The Great Decoupling and the end of the Golden Arches

There’s a lot of ‘End of an Era’, Turning Point’ and ‘Watershed Moment’ stuff around at the moment. The decision by Mc Donald’s to pull out of Russia after thirty years is another significant event. The three decades since the collapse of the Eastern Bloc have been characterised by what Yale’s Jeffrey Sonnenfeld called “capitalistic diplomacy”. The idea behind it was that the spread of western capitalism’s multi-nationals around the planet would integrate the world economy and make conflict less likely. This was the Golden Arches theory. As Sonnenfeld put it recently, “No two countries with a McDonald’s would fight each other.” But they did and since February, western companies have been scrambling to get out of Russia. The withdrawal of McDonald’s from Russia is as symbolic as its arrival was in 1990.

With all this going on, it was almost inevitable that Francis Fukuyama would be back in the news again. Hot takes on ‘The end of the End of History’ abound. The point about Fukuyama, though, is that while many criticised him at the time, his End of History caught the moment in the early 90s. Intellectuals might have poured scorn on his book but many business leaders (most of who had never read or even heard of Fukuyama) began to behave as though he was right. The prevailing assumption, which gathered strength throughout the 1990s, was that the world was moving towards liberal democracy and western capitalism. 

In many respects, Fukuyama was right. The collapse of the Soviet Union ushered in a period during which the Washington Consensus prevailed. There was a move towards trade and market deregulation, taxation rates fell and political rhetoric was generally pro-business from both the centre right and the centre left parties which were in government for most of the period. The democratisation of the former communist countries and the trade liberalisation of China brought a massive increase in workers, resources and markets to western capitalism. Firms could now do business in areas they had previously assumed were off limits. Business grabbed the opportunity with both hands. A system of global just-in-time supply chains was built which rested on the assumption that it would always be possible to move things around the world at speed. Businesses did that because they had an End of History mindset. You can only have a highly-geared and finely balanced global supply system if you assume that nothing significant is going to happen to disrupt it.

By-and-large, nothing did. As Fukuyama had said, there would still be “events to fill the pages of Foreign Affairs” but none of these events would stop the onward march of western liberalism. And so it proved. There were still major geopolitical conflicts but none of them derailed the process of globalisation. In 2001, the World Trade Centre bombings rocked America. Many said (and still do say) that 9/11 changed everything. Perhaps it did, in some respects, but the process of economic liberalisation and globalisation continued. The growth and integration of world trade barely paused after 9/11. The slight blip had as much to do with the dotcom crash as the bombing of the Twin Towers.

World Trade to GDP Ratio 1970-2019

Chart by Macrotrends based on World Bank data

Throughout the 2000s, world trade continued to grow, most of the former communist countries in Europe joined the EU, thus cementing their position as liberal democracies, and China hosted the Olympics. During this period, western governments weren’t simply business friendly. They began to fetishise business and trade. Foreign policy became subservient to capitalistic diplomacy. Everybody wanted to do business with China. In the UK, that even ran to letting it take over nuclear power plants and parts of our infrastructure. 

Those of us who worried that the triumph of western values might lead to more capitalism but not necessarily more liberalism or democracy were dismissed as dyed in the wool pessimists. (I took some flack at a panel discussion in the mid-2000s when I suggested that the scramble to trade with a brutal autocracy might have unforeseen and unpleasant consequences.) Free market idealogues preached about the innate superiority of their system and the inevitability of its triumph. They repeated their mantra, ‘free markets, free people’. You could even get it on t-shirts. That bringing people into the market system would eventually lead to their political emancipation was taken as read by many political and business leaders. I remember Douglas Hurd on a Radio 4 ‘predictions for the 90s’ show assuring us that democracy in China was sure to happen by 2000. 

This was the justification for awarding prestigious sports events to countries that routinely used torture and shot their people dead in the streets. It would bring them into the system and make them want to be more like us. Consequently, when the decision was taken to award the Olympics to China, apart from protests by Tibetan and Uyghur exiles, there was very little opposition. Despite the cool t-shirts, the protest movement didn’t get much traction. The celebrities carrying the Olympic torch through London seemed genuinely shockedthat protesters were trying to snatch it. The Metropolitan Police were similarly unprepared and the UK government seemed so desperate to cosy up to China that it allowed Chinese state security to rough up demonstrators on the streets of London.

