The end of Globalisation
Written by Neil Shearing,
Group Chief Economist
Last week we held a series of conferences across Europe in which we argued that globalisation has peaked – and that there is a significant and underappreciated risk that the world will start to de-globalise over the coming years. We will explore the end of globalisation, and what it might mean for the world economy and financial markets, in a series of forthcoming publications. These will be published on a new “Key Themes” section of our website, which you can access here.
The latest wave of globalisation, which began after the end of the Cold War and gathered pace throughout the 1990s and 2000s, has been a crucial influence on economic developments over the past thirty years. It has boosted economic growth, particularly in emerging markets, and has helped to lower both inflation and real interest rates in the developed world. It has also had a profound effect on how the proceeds of growth have been distributed – the integration of several billion workers into the global economy has pushed down labour’s share of income and pushed up the share flowing to company profits. The latter has provided an important prop to global equity markets, but the former has contributed to the Trumpian backlash to globalisation over the past couple of years.
One key point to emphasise is that the current wave of globalisation appears to have hit a wall well before the current trade war began. Trade of goods and services, as well as cross-border capital flows, rose sharply as a share of global GDP throughout the 1990s and 2000s but then levelled off from around 2010.
It is possible that this levelling off is just a temporary hiatus and that an unforeseen technological breakthrough will trigger a new wave of globalisation. But such waves are rare. And there are several reasons – even before we consider the trade war – why globalisation may have peaked. For a start, most economies are now extremely open and there are no new major countries left to integrate into the global economy. What’s more, new technologies have made it less attractive for firms to maintain large and complex supply chains. And governments have increasingly started to question the benefits of some aspects of the financial liberalisation that has been a central feature of the most recent wave of globalisation. China, in particular, is unlikely to open its capital markets significantly.
Reaching “peak” globalisation is not necessarily a cause for alarm for the world economy. On the contrary, the technological developments that are partly driving these trends will boost productivity growth and widen consumer choice. That said, given that the most common development path begins with labour-intensive manufacturing in sectors such as textiles, life for the poorest countries that have yet to gain a foothold on the development ladder will become more difficult. This will add to the structural headwinds already facing emerging markets.
What’s more, a more malign form of policy-driven de-globalisation – where cross-border trade and capital flows fall as a share of GDP – is looking increasingly likely. One of the key lessons from history is that it has been policy – rather than technology – that has caused globalisation to roll back.
The current most likely course of policy rollback is the trade war between the US and China. The trade war, in and of itself, is not actually that big a deal, given that trade between the US and China accounts for only 3% of total world trade. But it is a symptom of more fundamental strains in the relationship between China and the West. China’s emergence as a strategic competitor means that some form of push-back was inevitable, whoever the US president happened to be.
What’s more, there is a risk that the trade war is the start of a broader backlash against globalisation that goes beyond just the US and China. After all, globalisation has undermined the power of national governments and been blamed for rising inequality, multinational tax avoidance and unwanted migration.
While we think the likelihood of a period of de-globalisation is underappreciated, it is as yet unclear as to the exact form that this could take. At one end of the spectrum, we could see a mild form of regionalisation, in which production is clustered in neighbouring countries rather than globalised. At the other end of the spectrum, the world could spilt into competing blocs (for example, one led by the US and another led by China). In between, we could see the growing imposition of tit-for-tat tariffs by individual countries.
In most scenarios, the effects on the world economy as a whole would be negative, but manageable. A modest degree of regionalisation would not be a big problem given that a lot of trade already takes place between neighbouring countries, and regions would probably be big enough to sustain companies that achieve maximum economies of scale.
Likewise, the implications of a tit-for-tat trade war for global growth over the next decade or so would probably be small compared to the much larger challenges posed by demographics, stubbornly low productivity growth and the impotence of monetary policy.
However, the one de-globalisation scenario that is especially concerning is a deep split between China- and US-led economic blocs. Admittedly, it seems unlikely that trade and investment flows between the West and China dry up completely, in a repeat of the Cold War between the US and the Soviet Union. But a mix of restrictions on trade in specific sectors and products seems likely, as does some sort of technological iron curtain. Were this to happen, it would have a more deleterious effect on global growth, not to mention geo-political stability.
So this sets the scene for the research we will publish over the coming weeks and months. If you are interested in receiving these pieces, then email here. And regular readers should continue to monitor the new “Key Themes” of the website. Globalisation has peaked and may now be rolled back – understanding the implications for the world economy and global asset markets will be essential in the years ahead.