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Reverse globalization

by Brad Setser
March 30, 2007

The phrase the “uphill flow of capital” seems to have caught on.  It is a vivid way of describing a world where poor countries finance rich countries.   Or, a bit more accurately, China and some no-longer-all-that-poor oil exporting countries finance the US.     

I wonder if the term “reverse globalization” will also catch on.  Nasser al-Shaali, chief executive of the Dubai International Financial Center (DIFC) Authority, recently used the term "reverse globalization" to describe one likely long-term consequence of the uphill flow of capital: Emerging markets will be buying companies – not just bonds – in the developed world. 

"Reverse globalization – when you have emerging market players going out and acquiring developed institutions – is a tide that no matter how you try to swing against it, will be very very prevalent in the years to come," he [Shaali] said. 

You can quibble about the term.  Globalization as a term could easily describe a two-way flow of funds around the globe.  Call it financial integration.    That is basically how the transatlantic economy works.  US firms invest in Europe.  European firms invest in the US.  Their respective positions basically balance each other out.   

But “globalization” has not been perceived as a two-way flow of equity investment between the developed and the emerging world, either in the developed or the emerging world.  In the emerging world, globalization meant opening up to US and European and sometimes Japanese firms and capital.  It didn’t mean buying up US or European firms.   It meant letting local firms (including local banks) be bought by US and European firms. 

And in the US and Europe and Japan, globalization often meant the export of US and European and Japanese capital and know-how to the emerging world.  Globalization was often interpreted a process that would lead the rest to adopt US-style market capitalism.    

For example, Frank Lavin – the US under secretary of commerce – recently indicated that China would benefit if it imported more of  the know-how and management savvy of US private equity firms.    

Asked about US equity fund Carlyle’s drawn-out negotiations to buy a stake in Xugong, China’s leading machinery maker, Lavin said China needed such investments to help well-performing firms become internationally competitive by improving their technology and management.  ”The controversy shouldn’t be Carlyle-Xugong,” he told reporters. ”I think China needs 100 Carlyle Groups to come in and buy 100 Xugongs.”  

No doubt there are many Chinese firms with too little debt and too much equity in their capital stock.  But the downhill flow of management and equity control is arguably at odds with the uphill flow of capital.    

US firms investing in China are effectively investing money that the US has borrowed from China, at least in some grand global sense.  The US, remember, doesn’t save anywhere near enough to finance all US domestic investment, less alone to finance US investment abroad. At some point, China – and others – might conclude that rather than lending to US firms at low rates so US firms can make big returns on their investment in China, they would be better off just doing the investment themselve.    No more offshore intermediation.  Read Yu Yongding.   

But it goes beyond that.   When a private equity firm borrows dollars in London (or borrows dollars in New York that the New York institution borrowed from someone in London) to take a US firm private (something that is happening rather frequently right now), the private equity shop is often effectively borrowing Gulf or Chinese savings to help leverage up their returns.   

At some point, investors in Gulf and in China might decide to try to play this game themselves.  Rather than lend their money out to American and European investors — or take a stake in US private equity firms, as some Gulf families are known to do — some emerging market economies might use their own funds to go shopping for American and European firms.  It isn't hard to find signs that the big emerging market creditors want to try their hand at getting some of really big returns that have accompanied the “global asset shortage.”   Or at least try to get a better return than they have been getting lending out their funds on the cheap.  

And rather than hire American or European managers, they may conclude that they kind find better management-value-for-their money at home.  US CEOs are not exactly cheap by global standards. That would be a change.  And for the US, a potentially very big change.   The US came to accept Japanese FDI – and some Japanese management practices – in the 1980s.    But the potential shift of control should the current “uphill”  flow of capital from the emerging world become the”uphill” flow of equity capital from the emerging world is far, far larger than anything that happened then.  


Remember, creditors – not debtors – traditionally have set the rules of the global financial game.   Right now the US is a debtor – a big one.  But the US still expects to set the rules, more or less.   My guess is that most US business circles still think globalization means something close to the global Americanization of finance and business.   It may.  But it also may not. 

Reverse globalization may not be a bad term. 


