The Breakdown - De-Globalization vs. De-Nationification: Which Trend Wins?

Episode Date: July 8, 2021

Today on “The Breakdown,” NLW explores what he calls “the shifting tectonic plates of the global social order.” On one side, he argues, are the forces of de-globalization, with nations turning inward and focusing on economic sovereignty. Part of that is states exerting more control over corporations and Big Tech. On the other is a process of de-nationification, where powers previously reserved for states – such as printing money – are increasingly in the hands of new internet-based networks and corporations. This shapes the larger context of crypto disruption and puts a lens on understanding the growing regulatory debate.  -- Enjoying this content?   SUBSCRIBE to the Podcast Apple:  https://podcasts.apple.com/podcast/id1438693620?at=1000lSDb Spotify: https://open.spotify.com/show/538vuul1PuorUDwgkC8JWF?si=ddSvD-HST2e_E7wgxcjtfQ Google: https://podcasts.google.com/feed/aHR0cHM6Ly9ubHdjcnlwdG8ubGlic3luLmNvbS9yc3M=   Follow on Twitter: NLW: https://twitter.com/nlw Breakdown: https://twitter.com/BreakdownNLW   The Breakdown is sponsored by NYDIG and produced and distributed by CoinDesk.com

Welcome back to The Breakdown with me, NLW. It's a daily podcast on macro, Bitcoin, and the big picture power shifts remaking our world. The breakdown is sponsored by Nidig and produced and distributed by CoinDesk. What's going on, guys? It is Wednesday, July 7th. As I say at the beginning of every show, the breakdown is about the big picture power shifts remaking our world. I've been reflecting across some of the news stories I've covered, and wanted to address over the last few days and found a curious tension

in the underlying trends I think they represent. In many ways, these stories of Binance, of China, of big tech show two separate forces that are both exerting themselves on the global landscape and competing to shape the future. Those forces are, one,

a de-globalization and retreat from an integrated global economic and political system, and two, a denationalization or maybe better put a de-emphasis on the nation-state as the locus of global power. It's fascinating and probably not accidental that these two trends are happening in parallel, and I think in many ways they represent the tectonic plates of global social order. Let's discuss de-globalization first. Globalization as a force arguably precedes the modern state.

Take, for example, Columbus's voyage to the new world. He was a Genoese merchant who used connections with other Genoese, to win royal backing for his expeditions. The most famous, of course, came in 1492, and that particular trip was backed by Queen Isabella and King Ferdinand of, well, not Spain exactly, but the newly combined, thanks to their marriage, kingdoms of Aragon and Castile. It was the global connections of the proto-Italiant Merchant Network that got financing for an expedition from the leaders of what would become Spain to go on a journey that would eventually lead to the colonization of North and South America. The point here is that money and

networks and political power have been intertwined for a very long time. Still, that's not usually what people refer to when they're discussing globalization. Instead, they're usually discussing a post-World War II process of global economic integration, and especially a post-Cold war process that organized the world around the access of exclusive American political, economic, and military hegemony. This is the globalization of the 1990s in 2000s, and institutions like the World Trade Organization and the World Economic Forum and the like. This globalization has, we might say, a mixed record when it comes to people's perspectives. On the one hand, it has undeniably made the cost of consumer goods the world over come down.

On the other hand, big swaths of America have had to deal with structural changes in their employment and their lives that have come with a set of unintended consequences. One might say we traded cheap flat-screen TVs for the opioid crisis. That, of course, is absurdly reductive for a process so-com. complex, as well as reductive to the benefits that integrated global trade bring in terms of global conflict, cultural accessibility, and more. But there is another part of globalization consequences that were more acutely on display last year during the coronavirus crisis. To use another reductive framework, although this one I think is a little more apt, part of the

bargain of globalization was trading resilience for efficiency. Just in time supply chains that don't have to care about the politics of geography are incredibly efficient, but they're also very fragile. This was on clear display as the COVID pandemic hit, and we were unable either to source nor produce personal protective equipment for frontline medical professionals. In fact, the two biggest moments of the global shift away from globalization were the great financial crisis in 2008, 2009, which convinced many around the world that there were hidden downsides to global economic integration, specifically around cascading financial risk, and COVID-19, which made people reconsider seriously what was made where and how.

