Is Globalisation over?
“geopolitics is definitively moving against globalization — toward a world dominated by two or three great trading blocs.” This broader context, and especially the invasion of Ukraine, “is burying most of the basic assumptions that have underlain business thinking about the world for the past 40 years.”
John Micklethwait and Adrian Wooldridge,
Twenty-five years ago, as globalization was growing, many believed inflation would fade away due to cheap imports from China and new technology that kept prices low. Now this trend ending. He explained that blocking the cheapest suppliers raises costs.
The signs have been visible for a while. Events like Donald Trump's presidency, Brexit, and the Covid pandemic raised concerns about free trade. Trump's "America First" approach sparked a trade war, leading to tariffs on Chinese goods. In 2019, the Brookings Institute reported that the US government collected $79 billion in tariffs, double what they had two years earlier. Brexit also complicated trade with the EU through customs checks and added costs for importing and exporting.
These events showed how global trade functions. In the UK, car manufacturers noted that the just-in-time supply chain relied on smoothly moving parts across the Channel.
However, it was Covid that truly highlighted the importance of international trade. Lockdowns left container ships stranded in ports, and once economies reopened, those ships couldn't get to their destinations quickly. Freight costs soared, sometimes quadrupling, which led to delays and raised doubts about long supply chains, even if they were cheap.
In recent decades, global politics has created significant social inequality. In many nations, educated urban elites have gained control over media, education, culture, and political power. As a result, many people feel ignored and looked down upon. This discontent has led to the rise of populist leaders such as Donald Trump in the U.S., Narendra Modi in India, and Marine Le Pen in France.
At the same time, authoritarian leaders like Putin and Xi Jinping have taken this resentment to the global stage. They view the West as a group of global elites and openly challenge them. Putin recounts stories of Russia's humiliation by the West in the 1990s, promising a revival of Russia's greatness and its importance in world events.
Chinese leaders discuss the “century of humiliation,” criticizing how Westerners impose their values on others. Despite the possibility of becoming the largest economy, Xi still frames China as a developing nation.
Many people feel a strong connection to their communities and countries. However, over the years, many have sensed that their hometowns are being neglected and their national pride is under threat. During the height of globalization, multinational organizations and global companies began to overshadow nation-states.
The world is moving apart rather than coming together. Globalization is slowing down and, in some cases, reversing. Russia's invasion of Ukraine illustrates this shift. While Ukraine's resistance to authoritarianism inspires many in the West, much of the world remains indifferent or even supportive of Putin.
According to The Economist, from 2008 to 2019, global trade relative to world GDP dropped by about five percentage points. New tariffs and trade barriers have emerged. Immigration rates have decreased, and long-term investment flows fell by half between 2016 and 2019. The reasons for this trend away from globalization are varied. The 2008 financial crisis made global capitalism look less legitimate to many people. China's approach shows that mercantilism can be an effective strategy. Various anti-globalization movements have gained traction, including those from Brexiteers, nationalist groups, populists, and the anti-globalist left.
Currently, global conflict is more prevalent than it was during the brief period of stability in the 1990s. Trade, travel, and communication between political groups have become more complicated and contentious. Many companies have pulled out of Russia as the West reduces its ties to Putin's regime. Western consumers are wary of trading with China, given the allegations of forced labor and genocide. Many business leaders are reconsidering their operations in China due to increased hostility from the government and the risk of unstable supply chains. In 2014, the U.S. blocked Chinese tech firm Huawei from government contracts. President Biden has reinforced “Buy American” policies to encourage domestic purchasing.
The world economy appears to be dividing into distinct zones, mainly a Western zone and a Chinese zone. Five years ago, nearly $30 billion in foreign direct investment flowed between China and the U.S. Now, that figure has plummeted to $5 billion.
Morris Chang, the legendary founder of Taiwan’s (and the world’s) leading semiconductor producer, proclaimed that “globalization is almost dead.” In a world where supply chains have been disrupted by COVID-19 and the deepening Sino-American rivalry, other commentators have echoed this view, and many companies have begun “on-shoring” and “near-shoring” their procurement of goods
However.
The US has put new restrictions on the trade of certain sensitive goods with China. As a result, imports from China have only increased by 6% compared to pre-COVID levels, while imports from Canada and Mexico have surged by over 30%. This suggests that regional trade is recovering better than global trade for the US. However, a closer look reveals that China's share of US imports fell from 21% to 17% between 2018 and 2022, while imports from Vietnam, Bangladesh, and Thailand grew by more than 80%. These statistics indicate that globalization is not dead.
It is important to note that much of this increased trade with Asia involves indirect connections to China. The US and its partners are still more reliant on the Chinese economy than they were on the Soviet Union during the Cold War. For example, Western nations can limit security risks by excluding Chinese firms like Huawei from their 5G networks without completely dismantling global supply chains.
Even if rising geopolitical tensions reduce economic globalization, countries will remain interconnected through environmental issues. Problems like pandemics and climate change follow biological and physical laws, not political ones. No nation can tackle these challenges alone. Emissions from China can cause severe weather changes or rising sea levels in the US or Europe, and the same is true in reverse.
The costs linked to these issues could be significant. Scientists estimate that both China and the US experienced over one million excess deaths due to the COVID-19 pandemic that started in Wuhan. This situation partly stemmed from a lack of cooperation between the two nations. Addressing climate change or future pandemics will require an understanding of global interdependence, even if it is uncomfortable.
Technological advancements continue to drive globalization by diminishing the importance of distance. This trend is unlikely to change. Globalization is not finished; it may just take a different form than what we expect.