  • Posted by Dave Chiang


    Fixed currency exchange rates under the original Bretton Woods agreement after World War II provided the foundation for decades of global prosperity. It was only after the exorbitant costs of the Vietnam war that Richard Nixon negated fixed currency rates for a floating rate regime. The current gyrating currency rates are damaging to Chinese manufacturers who work on thin profit margins of 5 percent or less. When the US Dollar versus Japanese currency exchange rate can shift by 5 percent overnight, which has happened in the past, it is primarily driven by Wall Street Hedge Fund speculators to the detriment of the “real” economy. By providing a modicum of monetary stability, the fixed currency exchange rates by the Asian Central Banks provides a stable monetary platform for the “real wealth” generating sectors of the world economy. Unfortunately, equilvalent monetary policy foresight is nowhere to be seen in the Washington beltway. Republicans and Democrats, both parties are subservient to the narrow economic interests of Wall Street Hedge fund speculators. Wall Street special interest groups have both sides of the aisle covered: Henry Paulson for the Republicans, and Robert Rubin who supported the Enron Corporation in control of the Democratic party.

  • Posted by Macro Man

    Reverse globalization probably wouldn’t be a bad thing. However, until/unless the acquirers develop more market-determined exchange rates, any attempt to aggressively acquire developed market assets (in any of the G3) will likely raise protectionist hackles.

  • Posted by Dave Chiang

    [ Macroman ]
    DC, it may be difficult for you to believe, but the world doesn’t owe Chinese manufacturers a living any more than it owes US consumers. Mercantilists can’t offer off market credit terms and then moan when they are accepted, nor can they buy overvalued dollars and then complain when the dollar goes down.

    [ Reply ]
    No one in this world owes anyone else a living. The Chinese have NEVER asked for any handouts or foreign aid from the United States. Moreover, politically motivated allegations of Chinese currency manipulation are clear disinformation, not supported by either fact or theory. Manipulation involves willful, proactive volatile changes to profit from temporary technical market trends against market fundamentals. China has pegged its RMB yuan to the dollar at 8.28 yuan to a dollar within a narrow band of 0.03% for a decade, from 1995-2005, at times above and at other times below market trends. At substantial cost to its own economy, the PBoC kept the yuan’s peg to the dollar all through the decade-long Asian financial crisis that began in July 1997, when all other Asian currencies devalued in quick order in a frenzied rush to the bottom. A stable exchange rate cannot be labeled as manipulative. Period.

  • Posted by Macro Man

    Who cares if China is manipulating the currency. The problems that China causes, and their culpability for a share of global imbalances, comes from accruing $25 billion a month in FX reserves when the current stock of reserves exceeds any conceivable requirement. The very fact that they need to soak up this RMB demand is illustrative of some sort of fundamental misalignment, or imbalance. And no, believe it or not, the mythical ‘Wall Street speculators’ are not the primary source of reserve accrual- trade is.

  • Posted by Dave Chiang

    Under US National Security regulations, even the China CNOOC oil industry acquisition of Unocal was blocked by Congress. There isn’t very much that the Chinese can acquire without running into regulatory trouble by the US government. And Congress is broadening the definition of national security to include almost anything of monetary value including natural resources, civilian technology, and service industries in order to exclude the Chinese. It is a bit hypocritical for Frank Lavin – the US under secretary of commerce, to complain about China’s 49% foreign ownership rules when the US government prohibits a state-owned Chinese corporation from owning any percentage of an US Corporation. The Chinese have gotten the message and have already set their sights on the acquisition of small European technology firms, and natural resource enterprises in various developing nations.

  • Posted by Dave Chiang


    Wall Street Hedge Funds are the real Currency Manipulators, but the Chinese are always the convenient scapegoats by the Wall Street-Treasury complex looking to deflect blame for dysfunctional US markets. Hedge fund assets have doubled globally to more than $1.4 trillion in the last five years betting on notional values in the hundreds of trillion. Notional amounts of all types of OTC contracts stood at $370 trillion at the end of June, with foreign exchange (FX) contracts representing 22%. Currency contracts increased by one quarter to $429 trillion between January and March 2006. The currency derivative market has been described as a financial weapon of mass destruction. It makes the Chinese currency exchange rate issue pale in comparison to manipulation by Wall Street speculative Hedge Funds.

  • Posted by LC

    While I agree that there will be a shift in control (as you defined it) due to the so called uphill capital flow, I don’t think its path will be smooth or straight forward with a US cave in on controls. I think the more likely scenario will be a US protectionist backlash for a period of time, during which globalization will still proceed rapidly but centered around Asia. After a while, US will find itself wanting to jump back on the globalization train and participate because profit will always entice participation. Already, the 2008 presidential election is shaping up to be the most protectionist, anti-free trade campaign in recent memory. Allen Blinder’s recent warning about downside of free trade will play into many anti-free trader’s hands and change the direction of US policy. There is also failed free trade talks with Malaysia and South Korea. These things coupled with Iraq has made me more pessimistic about US prospects in the short term.

