dynamic, and technology-enabled networked organizations.
At Altana Technologies, we provide a technology platform for building and maintaining Trusted Networks. If we succeed in our mission to power Globalization 2.0, the following will soon be possible:
- Businesses will build and maintain trust through their extended supply chains in what will come to look and feel like the virtual vertical integration of secure, sustainable, resilient and inclusive supply networks.
- We will finally know the true social and environmental impacts of the products we make, buy and consume. Sustainable products will be rewarded through higher stock prices and lower tariffs.
- Customs and border agencies will engage with the trading community through a shared source of truth, expediting “trusted” trade flows while pushing the unverified trade into a narrow lane with high scrutiny.
- Supply chain risks will be anticipated and detected in real time; business interruption losses will be compensated automatically through dynamic insurance policies.
- Every purchase order through a Trusted Network will come with a pre-approved working capital loan to assist the supplier in fulfilling that order.
- Global logistics networks will adapt automatically to supply chain disruptions; they will become an extension of government enforcement to ensure that the goods being moved are safe and compliant.
- Cross-border trade will be pre-cleared by customs before arriving at the border, and payments will automatically trigger and instantly settle as the goods change hands.
- Public-private partnerships across customs, national security, and government procurement will reward and ensure transparency, security, and trust in the supply chain network.
- Small and medium sized companies will gain access to global marketplaces, unlock financing to grow their business, and generate wealth for entrepreneurs and employees.
That is a world about which we can and should feel excitement and optimism. While this moment of change and dislocation presents danger and insecurity, it also presents an opportunity to preserve many of the advantages created by Globalization 1.0 while addressing its most painful deficiencies. Through Trusted Networks, Globalization 2.0 will deliver a more resilient, secure, inclusive, and sustainable globalization than the unbridled globalization of the last 75 years.