Like it or not, we live in a globalized economy. How you define or measure globalization can vary, but it tends to mean greater financial integration among countries, as well as more political cooperation, immigration and trade of goods and services. In all these domains, globalization has been on the rise until recently.
Economists, pundits and politicians are arguing that globalization has peaked and will now start to reverse. Historian Niall Ferguson sees this period of globalization, thanks to the COVID-19 pandemic, fading away with a whimper. Harvard economist Dani Rodrick is announcing the end of neoliberalism.
However, globalization is not a phase; it is a force that cannot be stopped.
Illustration: Mountain People
There was a concerted push toward more global integration throughout the era following World War II. As the war ended, the global community created several large institutions — the IMF, the World Bank, the UN and the like — to facilitate more cooperation and trade and avoid the mistakes of the past.
However, globalization really took off after the fall of the Berlin Wall.
The end of the Cold War, improving technology that facilitated trade — especially of services and information — and an intellectual environment, such as the Washington Consensus, favored all things global.
Countries dropped tariffs allowing more capital and goods to move across borders than ever before. You can see this in the KOF index of globalization, which includes various measures of economic and political integration.
However, if you look closely at the index, there has been a slowdown in the pace of globalization over the past decade. It peaked in 2008 if you measure it as trade as a percentage of GDP.
The past few years caused us to question the value of globalization. It delivered on many of its promises: More than a billion people no longer live in poverty. Goods and services are much cheaper and diversification has made the economy less risky.
However, there were also problems. Bringing billions of lower-paid workers into the global market quickly displaced many people in richer countries from their jobs and worsened inequality within countries. Dollarization meant some developing countries faced currency volatility as foreign investors pulled their money out at the first sign of trouble.
It is therefore no surprise that there has been a backlash against globalization accompanied by policies to slow or even reverse it. The pandemic, which led to shortages when trade slowed, only added to the disenchantment with globally integrated supply chains. Both sides of the US political spectrum are pushing for industrial policies that subsidize more domestic manufacturing of certain goods. There are more tariffs on some goods and restrictions on capital. The IMF, once globalization’s biggest champion, now endorses capital controls.
The outlook appears even more dire. China’s once unstoppable economy — a big force in globalization’s rise — is not looking so good. The world might not be able to count on China for cheap and plentiful goods anymore. Meanwhile, the rising US dollar and interest rates would put pressure on emerging markets, which would make them even more skeptical of global markets.
Nothing lasts forever. Human progress stumbles and can stall. Yet globalization is not going anywhere. First, it is too hard to unwind many of these relationships. We are all in bed together, assets and commodities are still priced in dollars and foreigners still own a lot of US debt. Manufacturing depends on intermediate goods made all over the world that are not only cheaper, but made with skills the US does not have anymore. Its attempt to re-shore semiconductor manufacturing illustrates why industrial policy is much harder than it looks and is not a good solution to structural job loss.
Second, the benefits from globalization are too good to walk away from. Many people no longer live in poverty and the world has become accustomed to cheaper stuff.
We are seeing how disruptive and painful the return of inflation has been both economically and politically. Deglobalization would make inflation much worse, and no one wants that.
It turns out politicians are quite flexible on their policy views if it can deliver cheaper prices — see phasing out fossil fuels. Big talk on a retreat from globalization might be the next populist position to fall.
The economic and political trends that threaten globalization need not be so ominous. Ken Moelis, founder and chief executive officer of Moelis & Co, is concerned there will be a pullback on globalization because the war in Ukraine exposed how vulnerable we are to foreign countries. In reality, it only shows how risky it is to depend on any one country, including your own.
Countries need more diversification when it comes to where they get their goods and commodities, not less. We might not be able to depend on China with its aging population and uncertain economic future, but more production might come from countries on the African continent, those that can still benefit from more economic integration.
Globalization is far from perfect, but on balance it does make our lives better. New tariffs and industrial policies will take us a few steps back toward protectionism, but more trade can relieve pricing pressure and maintain the momentum toward more integration.
The tone of discourse about globalization might have changed, but the genie is out of the bottle and cannot be contained.
Allison Schrager is a Bloomberg Opinion columnist covering economics. She is a senior fellow at the Manhattan Institute. This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
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