LONDON- The end of the era of untrammeled globalization is a net negative for the world economy. Economic downturns, a global pandemic and the outbreak of war have hit international commerce. Geopolitical tensions have spawned new tariffs and nationalistic industrial policies. In aggregate, the process of deglobalization will make economies less efficient. Yet some countries, commodities and manufacturing workers are likely to benefit.
Globalization has had an amazing run. Over the past seven decades, the world economy has grown 14-fold, powered by a 45-fold expansion in global trade, according to the World Trade Organization. That process yielded tangible gains for developing countries, whose share of world output rose from 24 percent in the 1980s to more than 43 percent in 2020. Meanwhile, rich economies enjoyed an era of low-cost production, cheaper consumer goods and negligible inflation. Yet over the past 15 years that process has stalled. World trade as a percentage of GDP peaked at 61 percent in 2008. In July, trade recorded its biggest year-on-year fall in almost three years, according to the Netherlands Bureau for Economic Policy Analysis.
Though the trade reversal started during the recession that followed the 2008 financial crisis, other factors are erecting new barriers. The first is rising geopolitical tensions between the United States and China. Co-operation between the world’s two largest economies is fraying. When Joe Biden calls his Chinese counterpart Xi Jinping “a dictator”, as the US president did in June, and Beijing actively seeks to forge new alliances against the United States, it is no wonder that companies and portfolio managers are rethinking bilateral commerce.
The tariff war between Washington and Beijing that started in 2018 is compounding the problem. Optimists point out that, despite the tit-for-tat import taxes, bilateral trade flows reached a record high of $691 billion last year. But those volumes were boosted by inflation and masked large changes in the composition of trade. US imports from China fell from 21.6 percent to 16.5 percent of the total between 2017 and 2022 and are now back at 2007 levels, according to a recent paper by economists Caroline Freund, Aaditya Mattoo, Alen Mulabdic and Michele Ruta.
Wariness of being too dependent on cross-border suppliers is also spawning new national industrial policies. Last year’s $430 billion Inflation Reduction Act and the $53 billion CHIPS and Science Act put the United States at the forefront of a subsidy race to attract technology investments, fund the green transition and revamp the country’s battered manufacturing base.
At the same time, China has deployed state aid to boost production of electric vehicles, supporting national champions such as carmaker BYD and battery manufacturer Contemporary Amperex Technology That sparked a strong reaction from European Commission President Ursula von der Leyen, who announced a probe into the Chinese practices last month.
A near-total reversal of deglobalization would see world imports plummet by up to 30 percent , according to a European Central Bank study. That’s unlikely. The retrenchment is probably going to be gradual: global trade was still worth 57 percent of world GDP last year. But it’s already throwing up some new winners.
Start with countries. As China’s share of imports into the United States has fallen, others have inserted themselves into supply chains. Vietnam’s share of US imports doubled to 4 percent between 2017 and 2022, according to new research by academics Laura Alfaro and Davin Chor. Taiwan and Mexico have also gained from US eagerness to draw more goods from nations that are geographically or politically close. Vietnam increased its share of US imports in electronics, apparel and textiles, the researchers found, while Mexico did well in auto parts, glass and steel.
To be sure, such diversification may be less radical than it appears, as these new manufacturing hubs still rely heavily on Chinese-made goods. Vietnam, for example, got 40 percent of its goods from the People’s Republic in 2022, up from just 9 percent in 1994. In the same period, the share of Mexico’s imports from China went from 1 percent to 20 percent.
