Reeling in the Line: What Will a Deglobalized Future Look Like?
In the last couple of years, the portion of macroeconomic and geopolitical issues discussed at the dinner table has become almost indigestible. We have seen drastic market downturn due to supply chain issues, the Russia-Ukraine War, US-China tensions, and inflation. But what does this mean for our highly integrated world economy? It represents key events leading to further deglobalization. In fact, globalization peaked during the Global Financial Crisis and has been trending downwards since.
For all stakeholders, current events have undoubtedly demonstrated weaknesses in our global trade system that must be mitigated. However, how the future will play out—and what levels we should resort to—is impossible to guess. To digest this dense topic, we will break it down into four stages and envision the global trade system as a fisherman’s tale.
Casting the Reel - The Rise of Globalization
At its core, globalization is about our world economy branching out and becoming more interconnected. It enables the cross-border flow of people, culture, goods and services, and investment. As an economic concept, globalization has allowed firms to break the lid off growth ceilings and become multinational players that utilize other countries to gain a competitive advantage. This has been achieved most notably by firms in developed nations taking advantage of cheap labour and resource access in developing counterparts. But how did we get here?
Global trade can be traced back to the creation of the Silk Road in the 1st century BCE and grew to see significant rise during the age of discovery. However, economic trade still represented a small portion of total GDP and was not yet globalized. True globalization boomed following the first and second industrial revolutions, where technological, transportation, and communication advancements made it extremely lucrative for firms to operate on a global scale. For our fisherman, these resource advancements bestowed the ability for the cast to reach further and deeper waters—benefiting both himself, his customers, and the entire ecosystem.
Benefits of the Sea - Transitioning into Hyperglobalization
Just as globalization boomed following the ends of WWI and WWII, the collapse of the Soviet Union and end of the Cold War era in 1991 led to the region’s reintegration into the global economy. In 1995, the decades long General Agreement on Tariffs and Trade (GATT) was revised to become the World Trade Organization (WTO), further opening international waters for the benefits of the sea. As a platform that helped lower and uphold trade barriers, the WTO’s establishment significantly boosted international trade, primarily driven by emerging markets.
Specifically, the shift towards hyperglobalization is heavily attributed to India and China’s accession into the WTO in 1995 and 2001, respectively. For China, the US predicted the inauguration of the emerging market to be a catalyst for increased political alignment through a shift towards a more democratic nation. However, time has proved that the West’s hope has been largely uncaptured, a topic to be discussed later. What did follow was ‘Made in China’ goods resulting in cheaper import costs, corporate profits skyrocketing through greater access to the rising power, and a lift of 800 million Chinese from poverty. While poverty lifts have been globalization’s biggest triumph, the era of hyperglobalization magnified criticisms of the concept. This is because while developed countries have mainly benefited from increased globalization, their key blue-collar industries saw significant job losses to rising markets. This can be evidenced by ~6 million job losses in US manufacturing from 1999 to 2011. Just as overfishing poses substantial risks, so does globalization, seen by its impacts at deeper levels.
Deeper Waters - Post Financial Crisis Reversal
Due to record levels of economic globalization in the mid-2000s, what began as a domestic US financial crisis, underpinned by other factors, triggered the worldwide great recession. Both high foreign portfolio and direct investment in the United States elevated ensuing credit crises. This ultimately led to a liquidity crunch whereby cross-border commercial and financial flows reversed. Following past recessions, like the early 80s energy crisis and the 2001 dot-com burst, globalization continued advancing. However, the global exposure to this crisis and subsequent shifts in political rhetoric made the great recession a turning point for globalization.
Particularly, the European Sovereign Debt Crisis, caused by both the great recession and Iceland’s banking system default, affected several EU countries. Greece, which was hit the hardest, received bailouts contingent on mandated austerity measures to balance budgets (cutting spending and increasing taxes). Greece’s economy shrank 25% during this period and had its debt hit junk status at one point.
The implementation of austerities by the EU contributed to long-growing nationalism and Euroskepticism amongst groups in the UK. Considering other factors, this led to the 2016 referendum resulting in Brexit. For globalization, Brexit marked a reversal in trade openness, labour movements, and immigration policy. In fact, citizens that supported leaving the EU were the ones most impacted by globalization’s outwards shift of domestic industries. With further economic and political sovereignty on the horizon for the UK, populism and nationalism were also manifested across the Atlantic Ocean.