By the 2010s, though, it became clear that capitalistic diplomacy and the Golden Arch theory were not delivering the goods. Democracy was beginning to fade out east of Warsaw and the Arab Spring never really sprung. Furthermore, even western capitalism was not becoming the dominant force the optimists of the 1990s had hoped. China, especially, was taking the bits of capitalism it liked and ignoring the bits it didn’t. The free-market cheerleaders kept telling everybody that their system had lifted millions out of poverty. It’s not an argument you hear as often nowadays, though, as it has become obvious that the same processes of trade also fuelled the growth of an autocratic superpower. Capitalistic diplomacy failed both as a way of spreading democracy and as a more cynical attempt to ensure US dominance. 

Although it might look as though the Golden Arches era ended in February 2022, the signs have been there for a while. Larry Fink, boss of the world’s largest asset management company, said that the Russian invasion of Ukraine has put an end to globalisation while Rana Foroohar points out that it has been unravelling since 2008but it has only now become obvious. Foreign Policy magazine dismissed the Golden Arches Theory as a “Beautiful Dumb Dream” two years ago. What is now becoming clear is that, once again, the world is dividing into hostile, or at least mutually suspicious, blocs. 

Russia has now effectively left the capitalist economic system. China is making it clear that it no longer wishes to play by the rules of a system designed in the US. India and a number of other countries are sitting on the fence. A fascinating and wide-ranging piece by Rana Foroohar in the Financial Times discusses the West’s decoupling from China and the coming “decade of living dangerously”. In the article, she and Edward Luce agree that, while corporations will be desperate to keep access to Chinese markets, it is likely that, in the interests of foreign policy and national security, they will face tighter restrictions on trade with China. 

I have written previously about the return of politics to the business world. I’m told that companies spent quite a lot of time monitoring the political situation in the 1970s. For much of my career, though, corporations didn’t pay much attention to politics unless they were trading in a politically volatile part of the world. Of course, we discussed politics at work but it was like discussing football or gardening. It was something that people who were interested talked about but it was rarely more than a minor consideration when looking ahead over the next five years or so. Governments of whatever colour were broadly pro-business and it was becoming increasingly easy to do business anywhere in the world – even in places run by dictators. 

That is clearly no longer the case. The order of the last few decades, based on a US and Western view of the world, will not prevail as it once did. In many respects, it is going to become a lot more difficult to do business in the next decade. Some insurers are proving reluctant to cover company operations in countries like Russia and are advising corporations to insure against the risk of a sudden loss of access to markets as a result of hostile government action. None of this is to say that corporations will not continue to wield significant political and economic power. Their leaders will remain influential and absurdly rich. It is less likely now, though, that they will call the political and economic shots in the way that they once did. It might not be the End of History but it looks like it might be the end of ‘capitalistic diplomacy’. A financial journalist I was talking to recently remarked that the past thirty years saw geopolitics and foreign policy driven by economics but that, in the coming decade, it will be the other way around. 

I wonder, though, if that is a shift that western consumers are ready for. Sure, companies that didn’t respond quickly enough to the invasion of Ukraine came in for a lot of criticism. The resulting pressure might even see the break-up of HSBC, one of the world’s largest banks. In their day-to-day spending habits, though, consumers are so used to buying stuff from autocratic states that they barely realise they are doing it. One of the few things that unites Republicans and Democrats in the US is a more hawkish approach to China. Polls suggest public opinion supports this shift. Yet the queues of Chinese ships outside the Pacific ports suggest those same voters can’t shovel cash towards China fast enough. Will they be willing to forego cheap goods and energy in an economic arm-wrestling contest between the West and a Russo-Chinese axis? If China is keeping Russia from economic collapse, it doesn’t make much sense to protest against companies doing business in Russia while continuing to fill your house with Chinese goods. Yet there is clearly a disconnect between what people protest about and what they buy. I’m not convinced that western voters have the stomach for an ongoing geopolitical conflict that will make them materially worse off.

Maybe China is just too big and too much a part of the global economy for a complete decoupling to occur. It might be a bit soon to say the last rites for “capitalistic diplomacy” just yet. There is no doubt that the Russian invasion of Ukraine was a significant moment I’m sceptical about the extent to which it will herald a complete break with the past. Will business and economics really be subservient to geopolitics or will it be a bit messier than that? Maybe more of a rebalancing. Hawks in governments will try to rein in businesses in the interests of foreign policy and national security but businesses will continue to find work-arounds. Voters will protest about unethical businesses practices while continuing to buy from countries with the worst human rights records in the world. Perhaps all those Ukrainian flags that have appeared on our streets in recent weeks symbolise the dilemma. While they might be flown as a protest against the actions of an aggressive authoritarian regime, it is likely that most of them were made in China.