24 April 2021

Is the Era of Globalization Over?

Not long ago, the process of globalization was thought to be permanent as the global economy become increasingly integrated. However, it is important to remember that the world was divided into blocs just a few decades ago, with major segments of the world’s population living in countries that were disconnected from the wider global economy. This changed, of course, in the 1980s and 1990s as major parts of the world (China, Eastern Europe, etc.) were re-connected to the global economy. By the late 1990s and early 2000s, this reconnection resulted in a tremendous surge in economic growth in emerging markets, with an increasing share of trade and investment flowing in and out of many of these emerging markets. However, much has changed in recent years and the level of resistance to the process of globalization has clearly increased. This has led to doubts about the future of globalization and whether or not globalization has already reached its peak.


Peak Globalization

By some accounts, it appears that we have indeed reached what could be described as “peak globalization”. In fact, this peak may have already occurred when international trade and foreign investment last achieved consistent double-digit rates of growth in the late 2000s, or just before the Global Financial Crisis of 2008 and 2009. Since then, few economies have managed to continue to record the same rates of growth in terms of trade and investment that they had done prior to the financial crisis. In fact, the process of globalization is beginning to look more like a shift in global economic power toward Asia, rather than a process of connecting all regions of the world in a truly globalized economy.

The first signs that globalization may have peaked were seen during the Financial Crisis at the end of the 2000s, as that crisis triggered a series of major changes that have persisted to this day. For example, international trade had been growing at an annual rate of well above 10% per year for the three decades before the Financial Crisis. However, since the crisis, international trade has barely grown at all, even in the years in which there was not a financial crisis or a pandemic. The same holds true for foreign investment, which has slowed to an ever greater degree than international trade. Only in Asia has trade and investment growth remained relatively strong, reflecting the growing power of that region’s manufacturers and the increasing wealth of its consumers. As a result, outside of Asia, doubts about the benefits of globalization are spreading rapidly.


A Shift to Asia

In the immediate wake of the Global Financial Crisis, there was a post-crisis economic boom in most emerging markets, not just those in Asia. This boom was the result of a surge in manufacturing output in China and other Asian economies, and this led to a corresponding commodities boom that benefitted emerging markets in regions such as Latin America, Africa and the Middle East. In contrast, the United States economy was experiencing a sluggish recovery in these years, while Europe was bouncing from recession to recession. This led to an increase in support for protectionist economic policies on both the political right and the political left in the United States and much of Europe. At the same time, apart from Asian manufacturing exports and the flow of commodities into Asia, trade and investment growth was quite underwhelming in the years following the Financial Crisis.

When commodity prices fell sharply in 2014, what had appeared to be an emerging market surge instead turned into an Asian surge, as commodity exporters saw their rates of economic growth collapse, a trend that has continued to this day. In fact, only one region has managed to record relatively healthy rates of economic growth over the past seven years, Asia. While manufacturing growth rates in most of the world remain relatively low, they have continued to trend upwards in Asia, still driven by exports, but increasingly boosted by rising levels of demand in the region’s domestic market. In fact, the strategy of exporting one’s way to higher levels of wealth and economic diversification that was perfected by Japan after the Second World War and by South Korea in the latter part of the 20th century continues to be applied by many countries in Asia. As a result, Asia has emerged as the undisputed leading driver of growth for the global economy, for international trade, and for foreign investment.


Opposition to Globalization

While the dramatic shift in economic power towards Asia has lessened the appetite for globalization in other parts of the world, there are many other factors that are also playing a role in this change of attitudes. For example, the loss of manufacturing jobs in the industrial heartlands of the United States, Europe and other manufacturing centers has led to a backlash against trade and foreign investment. At the same time, wage growth in most leading economies has been lower than expected, a trend that is partially the result of the loss of manufacturing jobs to Asia, as well as the rising share of service sector jobs in these economies. The rise of populist politics on the right and the left of the political spectrum has also emerged as both a cause and an effect of this growing resistance to globalization. Add to these trends the emergence of automation in the production process and the drive towards more localization (or reshoring) for manufacturing activities, and it is clear that globalization may well have reached its peak already.

By all appearances, globalization, at least in the form that it was expected to take, appears to have lost momentum. Two major global economic crises in a short period of time, coupled with a host of other trends, have raised serious doubts about the benefits of globalization for people in many parts of the world, as we have witnessed in a number of recent elections. In fact, this backlash against globalization appears set to continue. This is very concerning news for countries and businesses that are dependent upon international trade and foreign investment in order to generate growth. If trade and investment growth remains stifled, and if productivity growth remains disappointing, there will be fewer ways for countries, industries and businesses to generate long-term growth, trends that we have already witnessed in most areas of the world. Should the last ten-to-fifteen years prove to be just the beginning of a long period slower trade and investment growth, the outlook for the global economy as a whole is sure to be significantly worse, something that should make everyone quite concerned.