This blog accompanies my 2022 book “Understanding the New Global Economy. A European Perspective” with occasional short blog entries. The contributions are featuring new developments, actual debates, and new important analyses regarding developments in the emerging New Global Economy by connecting the reader to new and important online resources.
Globalization is not passé. It is changing its character.
2 May 2022
Peter Coy, an econ columnist of the New York Times has talked to several leading economists on the state of globalization and concludes “Globalization isn’t over. It’s changing”. In a similar vein, and against the backdrop of Russia’s invasion of Ukraine, Steven Altman and Caroline Bastion in their report on “The state of globalization in 2022” for the Harvard Business Review posit:
“Russia’s invasion of Ukraine has led to a new round of predictions that the end of globalization is nigh, much like we saw at the beginning of the Covid-19 pandemic. However, global cross-border flows have rebounded strongly since the early part of the pandemic. In our view, the war will likely reduce many types of international business activity and cause some shifts in their geography, but it will not lead to a collapse of international flows.”
The changing character oof globalization, is the major thread running through my book “Understanding the New Global Economy. A European Perspective” (see the “Introduction”of my book, available as preview on the book’s website). To summarize my take on a premature diagnosed end of globalization, let me list a few points I have made in NGE:
- The process of globalization can be understood as increasing cross-border activities, such as trade, foreign direct investment, cross-border finance, labour migration, etc. Historically, sometimes but not always all these activities increase, but mostly not in uniform.
- Since the great financial crisis, especially merchandise trade has been stalling relative to global production (though rising in absolute terms, as observed by Coy). However, stalling trade globalization is not de-globalization. Global value chain (GVC) trade is still on a high level. To understand the stalling – and thus the end of increasing trade globalization – two points are important:
- Since approximately 2008, China is increasingly sourcing inputs to its manufacturing for the global economy domestically. This is mostly so because of China’s increased production capabilities in sophisticated (electronics and other) inputs rather than the result of a political strategy (such as “Made in China 2025”), at least before the trade war with the US started under the Trump administration.
- As Harvard’s Pol Antrás has argued global value chains may only go into the reverse when shocks to the economies are permanent rather than transitory. This does not mean that de-globalization is unlikely. Rather, we need to monitor the character of shocks, like Covid-19 and the war. The longer they prevail, the more likely GVCs will be reconfigured.
- In contrast to merchandise trade, trade in intangible goods, services, data and knowledge, is on the rise, thus changing the character of globalization.
- The emergence of digital money and finance will reshape the structure as well as the benefits and cost of global finance.
- The rise of emerging economies, especially China and India, will change the way globalization will be governed at the multilateral level.
To be sure, there is no guarantee that globalization will not go into the reverse. In fact, globalization can be viewed as the outcome of economic behavior by companies and households, reacting to both technological advances and policies. They may act as globalizing (centrifugal) forces or as de-globalizing (centripetal) forces. Rather than predicting the end of globalization by extrapolating some actual trends into the future (just have a look at this Figure by Jeffery Kleintop), careful analyses of all these forces are needed.
With respect to the war, of course, political developments are key. The more determined policy makers are, and the more they convince corporations that a changed policy stance towards Russia, and probably even more importantly towards China, will be permanent, the more likely business will reshape the geography of their GVCs. In this respect the potential impact of some key points (stressed in bold letters by me) made in a recent speech of US Secretary of the Treasury, Janet Yellen, can hardly be overestimated:
“…we need to modernize the multilateral approach we have used to build trade integration. Our objective should be to achieve free but secure trade. We cannot allow countries to use their market position in key raw materials, technologies, or products to have the power to disrupt our economy or exercise unwanted geopolitical leverage.
Favoring the friend-shoring of supply chains to a large number of trusted countries, so we can continue to securely extend market access, will lower the risks to our economy as well as to our trusted trade partners. We should also consider building a network of plurilateral trade arrangements to incorporate elements of the modern economy that are growing in economic importance, especially digital services. We should harmonize our approaches to protecting the privacy of data. And a modernized trade system will also require the ability to effectively enforce trade policies and practices, both multilateral and bilateral.”
The key point is that the role of policy in reshaping globalization will increase. This can have lasting effects on the character and geography of globalization. Rather than postulating the end of globalization we need to have a close look at this emerging new global economy, and what it holds in store for the wealth of nations and people.
The war in Ukraine has suddenly increased geopolitical risks. This column argues that firms will respond to the shock by reassessing security-related risks, leading to changes in the structure of supply chains. But given the capital in place, the cost of searching for alternatives, and factors such as wage differentials across countries, this process is likely to be gradual rather than sudden and will affect different sectors and products differently. It will not result in a reversal of globalisation, unless it is supported by pronounced government intervention.