Last year, it took almost no time to make this connection, and of course, the Chinese origin of the virus was part of it. On February 27, 2020, still weeks before the first lockdowns and stock market tremors in the U.S., the economist published a piece called COVID-19 is teaching hard lessons about China-only supply chains. At the very least, an emotional decoupling is underway. Two days later, Bloomberg published how the coronavirus is accelerating de-globalization. A few months later, the Peterson Institute for International Economics added some numbers to the narrative. They used a measure of global trade called the Trade Openness Index, which is a measure of world exports divided by world GDP. They called this a, quote, reasonable proxy for economic integration. From 1945 to 1980,

that grew from 10.1 to 39.5. From 1980 to 2008, it grew from 39.5 to 61.1. Since then, it has declined to 53.5. There are a variety of reasons people point to to explain this broader trend. The stall of liberalization of China is one. Reconsidered economic values of domestic politics in key countries like the U.S. is another. See the America First idea popularized under President Trump. In this context, COVID just added fuel to the fire. President Emmanuel Macron from France has said that the coronavirus would, quote, change the nature of globalization, with which we have lived for the past 40 years, and said that it was, quote, clear that this kind of globalization was reaching the end of its cycle.

There were countless examples of these types of statements last year. Scott Morrison, Australia's prime minister, said in a speech before Parliament there, quote, open trading has been a core part of our prosperity over centuries, but equally, we need to look carefully at our domestic economic sovereignty as well. This year, I think we've seen another dimension of the de-globalization story, though, which isn't just about countries withdrawing from one another. It's also about national governments trying to re-exert power over other types of institutions, particularly corporate institutions that they see as infringing on their territory.

The breakdown is sponsored by NIDIG, the institutional-grade platform for Bitcoin. As long-time listeners know, NIDIG is a major force in the Bitcoin space, and they're now making it possible for thousands of banks who have trusted relationships with hundreds of millions of customers to offer Bitcoin. That mainstream access is critical for all of us, and you can learn more about it at NIDIG.com slash NLW. that's n-y-dig.com forward slash n l-W. We've seen a little bit of this in the U.S.

There is a distinct return of antitrust sentiment on both sides of the aisle when it comes to big tech. Both Google and Facebook have been subject to major federal antitrust lawsuits, and this type of thing feels like it's starting up rather than winding down. The U.S., however, has nothing on China when it comes to the battle between government and big tech. This had been happening for a while but culminated last fall when China forced Ant Financial to withdraw its IPO, one that likely would have been the largest in history. Over the next few months, Ant was forced to completely restructured to be regulated in a way that kept them much more in sync with other state-owned banks and state-owned enterprises.

Just yesterday, we discussed how a few days after DD's IPO in American markets, the ride-sharing company, which is China's biggest, was delisted from app stores at the heast of the CCP, citing security concerns. This is a massive power projection moment for the Chinese authorities. Anthony Scaramucci went on CNBC and called it, quote, a direct assault on global capitalism and, quote, a form of political terrorism. But really what it's showing is that China is now in a new phase when it comes to what it will and what it won't allow domestic companies to do. A Bloomberg piece yesterday showed that it is also unlikely to be an isolated action from the Chinese government. They published a piece called China considers closing loophole used by tech giants for USIPOs,

and how it works legally is actually interesting. Quote, pioneered by Sinakorp and its investment bankers during the 2000 initial public offering, the VIE framework has never been formally endorsed by Beijing. It has nevertheless enabled Chinese companies to sidestep restrictions on foreign investment in sensitive sectors, including the internet industry. The structure allows a Chinese firm to transfer profits to an offshore entity, registered in places like the Cayman Islands or the British Virgin Islands, with shares that foreign investors can then own. While virtually every major Chinese internet company has used the structure, it's become increasingly worrisome for Beijing as it tightens its

