Globalization is over. So put together your self
Globalization has reached its peak and there is a significant and underestimated risk that the world will begin to de-globalize in the years to come.
The most recent wave of globalization, which began after the end of the Cold War and gained momentum in the 1990s and 2000s, has had a decisive impact on economic development over the past 30 years. It has stimulated economic growth, particularly in emerging markets, and helped lower both inflation and real interest rates in developed countries.
Globalization has also had a major impact on the distribution of growth revenues. The integration of billions of workers into the world economy has reduced the proportion of workers’ income and increased the proportion that goes into corporate profits. The latter has provided important prop to global stock markets, but the former has contributed to Trump’s backlash against globalization in recent years.
An important point to emphasize is that the recent wave of globalization seemed to hit a wall long before the current trade war began. The share of trade in goods and services as well as cross-border capital flows in global gross domestic product (GDP) rose sharply in the 1990s and 2000s, but then leveled off from around 2010.
It is possible that this flattening is just a temporary pause and that an unforeseen technological breakthrough will spark a new wave of globalization. But such waves are rare.
There are several reasons globalization may have peaked before we even consider the trade war. First of all, most economies are now open and there are no more new large countries to integrate into the world economy. In addition, new technologies have made it less attractive for companies to maintain large and complex supply chains. In addition, governments have increasingly begun to question the benefits of some aspects of financial liberalization, which has been a central feature of the recent wave of globalization. China in particular is unlikely to open up its capital markets significantly.
Reaching the height of globalization is not necessarily a cause for concern for the world economy. On the contrary, the technological developments that are partially driving these trends will fuel productivity growth and expand consumer choice. However, the life of the poorest countries that have yet to gain a foothold on the development ladder becomes more difficult as the most common development path begins with labor-intensive production in sectors such as the textile industry. This will add to the structural headwinds emerging economies are already facing.
In addition, a more vicious form of policy-driven deglobalization – where the proportion of cross-border trade and capital flows relative to GDP falls – is becoming increasingly likely. One of the most important lessons of history is that politics – not technology – has resulted in globalization being rolled back.
The current, most likely course of policy withdrawal is the US-China trade war. The trade war is actually not that big of a deal as trade between the US and China is only 3% of total world trade. But it is a symptom of more fundamental tensions in relations between China and the West. China’s rise as a strategic competitor meant that some form of repression was inevitable, whoever the US president was.
In addition, there is a danger that the trade war is the beginning of a broader backlash against globalization that extends beyond the US and China. After all, globalization has undermined the power of national governments, blaming growing inequality, multinational tax avoidance and undesirable migration.
Just as the likelihood of deglobalization is underestimated, it is also unclear what form this could take. At one end of the spectrum we can see a mild form of regionalization in which production in neighboring countries is clustered rather than globalized. At the other end, the world could split into competing blocs (for example, one led by the US and one led by China). In between we could observe the increasing introduction of customs tariffs by individual countries.
In most scenarios, the impact on the global economy would be negative but manageable. A modest degree of regionalization would not be a big problem as there is already a lot of trade between neighboring countries and regions would likely be large enough to support companies with maximum economies of scale.
Likewise, the head-to-toe impact of a head-to-toe trade war on global growth is likely to be small over the next decade compared to the much larger challenges posed by demographics, persistently low productivity growth, and the impotence of monetary policy.
The only deglobalization scenario, but one that is particularly worrying, is a deep rift between the economic blocs led by China and the US. Granted, it seems unlikely that trade and investment flows between the West and China will completely dry up in a re-run of the Cold War between the US and the former Soviet Union. But a mix of trade restrictions in certain sectors and products seems likely, as does some kind of technological iron curtain. Should this happen, it would have a negative impact on global growth and geopolitical stability.
Neil Shearing is Group Chief Economist at the independent economic research firm Capital Economics.