Globalization is not receding---empirics prove their evidence is hype

After two and a half years of a pandemic that has exposed the fragility of global supply chains and eight months of war in Ukraine that has severed economic ties between Russia and the West and disrupted global food and energy markets, the world seems to be at a turning point. Globalization, many claim, is receding. A growing number of analysts now argue that much as World War I and the 1918 influenza pandemic brought an end to the first great era of globalization, the combination of Russia’s war in Ukraine, COVID-19, simmering populism, and geopolitical competition between the United States and China has kicked the second great era of globalization into reverse. “This new cold war marks the end of the era of globalization and integration that has shaped the international system since 1989,” the journalist Fareed Zakaria wrote in mid-October.

Prominent investors and policymakers agree. Larry Fink, the CEO of the asset management firm BlackRock, wrote to shareholders in March that the war in Ukraine had “put an end to the globalization we have experienced over the last three decades.” And at the World Economic Forum in Davos in May, International Monetary Fund Managing Director Kristalina Georgieva warned of a coming “geoeconomic fragmentation.” Countries and companies, she said, are “re-evaluating global supply chains” and undoing decades of integration.

Yet globalization has been pronounced dead many times before: after the global financial crisis in 2008, after the Brexit referendum in 2016 and the election of Donald Trump later that year, and after the outbreak of the COVID-19 pandemic in 2020. That none of these predictions has come to pass should give analysts pause about predicting deglobalization once more. Rather than the end of economic integration, the world is experiencing a geopolitical recession that has left globalization adrift.

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Those proclaiming the demise of globalization as it was once known are not totally wrong. It is true that the era of “hyperglobalization” that lasted from the 1970s to the 2008 global financial crisis, during which a hegemonic United States drove a top-down process of trade liberalization and global integration, was a unique historical episode. That era is now dead and buried along with globalism, the ideology that propelled it, and unipolarity, the international order that upheld it.

An increasingly inward-looking United States no longer has the political will to serve as architect and guarantor of the world economy. China, meanwhile, is beset with structural economic challenges that limit its ability to promote its own order by means of trade access and investment policy. And no other country or group of countries has the capacity to fill the void.

But that does not mean that globalization is ending. Such an outcome would require the United States to actively turn against economic integration. Bombast aside, that did not happen under Trump, and it is not happening under U.S. President Joe Biden. Rather, the United States has simply stopped leading the drive for ever-greater globalization. This leadership vacuum has resulted in the fraying of the “governance of globalization,” as the former World Bank President Robert Zoellick has put it. But globalization itself is not fraying—it is simply adrift. It is less coordinated, deliberate, and efficient than before but still in most countries’ interest given how much worse the alternatives are.

A look at economic data belies the notion that globalization is reversing. Even as global capital flows relative to GDP have moderated since their peak in the middle of the first decade of this century, cross-border investment has continued to grow and financial market returns have remained highly correlated globally. Worldwide merchandise trade is near all-time highs, having surpassed pre-pandemic projections already this year. Multilateral trade negotiations have stalled, but new trade deals continue to emerge, including the Regional Comprehensive Economic Partnership between 15 Asia-Pacific nations and the 11-member Comprehensive and Progressive Agreement for Trans-Pacific Partnership. The number of regional trade agreements in force has grown continuously since the 1990s, more than doubling since 2008.

Trade in goods has slowed relative to global output since 2008, but even this shift does not signal deglobalization. To the contrary, the plateauing of the global trade ratio is partly a side effect of economic development—a sign of globalization’s success. Take the example of China, which has seen its ratio of trade to GDP decline by nearly 30 percentage points since 2006 and which, by virtue of its size, has been the biggest contributor to the slowing worldwide trade-to-GDP ratio. As the country has grown richer and its economy more complex—owing to market reforms and integration into global markets—China’s growth model has shifted away from exports and toward domestic consumption and investment. At the same time, domestic demand has shifted away from goods and toward services, which are traditionally less tradable. China has also moved up the value chain, manufacturing fewer cheap consumer goods and more advanced intermediate inputs, and now produces a greater share of the value of its exports domestically. Because of rising incomes, Chinese labor is more expensive as well, making the country a less desirable manufacturing hub and eliminating one of the country’s key competitive advantages. And finally, China has already exploited and exhausted most opportunities for trade liberalization and integration into global value chains, meaning that it has less room to globalize further.

None of these trends constitute disintegration or retrenchment. Rather, they reflect the fact that globalization has diminishing returns, and not just for China. Now that most countries are already relatively well integrated into the global economy, the world as a whole has less to gain from additional globalization. In general, as once closed low-income economies integrate into global markets and grow wealthier and more developed, they become more self-sufficient. China and many other emerging-market countries that globalized in the last half century now produce more of what they consume, consume more of what they produce, and produce more of what they produce. This shows up in the data as a decline in global trade intensity, but it is a sign of progress, not of deglobalization.