  • Posted by Macro Man

    Dave, out of curiosity, are hedge funds responsible for the piracy of intellectual property within Chinese borders? Were they the cause of wide-scale embezzlement in the Chinese banking sector? Are they the driving force behind the mess in the Middle East?

    BTW, the vast majority of currency derivative extand are forward contracts…of the kind used by coroprates all over the world to hedge, as well as funds to speculate.

    As an aside, the US is evidently going to announce protectionist measures against China. Hard to condone, for sure…and a bit sooner than even I expected 😉

  • Posted by bsetser

    macroman — i agree with you on china. China’s capital controls make it hard to speculate efficiently on a RMB appreciation. But it does seem to me that “wall street speculators” (or maybe Japanese households) are behind a large share of the roughly $10b a month in Brazilian reserve growth in February and March. current account and FDI flows explain maybe $2b a month of the growth.

    LC. i too would expect the uphill flow of equity (and the shift of control of US assets) to produce quite a political firestorm … no doubt DC will jump on me for saying this, but in my view, the protectionist forces emerging now are a direct consequence of the failure of the world to start to take policy actions to encourage rebalancing (i.e. reduce the US trade deficit/ offsetting surpluses) a few years back, and the resulting large deficit/ large need for imported savings in the US. And china is as responsible for the world’s inaction as anyone — the ADB report makes it clear that China rebalanced away from investment but toward net exports in 05 and 06.

  • Posted by RebelEconomist

    Since discussion seems to have wrapped around from the previous topic, I will repeat my reply to Macro Man here:

    “Macro Man,

    I agree that the present flow of Chinese intervention is unsustainable, and would advise them to raise the rate of their creeping appreciation a bit, but that is their problem. I just do not think that what China is doing should be such a big problem for the US.

    The Chinese commitment to a fixed exchange rate is a far greater restriction on them that the Americans. Such arbitrary restrictions usually represent an opportunity. Having a self imposed commitment to buy something from the US to balance payments at their chosen exchange rate, and faced with what is available to buy, the Chinese buy bonds, reducing US interest rates. If the US government does not believe that its private sector’s response to this is appropriate (eg because it thinks that consumers are being myopic), it should accommodate China’s demand for bonds and buy some other country’s bonds. Rather than use the pejorative term “intervention” for this US response, call it ALM!

    Now if China’s policy is forcing it to pay silly prices for US assets, this ALM ought to be profitable for the US (ie a case of “exorbitant privilege”). But even if it is not profitable, acquiring a diversified portfolio of state savings might nevertheless be worthwhile for the US on risk return grounds.”

    Actually, I think this comment is relevant here too. Economists sometimes think in boxes (with all due respect to present discussants). They accept mean-variance analysis in capital markets, and then in international macro, expect capital to flow to the highest return. Even if Chinese firms can get the same returns out of home investment as foreigners get out of FDI in China, which I doubt, it might still be rational for the Chinese to save significant amounts in lower returning overseas bonds rather than put all their eggs in the home basket.

  • Posted by Guest

    The downhill flow heretofore has allowed the U.S. to earn higher rates of return on external assets than what it paid on liabilities – a macro hedge fund of sorts. Until recently this produced an income surplus on current account, notwithstanding a net external liability profile. The uphill flow has now reversed the downhill flow in terms of revenues through the sheer weight and continued growth in the net external liability profile, without necessarily expanding its reach significantly into U.S. equities, which would also reverse it through rates of return. At some point, the continued expansion of the U.S. deficit must strain the supply of available debt instruments. Given an expanding net requirement, it could also strain the supply of capital inflows (incrementally and cumulatively) in addition to those required to fund the current account deficit, as the net external position becomes an every larger proportion of the gross position. In other words, the gross position may have to be cut back in order to fund the net position. But the net position as it emerges becomes funded somehow, whether by bank claims or equity claims – that’s a tautology – it’s a matter of composition and price and exchange rate. So long as imports are paid for, end-creditors are left with the increasingly unpleasant choice of instruments, price, and exchange rates. To the degree that creditors become increasingly interested in equity claims, protectionist instincts will come to the boil and the U.S. will then face the essence of the problem, which is the steady migration of wealth out of the U.S. at the margin, whether it is in the form of treasury bonds or Dow Jones stocks, in exchange for net imports and the cost of servicing existing debt. Also, one of the macro risks associated with the housing market decline will be the marginal slowing effect on total U.S. wealth growth, which will accentuate the negative marginal optics of the continuing migration of U.S. wealth overseas.

