In 1989, the Berlin Wall fell. It heralded the third era of globalisation. In terms of trade, the basic premise was that barriers between countries would go down, and cash could flow freely between states and across borders, and in return, goods would come the other way.
A certain narrative surrounding global trade at the moment is that such globalisation is grinding to a halt. In fact, it’s reversing, and we’re on the cusp of entering a period of “deglobalisation”. And if so, doom awaits. But there are two things wrong with arguing that way. Firstly, what actually is this “deglobalisation”? Secondly, is it a bad thing?
At the World Economic Forum meeting in Davos at the end of last month (May 2022), the notion of “deglobalisation” topped the agenda; the concern was that globalisation had begun to reverse as a result of geopolitical tensions, like the war in Ukraine, and due to disruptions to supply chains. One manifestation of supply chain pressures is volatility in foreign exchange markets. In a fully globalised world, when trading, transportation costs would be offset by the weakness of a foreign currency (making it more attractive for exports). But because of disruptions, these costs have risen to cancel out the advantage of buying in weaker currencies, thus making them less attractive. This has led to foreign exchange volatility making exports less attractive, and thus leading towards deglobalisation.
Kristaina Georgieva, IMF managing director, believes that “geoeconomic fragmentation will make our world poorer and more dangerous”. The sanctions against Russia demarcate the aggressor from the West. Meanwhile, trade blocs are emerging in the East; Biden has entered into the Indo-Pacific Economic Framework which represents 40% of the global economy – he is also supporting trade with Taiwan and Japan to protect against invasion by China. State intervention in China has limited foreign involvement in the Chinese stock market. Despite Xi JinPing’s recent reassurance in favour of international co-operation, there is an “underlying concern about decoupling”. The recent precedent of sanctions on Russia’s foreign exchange could spark a fear of future US sanctions. China, amidst these rising tensions, is looking to incentivise the holding of the renminbi, thereby further drawing up battle lines against the US.
Especially with the creation of trade blocs, limits in global trade might signal protectionist and nationalist attitudes to commerce: countries would only trade with friends, thus limiting their exports and imports. So, domestic companies in a country would have less competition from foreign ones; such lack of competition disincentivises innovation and quality domestically, driving down consumer satisfaction. However, a deglobalized economy is also subject to an inflation risk. A protectionist country would impose a tariff on goods coming in to drive up prices on those products, thus encouraging the consumption of domestic equivalents. However, assuming the demand for the foreign goods still exists, consumers must spend more to afford the same amount of these goods as before – these tariffs pose an inflation risk. Protectionist attitudes in the US had an inflationary threat, while Indonesia’s nationalist palm oil export ban had an impact on global inflation.
Rana Foroohar makes the argument that deglobalisation and decoupling is not a risk but a reality. Particularly in emerging markets like Latin America, Africa, and Asia, countries are developing their own regional and local supply chains. Decentralised technologies are allowing for “local for local” production. Her argument is driven further by the point that “globalisation isn’t inevitable… [an economy] has to serve domestic needs”.
We can see a shift towards local supply chains in the US too. Supply bottlenecks have encouraged a 20% rise in expenditure on maintaining and acquiring properties, suggesting efforts to move away from reliance on external supply chains. The recent shortage of semiconductor chips has been caused by supply chain issues. The chip is essential for computer production and technological advancements. As such, Intel have recently pledged to build a $20bn chip manufacturing site in Ohio to prevent any further supply issues. Like the markets in emerging countries, the US is moving towards a local view rather than a global one.
However, I am hesitant to call this deglobalisation. As of November 2021, there is little evidence to suggest that we are heading towards a deglobalized world. In September, imports in the US were at an all-time high, while China’s trade surplus exceeded pre-pandemic levels. Ports around the world were congested through high trade. In 2020, the year of the pandemic, China overtook the US as top destination for foreign direct investment, and exceeded those levels in 2021. Global trade has not paused.
The deglobalisation we are seeing in the formation of trade blocs and creation of local supply chains as opposed to global ones can be read as protections against risk. If China enters a trade war with the US, and sanctions are imposed on it, then it cannot have all of its reserves in dollars, since they would be blocked from spending in US markets. Countries are facing major supply shortages with disruptions in China as well as from the war in Europe. So, they need to find other ways to acquire their goods since international routes are failing. These establishments of local supply chains are not threats to global trade, but protections against future failures.
Globalisation has also created domestic financial inequality. Dani Rodik demonstrated that for every $1 gained in efficiency from free trade, $50 was moved away from the poor towards the wealthy. It is not hard to see this impact on “unskilled” workers in the UK who have lost jobs due to the outsourcing of labour enabled by globalisation. However, the pandemic has revealed a strong demand for workers, and demonstrated that essential workers are essential. In the cost-of-living crisis, coupled with the trend towards a local mindset, deglobalisation, or more accurately, de-risking, could help solve problems and inequalities created by the global mindset through the restoration of local jobs. The local mindset is also seen in regulatory bodies, who are also looking to firm up supply chain and domestic interests. Nvidia’s acquisition of Arm was stopped partly out of a desire to stop jobs from leaving the UK.
I’m not suggesting that we should all close our borders and stop global trade, ignore the benefits of globalised outsourcing, and deny the value of international M&A. And conversely, there are very real and prevalent protectionist attitudes globally (e.g., populist rhetoric about taking back jobs in the aftermath of the Brexit referendum, or Trump’s domestic focus) which are threatening global trade.
But the deglobalisation which we are seeing is not just a simple reversal globalisation or a splitting into factions. Instead, it is a raised wariness of reliance on the international market. Sanctions on Russia proved that even global superpowers could become persona non grata. Global supply crises revealed structural weaknesses in distribution channels. We are not seeing a decoupling of international networks. We are seeing countries and companies attempting to mitigate the risks of trading with the world.
Image credit: Dominik Lückmann