Globalisation has helped drive economic development as it allows countries to focus on making the goods and services they are best equipped to produce.
It has also helped companies lower their cost of production and enter new markets.
This pattern might reverse as geopolitical conflicts, protectionism and the pandemic make the world rethink globalisation.
In this article:
- Geopolitical conflicts
- Protectionist policies
- Inequality
- China cannot do without it
- Is data showing a trend towards deglobalisation?
- The human cost
Geopolitical conflicts
The idea that market considerations will drive global trade, even with authoritarian regimes, is dead.
This notion underpinned Germany’s relationship with Russia and Angela Merkel’s decision to grow increasingly reliant on Russian gas.
But then something big happened in February 2022: war in Europe.
The notion has been proved spectacularly wrong by the Russia-Ukraine conflict, and in the process destroyed Angela Merkel’s political legacy overnight.
The war has also made Western nations reconsider new investments and trade relations with China – in short, a deglobalisation trend has started.
Companies and governments are looking hard at their dependencies on other nations and seek to onshore or nearshore more of their operations.
BlackRock chief executive Larry Fink recently said the Ukraine conflict had “put an end to the globalisation we have experienced over the last three decades”.
“Even if Russia’s war was relatively short-lived, the existing international economic architecture is increasingly peripheral to the big political economy questions, with governments in future likely to promote security interests at the expense of comparative advantage,” he added.
Protectionist policies
As trade barriers fell as part of globalisation, domestic companies were forced to compete with cheaper imports, leading to lower prices for goods and services.
Globalisation has also encouraged businesses to outsource production to low-wage countries.
Many of the benefits flowed to companies’ profits. For example, after-tax corporate profits as a percentage of gross domestic product in the US rose from 5% in 1990 to 10.5% in 2021.
However, protectionist policies such as tariffs and ‘buy local’ procurement rules have resulted in businesses moving production back to their home countries.
Inequality
In the U.S. and other developed countries, many of the benefits from globalisation that companies and their investors accrued haven’t been passed on to the general population.
This has caused discontent due to stagnating wages and lost jobs, particularly for manual workers and the lower middle classes.
From 2000 onwards, the flow of western capital into nations such as China with a cheap labour market has held back wages and job growth in the US.
This has caused a situation in which most of the growth has accrued to the largest multinational companies and Asian countries.
China cannot do without it
China’s economy has become highly dependent on trade with the rest of the world, particularly with developed economies such as the U.S.
According to the IMF, China accounted for more than a sixth of global GDP last year and its role in global supply chains has become more pronounced over the course of the pandemic.
If China ever decides to decouple itself from global trade, perhaps due to a future conflict with Taiwan, the economic and social impacts would be highly damaging.
Seeing the fallout from Russia’s invasion of Ukraine, this is not something China’s leaders would want.
Is data showing a trend towards deglobalisation?
Data from Netherlands’ Bureau for Economic Policy Analysis notes that overall global trade volumes hit a record level in January 2022, about 9% above its pre-pandemic level in December 2019.
Instead of a trend towards deglobalisation, this shows that global trade is back above the trend level that it had sustained since the 2007-2008 financial crisis.
Container shipping rates are also almost double the levels of a year ago, with ports in almost every country reporting high volumes and significant logistics bottlenecks.
Resilience over efficiency
High shipping costs, increased tariffs and protectionist policies are encouraging companies and countries to think local.
Many companies are prioritising resilience over efficiency as the just-in-time manufacturing model is struggling due to supply chain bottlenecks, natural disasters, the pandemic and the war.
Businesses are making adjustments with inventory levels going up as they respond to the new challenges.
The human cost
The biggest winners from globalisation over the past 30 years have been emerging economies that have integrated into the world economy and raised their living standards.
Poverty rates have fallen significantly, especially in Asian countries that have become part of the global economy.
The number of people living in extreme poverty fell from 1.9 billion in 1990 to 650 million in 2018, according to the World Bank.
Although lower-income workers in advanced economies did lose out because of the greater competition, this was offset by cheaper prices of goods and services.
Deglobalisation could reverse this trend by decreasing the efficiency of companies as they raise prices due to lower competition.