  • Posted by Dave Chiang


    Before pointing out faults in the Chinese banking system, it is amazing how many cannot see the systemic corruption in the US Economy. Moody’s and S&P bond ratings of “AAA” followed Enron and Worldcom down into bankruptcy leaving the general public with billions of dollars in losses. In fact, Democratic party bigwig Robert Rubin personally pressured the bond rating agencies not to downgrade Enron bonds even when it was clear the corporation was facing serious financial problems. An even bigger fiasco exists today with trillions of dollars in subprime and Alt-A bonds rated “AAA” by S&P and Moody’s. I wish I were joking when 60% backed subprime bonds are still rated “AAA” despite the recent news of massive mortgage defaults on these junk bonds. It can only be labelled a criminal scam when public and private pension funds are defrauded of trillions of dollars by the bogus bond ratings assigned by the Bond rating firms in collusion with Wall Street investment banks.

    Let the marbles fall where they may, the sheer level of dishonesty boggles the mind and endangers the survival of the United States as a nation, it is time for a crimimal crackdown at the highest levels of the Wall Street-Treasury complex.

  • Posted by Macro Man

    RE, I can see your stance, and if the US were able to act in isolation then your proposal could possibly succeed. However, if the US sells $ to buy yen, what’s to stop the Japanee from selling yen to buy dollars? And if they both try and buy euros, what’s to stp Ecofin from buying dollars and yen? The problem with the “beggar-thy-neighbour” policy route is that it can easily end up being a game of ‘pass the currency weakness parcel’, which I don’t think anyone wants.

    Brad, yes Wall Streer specs are clearly an element of BRL appreciation…but then again, so are Brazilian specs. And where do you draw the line at what constitutes ‘speculation’? Is it hedge funds? Retail mutual funds? Pension funds? Educational endowments? Which of these guys are speculators, and which are investors? ‘Cuz they’re all buying BRL…

  • Posted by bsetser

    macroman — very fair point. all sorts of folks are piling into the BRL.

    guest — very astute comment. i have little to add. the ability of the US to expand its gross position (on a flow basis — some of the increase is a pure valuation effect) and to run up its net debt (with the impact on the NIIP masked by capital gains on the US equity position) truly has been stunning. but i think EMs are starting to catch on to the game, and are increasingly thinking of ways to try to shift the income balance in their favor!

  • Posted by Guest

    Hot War in the Middle East, now Trade War with China

    Dollar slumps as US imposes tariffs on China

  • Posted by LC

    I agree with Brad’s previous comment, but on a separate topic (and refering to Yu Yongding’s paper), is anyone convinced now that the Chinese exports are relatively insensitive to exchange rate movement? RMB has appreciated arround 7% in aggregate since July 05 and Chinese export growth still remains strong. I am also beginning to wonder if the persistently higher inflation we are now seeing has anything to do with the 7% appreciation.
    I am less worried about tariffs on Chinese products, but the overall trend does concern me quite a bit.

  • Posted by Gheorghius

    Gentlemen, please stop for a moment. Consider this sad news:

    “The U.S. Commerce Department decided today to levy new duties on imports from China to compensate for Chinese subsidies to exporters, reversing more than two decades of practices.”

    Globalisation is truly at risk.

    Now consider that harsh language accusations against China (or posturing as victims of those who run a trade surplus) allows politicians and pundits to mess up, use the government to favour special interests, and sink what they claim to protect, “national interest” – [Please remember: there is no obligation for anyone to avoid “global imbalances”, “accruing … FX reserves”, or generate “some sort of fundamental misalignment”: I think on this RebelEconomist has a good point, politically sensible!] – We live in a free world: we should build up common rules; but some refuse to do so: they are the kings of double standard.

    Gentlemen, since this is primarily a website for economists, I ask you to join me in condemning the protectionnist approach of Mr Bush (and Mrs Clinton too, on Nafta). Let’s put our differences aside, let’s spare our harshest words to use them against this misleading populism.


  • Posted by Emmanuel

    Guest, everyone: Let’s not think this ruling against China over coated paper is obscure as it may pave the way for several other firms to petition the Department of Commerce for tariffs against China. As always, Mr. Trade Legislation and Adjudication has more:

    Screw WTO, It’s Do-It-Yourself Time.

    It might not be so much a case of reverse globalization as a case of putting globalization on hold. With current anti-foreigner / anti-trade sentiment at elevated levels stateside, there’s a fat chance that the likes of China and the Mideast oilers will be allowed to buy US firms.

