Globalization is strong now

A consensus is emerging that the world is cleaving into blocs—not only geopolitically but economically, too. In 2020, the economist Douglas Irwin wrote that “the COVID-19 pandemic is driving the world economy to retreat from global economic integration.” In the years since, how to manage this purported deglobalization has been a consistent theme at World Economic Forum meetings; in May, an Economist cover depicted a map of the world physically fracturing into competing economic blocs. The associated story presumed that deglobalization is a long-term certainty, arguing that it is becoming “visible in the economic data, as investors reprice assets and redirect capital in a less integrated world.” Last week, a Bloomberg columnist piled on, concluding that “global trade and finance are fragmenting into rival and increasingly hostile blocs, one centered on China and extending into the global South and another around the United States and other Western countries.”

But there is a problem with the assumption that deglobalization is a fact on the ground: the data does not fully back it up. As evidence of continuing deglobalization, observers often cite phenomena such as the United States’ reluctance to establish new free-trade deals, the debilitation of the dispute-settlement system overseen by the World Trade Organization (WTO), the proliferation of new national measures restricting trade, and declines in both short- and long-term capital flows from their past peaks. The COVID-19 pandemic certainly did reveal that economic interdependence carries risks, and the efforts Russia has made since 2022 to use its natural gas pipelines to influence the G-7’s response to its invasion of Ukraine—as well as the many sanctions the G-7 has imposed to try to weaken Russia’s economy—have highlighted the vulnerabilities that can arise when countries trade across geopolitical divides. But a closer look at economic data shows that even though governments have increasingly adopted policies aimed at strengthening their own resilience, the world economy is still evolving to become more, not less, globalized in key ways—and more dependent on Chinese supply in particular.

Global trade surged during the pandemic, and the world’s trade with China accelerated rather than slowed. A pandemic-era shift toward goods and away from services partly accounts for the acceleration. But the growth in trade with China also reflects the fact that China is simply producing things—high-tech exports such as electric vehicles, wind turbines, solar panels, and vital electronic and battery components—at a price point few can match. Between 2019 and 2023, China’s manufacturing surplus rose by about a percentage point of global GDP; it is now far larger than the surpluses run by Germany and Japan, the world’s other manufacturing powerhouses.

There is also less to the fall in capital flows than meets the eye. The decline in foreign direct investment (FDI) after 2016, for example, largely resulted from specific changes in tax regulations that led to a big reduction in the use of special-purpose vehicles in Luxembourg, the Netherlands, and a few other key European tax centers. And that tax simplification has not blunted one of the less savory forms of globalization: trade and financial flows that appear to serve only as a vehicle for multinational tax avoidance.