For the US, Trump’s rise into power rang a similar tone. Put simply, his stance on globalization was that “the men and women of this country who have been forgotten will never be forgotten again.” Trump’s protectionist sentiment was so strong that even for US companies operating abroad, the message was a ‘call to arms’ back home or ‘suffer the same consequences as international competitors of increased tariffs. With the executive power at his helm, Trump followed through on his campaign promises by increasing tariffs on imports from multiple trading partners. This led to trade deal renegotiations and retaliatory tariffs from countries such as China. Think of this like a fisherman bringing his boat back to coast. With the symbolic fisherman now being Trump, he did not like the effects and security risks of fishing deep out in international waters. To protect his home customers, he turned inwards and fought the currents head on. Did Trump really reach safer waters though? Most economists argue no; the trade war was a net negative for US citizens and industries. While thousands of jobs did get created in manufacturing sectors, US firms both domestically and abroad joined international competitors in having their costs increase. This trickled down to US consumers, who paid from $340 to $970 more annually for goods and services during the trade wars. After all, voluntarily reversing global integration certainly comes with suffering. Though at the start of the new decade, a tidal wave that no one saw coming assailed our globalized fisherman.
Reeling Back the Line - Moving Forward
The last few years have had a significant impact on global trade. Before looking into the key events of our current times, let’s take a step back and visualize our discussion on globalization’s rise and reversal.
Exhibit 1: Global Merchandise Trade as a % of GDP over the past 60 years. Source: The World Bank
To start with our current times, the Covid-19 pandemic acted as a stress test to our modern cycle of globalization. Its results have been a resounding failure. As we know, wide-scale imports from efficient and emerging markets have been a net positive. However, a macro issue as large as Covid-19 has redefined this:
Over-reliance on imports from efficient and emerging markets demonstrate massive risks.
So, it was no longer about populism—leaders from across the globe began echoing the importance of protected supply chains—whether through diversification, domestication, or both. For healthcare sectors, increased domestication has clearly been the case. However, the same is not true for most other industries, given the cost increases at multiple levels. To address supply chain issues, some industries solutions have included supplier diversification and inventory overstocking. This has created a much more feasible resiliency solution for the short to mid-term.
While the pandemic was primarily about supply chain issues, the following crisis in the Russia-Ukraine War brought key supply chain cutoffs to food and energy. Trade relations with the West rapidly resorted to Cold War levels as company pull-outs, sanctions, and other financial weaponization tactics hit Russia hard. Both energy and food prices have soared in most of the world. Many economists believe this is the conflict that has dealt the biggest fracture to global integration and is furthering the creation of two economic blocs, ‘US’ and ‘China’.
As seen in the background on the Trump Trade Wars, economic and political tensions between US and China have been elevated in recent years. China is pushing for an ‘economic rebalance’ where they shift away from their ‘world factory’ export model, which has become unsustainable due to deglobalization and protectionist trends in the post-financial crisis world. In fact, since its 2006 peak of exports accounting for 36% of GDP, a decline of 16% has been seen through 2021. To regain this loss in GDP growth, China is looking to rely more on internal demand from home consumers.
The extent to which this self-reliance strategy can actually be captured will be increasingly important over the mid-term as political tensions between the US and China are rising. This is largely due to the US’s re-established commitment to Taiwan remaining self-sustaining and democratic. To protect from what the future may hold, the US is furthering their push to reshore manufacturing through the recent US CHIPS & Science Act—which will invest billions in semiconductor R&D to gain the edge on one of the most important industries for national security. For US firms operating in China, Apple has taken a first-mover stance as they push to reduce their reliance on Chinese manufacturing and increase investment in plants located in India.
For our fisherman, a shake in the ocean floor has alerted that a tidal wave is coming. While the scale remains to be seen, he does not want to stick around and find out. While the world will still depend on him maintaining his flow of trade, a new balance between global integration and self-reliance must be set. Many believe the best course of action is to continue reeling in the line and go closer to home to find safer waters.