July 8, 2022

News in Charts: How globalisation has stumbled

by Fathom Consulting.

The views expressed in this article are the views of the author, not necessarily those of Refinitiv Lipper or LSEG.

One of the things that economists (mostly) agree on is that more trade is good. This view underpinned the rise of globalisation between the ‘90s and early ‘00s. In those years policymakers became complacent due to the successes of globalisation and allowed problems at society level to brew. We are now experiencing the consequences of the policy mistakes made during those years.

The shift towards an integrated global economy and away from the dominance of individual national economies, which was set in motion after the Soviet Union’s collapse, is now faltering. The share of global trade in GDP, one measure of globalisation, increased steadily during the three decades ahead of the Great Financial Crisis (GFC) of 2008-09 but has stalled since then. Its rise was interrupted first by the GFC, then by sluggish recovery, then by the Sino-US trade tensions, then by the supply-chain disruptions triggered by the pandemic and, most recently, by the impact of the Russo-Ukrainian conflict.

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Economists generally agree that globalisation boosts growth. This is because increased trade and other cross-border flows help the global economy to exploit the underlying patterns of comparative advantage, prompting nations and regions to specialise in the sectors in which they relatively excel. So, for example, countries where labour is cheap and plentiful should specialise in labour-intensive industry; countries where capital is relatively cheap and plentiful (including intellectual capital) should specialise in industries that make intensive use of that capital. Globalisation facilitates this kind of specialisation, making all countries better off as a result.

With foreign revenue representing more than half of their total revenue, US corporate giants certainly were one of the main beneficiaries of the rise of globalisation. In addition to fewer trade frictions, the rise of globalisation brought about the spread of technological advances that enabled information, ideas and culture to reach all people almost instantly. This proliferation of the spread of information and ideas, along with the lowering of entry barriers to national economies, aided corporates to tap foreign markets.

 

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Globalisation has enabled poorer nations to grow much faster than they otherwise would have done. In this sense, it has reduced inequality between countries. China, for example, leveraged its competitive advantage (its abundance of cheap labour, originally employed in low-paying rural jobs) to dramatically increase its average living standards since its accession to the World Trade Organisation (WTO) in 2001.

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Not everyone has benefited, however. Offshoring meant that the wages of lower-skilled workers in advanced economies were suppressed. Moreover, while skilled labour, large corporations and the owners of capital were rewarded by globalisation, increased income at the aggregate level was not redistributed sufficiently by governments in the advanced economies to compensate lower-skilled workers. As a result, the labour share of income has fallen significantly across the G7 countries since the early 1990s. In this sense, globalisation can be thought of as having increased inequality within countries. It should be noted though that this is a policy choice — since globalisation made advanced economies better off at the aggregate level, increased inequality and the depressed wages of some workers represents a failure of policy to evenly distribute the additional income.

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Resentment at stagnating income and jobs offshored to China was compounded by the sense of unfairness arising from the lack of reciprocity (i.e., the unwillingness of China to open its markets to non-Chinese firms) and a perceived threat generated by the successes of China. Particularly in the US, the widening trade gap with China and job losses to offshore markets provided the excuse to blame globalisation. The result is the (now bipartisan) decision by the US to roll back some aspects of globalisation by imposing tariffs on imports.

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Since then the pandemic has given us all a taste of what serious disruption to global supply chains is like, aggravating the steepest global recession in recorded economic history. Consumer preferences changed during that period, shifting from consumption of services to consumption of goods — a shift that in some cases may become permanent: for example, in lower demand for public transport as workers are commuting less. The shift in consumption has put even greater pressure on global supply chains which have not yet recovered.

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Finally, the Russo-Ukrainian conflict struck another blow to supply chains, and essentially to globalisation, through its impact on global fuel, food, and metal prices. More alarmingly, it has served to emphasise that with globalisation now on the back foot, spikes in geopolitical tensions may in future become more frequent.

To summarise, more trade is indeed good, and it has contributed to the levelling up of poorer countries — even with all past setbacks, global gross national income per capita is the highest it ever been ($12,070 in 2021). But globalisation does have side effects — for advanced economies, it has tended to lead to an increase in inequality. Policies that facilitate re-distribution of the trade benefits could have dealt with this issue; but failure to implement such policies has led to dissatisfaction with the current, highly-globalised world, and to the rise of anti-globalisation populist movements. As a result, it seems like globalisation will remain on the back foot for the foreseeable future.

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