grip on technology firms that have infiltrated every corner of Chinese life and control reams of consumer data. Basically, China is now working to close this legal loophole that allows these Chinese companies to operate an IPO outside of their purview, and if it happens, it will sever one of the strongest ties that has bound the modern globalization enterprise together. That is the tie between Wall Street and big Chinese firms. However, I said this show is about two competing forces, and so far I've only discussed the de-globalization side, not the denationalization side. Not exactly. The reason that governments like the U.S. and China are acting so aggressively towards corporates and more specifically towards big tech, is that big tech represents a new force

competing for state-like power. There are so many dimensions through which this is playing out. As highly politicized and partisanized as they are, debates about social media censorship are in the U.S. on a more fundamental level debates about who has the power. to determine the public square and the boundaries of free speech. Up until a decade or so ago, that wasn't a question. It was just the state. But now, Facebook has more users than any global country has people. That creates enormous latent power whether those platforms wish to have it or not.

Twitter's Jack Dorsey is clearly someone who, from his public statements and his pushes to build a decentralized engine for Twitter and Twitter-like things, wishes that platform didn't have that power, although given that they do, he's not unwilling to use it. And speaking of Dorsey and Zuckerberg and Tech Power versus National Power more broadly, news is that former President Trump is planning on suing them for banning him, so that will be another test of this tension. And yes, by now, you're probably guessing where this goes next.

What's another form of state power that was never really in question about whether it was only states who had that power that is now having that paradigm upended? Creation of money, of course. In many ways, crypto is the most dramatic example of the new competition states have from non-state actors, and specifically non-state networks, around authorities that they used to take for granted. When you look at it this way, China's actions cracking down on Bitcoin don't seem all that strange. They seem like a state that has already shown that it will not countenance the introduction of big tech firms as a competing power in their jurisdictions.

They seem like a state that views permissionless global peer-to-peer currencies as a threat to the state-operated surveillance money they're currently testing. Why then would a different state, the United States, for example, make a different choice? Don't cryptos threaten the U.S. national governments authority just as much? Well, remember, states bring with them different types of values. In the U.S., there is value placed around innovation, and something that comes with that is at least some amount of comfort with change. The U.S. also values market choice over central planning.

Cutting off people from exerting free will to buy a new asset strikes many, even those with power, as fundamentally un-American. Finally, I think there is some recognition here that the question isn't really about cryptos. It's about the internet. The great disruptive force that is roiling state power and authority the world over is the internet itself. Or more specifically, the global networks facilitated by the internet that allow people to exchange ideas, content, values, and yes, now value, globally, without intermediaries and without respect for national boundaries. In that light, there are likely to be two polls that national governments will land between going forward. On the one end of the spectrum

will be those that see threat in every new startup, be it a corporation or a Dow, and we'll do whatever they can to clamp down and try to keep the next century looking like the last, with state-level governments as the sole rulers of the roost. On the other end, will be governments who see the internet's transformative power as inevitable, and who spend their time instead trying to figure out what the world looks like later, after that transition has more fully sunk in, and what the governments and jurisdictions that are most successful at that time will have done. Will they have tried to cling and claw and scrape and scrap for every morsel of control? Or will that only lead them to having prevented their citizens from enjoying the benefits

that the new technology brings. Will they, on the other hand, have set themselves up to be the beneficiaries of new trends and new patterns? For example, the global mobility of workers and corporate organization, and consequently, the global mobility of tax revenue and economic dynamism. I think it's probably pretty clear from these descriptions what I think, but the point of the show today is to provide a framework and a lens to see all the news that's happening differently. When you see stories like Binance temporarily halting payments from the EU's SEPA, single euro payments area, it's more than just about finance having a rough week.

So hopefully this paradigm, this framework of de-globalization versus denationalization will be a useful tool as you read future news and listen to future shows. For now, I appreciate you hanging out and indulging this rather meta episode of The Breakdown. Until tomorrow, guys, be safe and take care of each other. Peace.