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The way forward for globalization

Economic

The way forward for globalization

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The spread and acceptance of globalization has been a relentless force, but its advance has lost some of its momentum in recent years – is this the beginning of a new trend towards a total contraction of globalization or just a temporary slowdown?

We believe that the more general trends of globalization persist and will continue to evolve as the benefits are widespread and far-reaching. Credit investors have long benefited from globalization and may now want to prepare for an element of “regionalization”, especially given some of the supply chain disruptions we have seen as a result of the Covid-19 pandemic.

The rise of hyper-globalization

Globalization prevailed and gained importance after the 1970s. The economic landscape quickly shifted towards free and liberalized international markets for goods, labor and finance capital.

A more globalized economy became a natural way for companies to grow and gain additional economies of scale while also opening up new job markets and, ultimately, a new customer base.

Countries quickly took on new trading partners while dismantling trade barriers and liberalizing their domestic markets. Supply chains became increasingly complex as first world multinational companies began relocating their manufacturing facilities overseas. Several Asian countries became leaders among their competitors, exporting their way to “tiger economy” status, while global financial centers developed in the United States, Europe and Asia.

Global trade volumes rose steadily before peaking and flattening after the 2008 crisis (Figure 1).

A nation’s meteoric rise in power was driven by world trade: China. The world’s most populous nation opened its job market to Western multinationals in the 1980s and eventually joined the World Trade Organization in 2001. China became the fastest growing economy of the early millennium, and its share of global exports overtook many developed countries (Figure 2).

The United States and many other developed nations benefited from globalization on numerous fronts, but none was more obvious than the opportunity to take advantage of lower labor costs. Large investment grade multinational corporations quickly saw their labor costs fall while their profit margins rose, adding to stock valuations and company value. Falling labor costs were also a major contributor to secular disinflation in the West, which continues to this day and has a positive impact on consumer disposable income.

The fall of hyper-globalization

The 2008 financial crisis (a global systemic crisis), exacerbated by intricate links not only between financial sectors but also between countries, took some wind out of the sails of globalization. Perhaps globalization took a back seat as the world saw slower growth, consumers reduced their debt levels, and an environment where fiscal austerity took center stage – shedding light on mounting inequality in advanced economies.

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