Globalization: Is it Down for the Count?
The COVID-19 crisis exposed critical issues with today’s globalized economy and resulted in new fears about what it means to depend on others, especially when the going gets tough. With an inward turn in certain segments of the global economy under way, it’s reasonable to question modern globalization as a concept.
But globalization is unavoidable, in my view. More than ever, the world economy is intertwined, beholden to trade flows, investments, technology and people crossing borders. In an era of rapid innovation, the need to stay competitive will continue to connect the economies of far off places. That means even minor deglobalization activity can cause meaningful economic damage. Pre-COVID, the U.S. exported $2.5 trillion of goods and services each year, supporting the best-performing 12% of our economy.1 Large scale deglobalizing would put these profitable relationships in jeopardy.
Geopolitics, Technology and Cheap Labor Shrunk the Globe
The world got a lot smaller between 1980 and 2008. Economic integration rose to unprecedented levels as emerging economies like China and India opened up to trade. Democracy taking hold in Eastern Europe, highlighted by the Berlin Wall’s fall and the Soviet Union’s collapse, added to the openness.
However, advancements in information and communication technology, as well as cargo container transport, soon established new global supply chains. These innovations shrunk the world and brought modern society to previously closed off economies. In the mid-’90s, I saw first-hand what it meant to be closed off from the world while working in post-Soviet era Ukraine as a member of the Peace Corps. There, I found a society seemingly frozen in time, with economic development stuck in the 1950s and innovation among the scarcest of resources.
As the world grew increasingly connected, it also demanded new corporate strategies. With untapped economies open for business, companies from developed economies like the U.S. went in search of deals to gain an edge and outcompete their peers. Those deals often meant moving large shares of their manufacturing to developing countries with cheaper labor and minimal regulations.
The Financial Crisis: A Globalization Inflection Point
The unequal economic recovery from the 2008 financial crisis is core to the current deglobalization movement. Rising inequality spurred the growth of nationalism globally. In the U.S., the unexpected election of Donald Trump and the protectionist bent of his administration contributed to the growing nationalist wave. Thereafter, all roads led to a somewhat predictable U.S. trade conflict with China, the longtime face of globalization.
While some of the Trump administration’s negotiation tactics haven’t been ideal, the rationale to renegotiate longstanding trade policies with China has merit—and bipartisan support—in the post-financial crisis economy. If the damage from the financial crisis and the ripple effects of the U.S.’ trade war with China didn’t get policymakers and business leaders around the world rethinking supply chains, COVID-19 did. The pandemic brought with it national security concerns, including the availability of basic necessities like food and medical equipment. The result is increased interest in homeward bound economics. For example, potential beneficiaries of this production shift are robotics and automation companies, as manufacturers increasingly leverage the cost-effective labor of mechanized workers.
Deglobalization Isn’t New
Globalization went through a meaningful reversal from 1914 to 1945. Interestingly, some of the forces at play then were eerily similar to what we’re dealing with today. Economies and growth sputtered from the fallout of World War I, the 1918 pandemic, immigration restrictions, monetary crises, the Great Depression, increased protectionism, and World War II. Prior to this slowdown, during the period between 1870 and 1914, the U.S. saw gross domestic product (GDP) per capita growth of 3.4% per year. From 1914-1945, per capita GDP growth faltered to 3.3% despite numerous technologic advancements and wartime mobilization as The Great Depression swept over the world. Western Europe experienced a similar drop in productivity during the interwar period, with the UK, France and Germany averaging annual GDP per capita growth of 0.08%, before bouncing to 6.6% during the post-war rebound of 1945-1980.2
Such inward turns are understandable. Economic self-reliance is a noble pursuit. No one wants to get caught without. Today, in the face of this global health crisis, that desire is driving the re-nationalization of many key products, including pharmaceuticals and communications technology. Production of more consumer-targeted products is shifting away from China towards countries like India, Malaysia and Vietnam.
Increased awareness about Environmental, Social and Corporate Governance (ESG) factors also plays a role in the current deglobalization trend. Issues that were largely overlooked when considering China for production are now dealbreakers for many companies—not to mention their customers and shareholders. Human rights violations are a long-term issue, as are information security and intellectual property. With the international community paying greater attention to these concerns, public pressure and consumer choice may force corporate hands.
Conclusion: Globalization Too Profitable to Give Up
Fear about economic dependence on others growing has the world economy deglobalizing. But globalization isn’t going away. International economic connections are too profitable to be completely removed, and technology makes it easy to generate new revenue streams far from home. Rather, globalization will evolve as economies respond to changing market dynamics. The pull of home is undeniable, but so too is the desire to find new opportunities, many of which are readily found in this still-connected world.