Capital realism: A divided world, more connected than ever

A shipment leaves southern China, but instead of heading straight to North America, it detours through Vietnam. There, key stages of production are completed to satisfy rules-of-origin requirements, before the goods are re-exported to the US under a “Made in Vietnam” label.

The route is longer and more complex: an extra leg of sea freight, another round of customs clearance, and additional compliance checks. Yet, the goods still reach their destination.

This is the reality of global trade today — not the frictionless flow described in textbooks, nor the total rupture many once predicted, but a system that is more laborious and circuitous, yet continues to move forward unabated.

Why hasn’t it stopped? Not because any consensus has been reached, nor because some international mechanism is providing a backstop, but because a new logic is at work. It does not hinge on who wins or loses, nor does it shift abruptly with changes in great power relations; instead, it operates quietly beneath these fluctuations. To understand this logic, one must first confront three contradictions.

One, as constraints increase, connections are, paradoxically, deepening.

As barriers rise, trade flows ought to decline — this is common sense. In 2025, the US introduced a “reciprocal tariffs” regime, raising export tariffs on most economies from single digits to the 10-20% range, with the effective tariff rate on some Chinese goods at one point approaching 55%. Investment screening shifted from post-deal review to pre-approval checks. Export controls likewise expanded from targeted measures into a broader, more systematic framework. By this logic, the global economy should have contracted. Yet it has not.

In 2025, US goods trade with China totalled roughly US$415 billion, down about 20% year-on-year, but still substantial in absolute terms. That same year, Vietnam’s total trade surpassed US$930 billion, growing by around 18% year-on-year and almost twice its GDP. The combined trade of the ten Southeast Asian economies remained in the US$3-4 trillion range, still ranking among the world’s major trading blocs.

The decline is real, but there has been no precipitous drop. Flows have not disappeared but are rearranging. They bypass bottlenecks, pass through new nodes and form new channels. Each additional channel implies a factory, a compliance system and a set of institutional alignments. The denser the barriers, the more the detours — the deeper the connections between these economies. Constraints do not produce rupture; they generate new connections.

The role of countries that provide these connections is evolving. Those able to operate across multiple regulatory systems simultaneously — enabling firms and capital from different regimes to pass through — are no longer mere market participants, but are increasingly becoming integral to the infrastructure of the global economy.

“Not choosing sides” here is not a posture of ambiguity, but an institutional capability built over the long term. Conversely, some economies, by signalling their policy stance too early or too clearly, are already beginning to bear the costs of trade diversion and capital reallocation. Choosing sides is never free; sooner or later, the bill is due.

Two, scale, which should be an advantage, is becoming a vulnerability. Over the past 40 years, the formula for competitiveness was straightforward: greater capacity, lower costs and higher market share. In a relatively uniform global market, this formula was indisputable. 

But the problem is that rules are no longer uniform. When capacity is highly concentrated in one single location, its fate becomes tied to the rules of that place. Once those rules change, the issue is no longer one of efficiency, but a more fundamental question: can you still access the market? It is not that production is impossible; it is that the goods can no longer be sold.

TSMC has grasped this clearly. It is investing around US$165 billion in Arizona, planning multiple fabs, advanced packaging facilities, and an R&D centre. Its plant in Kumamoto, Japan, is in operation, and projects in Germany are progressing. These moves are not driven by lower overseas costs — in fact, public data show that US production costs are significantly higher than in Taiwan. The reason is simple: embedding production capacity across multiple systems is the only way to retain global customers.

Similarly, Apple is shifting more iPhone production destined for the US market to India, while Foxconn continues to expand its investments there. This is not because India is cheaper, but because if the largest export market changes its rules, the entire supply chain cannot be left to stall. TSMC is expanding from a single system to multiple systems, while Apple is shifting from reliance on one system to hedging across several. Same logic, different moves.

The same can be seen in manufacturing and consumer goods. Multinational companies are building parallel supply chains in Southeast Asia, not primarily to cut costs, but because rules of origin and compliance requirements have diverged across markets to the point where a single base cannot meet them all. US crackdowns on “transshipment” are also pushing rules of origin from a matter of compliance to a question of survival. This is not an adjustment by individual firms, but a deeper, structural shift.

“Concentrating resources to accomplish big things” has long been seen as a key path for late-developing economies, with the expansion of scale often equated with growth in actual capability. This logic held — so long as what you produced was both in global demand and freely permitted to be bought.

When that premise begins to erode, and external markets grow less receptive to concentrated supply, scale no longer translates automatically into advantage. Instead, it compresses domestic profits and dilutes returns, while shifting the pressures of industrial adjustment and employment onto external markets. This, in turn, provokes stronger trade, investment and regulatory pushback — ultimately constricting its own international space.

This is not a moral judgment, but a structural one. Once rules diverge, any scale-based strategy reliant on a single system will encounter this counterforce.

What, then, defines new competitiveness? It is not being the largest, but the ability to continue operating across different rule systems — establishing a presence in multiple locations, maintaining layered compliance, and switching flexibly between regimes. These capabilities take years to build. Firms that wait for clarity in the environment often find that the orders have already gone to someone else’s factories.

Three, costs are rising, yet the system is becoming more entrenched. Every participant pays a higher price in this new environment. Redundant capacity, duplicate compliance systems, parallel supply chains and multi-location R&D — none of these are the most efficient choices. From a traditional perspective, this looks like waste. But from another angle, every cross-border investment raises the cost of exit.

A company that builds a factory in Vietnam, sets up a warehouse in Mexico, and obtains certification in Europe will not abandon these arrangements lightly. A country that has spent a decade establishing a free trade network and building institutional channels will not dismantle them voluntarily. A long-term investor rooted in an emerging market will not fully withdraw after a single disruption. As all participants deepen their investments, the cost of exiting rises in tandem. No one stays out of trust in others; they stay because leaving is more costly. 

This is the stabilising mechanism of today’s global system. It does not rely on consensus, coordination or goodwill. It rests on a simple fact: everyone has invested too much, making continued operation more cost-effective than exit. The costs have not weakened this system; the costs themselves are the system.

The three contradictions — constraints prompting connections, scale creating vulnerability, and costs underpinning stability — may seem separate issues, but they are different facets of the same logic. This logic has been at work all along, just that it has yet to be clearly named. I call it capital realism.

It is not an ideal or a proposition, but a description of the present: in a world of repeated shocks, fragmented rules and scarce trust, participants maintain operability through continuous investment, and the aggregation of these investments forms the foundation for the system’s persistence.

Under this logic, “winning” has changed. Being the biggest no longer guarantees victory — nor does being the cheapest, or choosing the right side. Those who win are the ones who can keep operating even after the next shock. This is not an abstract claim. It becomes concrete for every participant, turning into a practical problem they must confront.

If you are shaping economic policy, are you a conduit or an obstacle? If you are running a business, can you still operate if your main market changes the rules? If you are allocating capital, will the conditions you rely on still exist five years from now? In an era of capital realism, stability does not come from coordination, but from the cost of exit.

The winners are not those who correctly predict the shock, but those who remain at the table, no matter which direction the shocks come from.

This article was first published in Lianhe Zaobao as “约束之下的赢家”.

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