  • Posted by Dave Chiang

    We have gone way beyond the point where the Global Economic imbalances can be resolved painlessly. It is now only a question of how bad the post-bubble contraction from the global capital misallocation will become. I suspect we are in for a frightening ride. There is no easy way out.

  • Posted by Dave Chiang

    The Bush Administration has imposed tariffs ranging from 10.9% to 20.35% on Chinese coated paper imports. The tariffs probably aren’t high enough to make a significant impact on imports of Chinese paper. Environmental standards are much lower in China, and the wage gap between similar jobs in China and the US ranges from 7-1 to 50-1, for engineers and manual labor, respectively. Moreover, the same paper can be trans-shipped to other Asian nations, and re-exported to the US market with only with the point of origin paperwork relabeled, as is frequently done with textile exports. I suspect that the relatively low level of tariffs is more a shot across the bow, rather than a full blown trade war declared on China.

  • Posted by Macro Man

    Gheorghius, of course it’s a stupid thing to do. I doubt there’s much debate about that outside of Washington and the Acme paper Company.

    RE has suggest one form of beggar-thy-neighbour policy, US intervention to weaken the $. For better (or, more to the point) for worse, the government has decided on another beggar-thy-neighbour strategy, one that is more likely to win votes next autumn.

    A common standard is most likely to be reached in some sort of multilateral forum. Unfortunately, the largest surplus holders are either not members (G7) or marginalized (IMF) at the obvious options. It will be curious to see if the IMF tries to grab the reins next month like they appeared to do last April…by now all of the bilateral are completed, n’est-ce pas?

  • Posted by bsetser

    LC — the ADB reports that on a broad basis, China’s real exchange actually depreciated in 06, as the appreciation v. the $ didn’t offset the $’s depreciation (and lower Chinese inflation than US inflation).

  • Posted by RebelEconomist

    Gheorghius: I do join you in deploring this. It reminds me of the move on Japanese luxury cars in 1995, which as we now know, did absolutely nothing to help the US car manufacturers. I can condemn this action no more strongly than to say that it is the sort of thing that the French would do! (By the way, please check out my attempt to resolve your debate with Brad a couple of topics ago if you have not already seen it)

    Macro Man: Thanks for the discussion. My intention is not that the US should beggar its neighbours, although I concede that it would be portrayed as this by some on the receiving end (eg the French!)…..I am not suggesting that the US has any specific exchange rate targets, for example. It is more that the US state should do some of the overseas saving that the US private sector is not doing (unlike in Europe).

  • Posted by Anonymous

    Friedman asked for a free market. Be careful what you ask for.He assumed that the regulatory playing field was level and if not, that it would level out eventually if you let the haves buy the idiot priced goods at a low price until the supply dried up. China’s pay rates of 5% those in the west , almost free rent, virtually no IP cost or environmental controls, and people who save ,live simply and don’t consume much, all combines to build a big pool of energy,ie money.It won’t stay at home. China is most likely to spend its trillions of surplus on bonds and corporates. Why not?

    The question I would like to know the answer to is when will the slide begin and will it end with one world wide currency? It is a small planet and there is only one species that deals in money.

  • Posted by Anonymous

    Lend Lease was real Free Trade and not chopped liver as in the Globalist World – see This is the most popular articles in a series of articles about Globalization and Free Trade at

    The Lend Lease Act was set up by President Roosevelt who said he would not let the dollar get in his way to help the allies in World War 2. He pumped up the industrial might of the U.S. prior to declaring war and supplied England , France and Russia with goods. It demonstrated that you can not do business with people who do not have money. You first have to find a way to grow money in some value added fashion. As we know, the U.S. came out of World War 2 with the most awesome industrial power the world has ever known. It backed up the Marshall Plan which restored local value added economies in Europe and Asia. It was economically artifical but it worked for a long time. However, for some reason in 1956, the U.S. Federal Government itself sponsored the moving of factories outside the USA which later evolved into what is called Free Trade today. It was really all about moving production from place to place for the sake of the cheapest labor possible. We chopped up the Golden Goose that layed the Golden Eggs. Who said we had to compete like this- see

    However, with Free Trade and Globalization, people without money are used for selfish interests. The only variable in the process is the cost of labor. Workers are traded on a world trading block to compete down to the lowest levels of wage slave and even child labor. Reverse Globalization is an odd thing to call this attack on the value of work relating to workers’ dignity.

    For more information, see Tapart News and Art that Talks at and from the perspective of the streets of USA where human dignity in the workday has been compromised.