13 September 2022
In this article, we discuss the political and economic factors that are reshaping the agenda on globalisation and whether this could herald the start of a new era, which is less accommodating for free trade and capital flows which have driven globalisation for much of period since the Second World War.
Setting the scene
Globalisation has been the defining theme of the post-World War Two international order, having grown over decades due to a combination of technological advancements, multi-lateral treaties and public policy changes, ushered in by intergovernmental organisations and the spirit of international cooperation.
While there are many aspects of globalisation, including labour migration, knowledge sharing, and international capital flows, the factor which is most readily identifiable has been the increase in the flow and trade of goods and services.
We can quantify the trend of globalisation by highlighting how global trade as a share of world gross domestic product (GDP) has grown in a historical context. Shortly after the fall of the Berlin Wall, which paved the way for the reunification of Germany after more than 40 years of political and economic division between Western and Eastern Europe, global trade as a share of GDP rose from 39% in 1990 to 61% by 2008 (World Bank ) This acceleration in global trade flows fuelled the development of trading relationships, propelling a period of rapid expansion in the world’s emerging economies, particularly China which became a global manufacturing hub.
Post the GFC in 2008-2009, there is some evidence that countries started turning inwards, triggering concerns for the future of globalisation. While some would argue that world trade was stalling post the GFC and prior to the Covid-19 pandemic, it is important to consider the volume of global trade, since the value of trade can be impacted by many factors. For example: the appreciation of the US$ weighing on the dollar value of trade, or the decline in the trade in oil internationally, as the US has become more self-sufficient as an oil producer. Accordingly, it is more meaningful to focus on trade volume as an indicator of the trend in globalisation.
World trade volume rebounded sharply from the disruptive impact of the GFC, and after the outbreak of the COVID-19 pandemic in early 2020. In both cases, world trade volume re-established earlier growth trends as the GFC eased going into the start of a new decade in 2010, while activity swiftly recovered after the leading economies emerged from lockdown in the second half of 2020.
Politics rears its head
Globalisation is often viewed as an economic concept, but more recently it has been politics that has defined and shaped economic policy. If we look at the world’s two largest economies, the US and China, the geopolitical climate between these heavyweights now sets the tone for the world economy in the twenty first century.
The election of Donald Trump as the 45th President of the United States in 2016, ushering in a series of protectionist trade policies with the rallying cry of ‘America First’, heralded a significant shift in geopolitical relations. President Trump launched a trade war against China, culminating in a range of tariffs imposed on 66% of Chinese exports.
The rise of populism and economic nationalism has now become a rallying cry for many politicians across the globe, not least in Europe where the war in Ukraine has only added to concerns over protectionist trade measures and the impact of sanctions on trade volumes. This has raised the possibility that we are now entering a multi-polar world, divided between the US and its allies, and less savoury regimes.
These concerns are highlighted in Chart 2, where we can observe that in the very recent past the number of protectionist trade measures introduced globally has increased and accelerated post 2017, as populist policies are becoming more common around the globe.
Chart 1 – Trade Measures Introduced Globally (2009-2020)
Source: Global Trade Alert Database, United Nations May 2022
The onset of ‘slowbalisation’
Between 1970 and 2008, world exports as a share of GDP rose from 13% to 31%, however since 2008, Chart 2 highlights that exports as a share of GDP have flat lined. This has led some commentators to dub the 10 years since the end of the GFC as the decade of ‘slowbalisation’.
Chart 2 – Global Exports as a Percent of Global GDP (%)
Source: World Bank
While increased levels of trade protectionism have played their part, the slowdown of globalisation cannot solely be attributable to these measures. Other factors have also combined to put the brakes on growth in world trade.
We can identify several key factors that have played their part in this deceleration, including:
- Relative shift from manufacturing to services – as household disposable incomes rise, economies mature and this has facilitated a shift towards income sensitive services rather than durable goods. The provision of services is by its nature inherently less global in nature.
- Gains from offshoring to cheaper labour pools have already been maximised – evidence is growing that the gains from containerised shipping have been reached, with fewer highly skilled low-cost labour pools entering the market, in comparison with 30 years ago.
- Changing consumer preferences – as wealth has risen in both developed and developing markets, consumer preferences have changed. Demand for greater personalisation and instant gratification has resulted in a ‘near-shoring’ of some production. Additionally, greater consumer awareness of the environmental and social credentials of a product, particularly the management and origin of supply chains, is becoming an increasingly important factor in driving brand awareness and spending patterns. This has important implications for investors, particularly those who apply strict ESG (environmental, social and governance) criteria to portfolio construction.
- Higher tariffs and economic nationalism – while tariffs are putting pressure on the growth rate of globalisation, it is becoming increasingly apparent that in the prevailing political climate the rise in economic nationalism is shaping the investment decisions of global corporations.
- Regionalisation of supply chains – global inventory chains are evolving, with fewer but more valuable locations, and with a greater emphasis on re-shoring production in domestic markets. Put simply, both companies and countries are focused on adding to their domestic production capabilities, while seeking to limit reliance on foreign markets and the imported components in products. The impact of the COVID-19 pandemic, with the associated disruption to global supply chains, has highlighted bottlenecks and the risks to companies and countries alike of an overdependence on non-domestic markets.
A case of evolution, driven by technology
However, while the physical trade in goods and services is on the face of it slowing, there is a strengthening case for concluding that globalisation itself may be evolving and altering, assisted in no small part by technological developments. Rather than growth through trade of physical goods, we are now seeing accelerating growth in technology, data applications and services. Data storage, web traffic and international communication continue to grow rapidly, (see Chart 4) and indeed in some ways have been accelerated by the pandemic. For instance, even though social restrictions have now been relaxed and occupation in the office sector is rising again, people are still meeting over Zoom and Teams calls, with many companies having embraced flexible working practices whereby remote working is set to become a permanent feature.
Chart 3 – Cross-border Data Flows
Source: Bank of America, May 2022
Corporate earnings have been one of the largest beneficiaries of globalisation, thanks in part to lower production costs and greater returns to scale. While slowbalisation has undoubtedly raised concerns amongst investors, tellingly the most recent period of globalisation (2009-2022) has heralded a four-fold increase in earnings per share amongst the benchmark S&P 500 Index of major US companies. While lower corporate taxes, declining interest rates and the rise of dominant technology companies explains much of this phenomenon, it is encouraging that, so far, the slowdown in globalisation trends highlighted above has not had a dampening effect on earnings growth.
Slowdown the key trend, rather than deglobalisation
In conclusion, we can affirm that since the end of the GFC, the growth in global trade has moderated, although it remains around 30% of world GDP (World Bank). In addition, many countries have moved towards more protectionist trade policies, prioritising a more domestic-oriented approach to supply chains. While we expect these trends to persist post Covid-19, we do not expect a reversal of globalisation, but a continued slowing of the pace of expansion, which is likely to disproportionately affect prospects for export-orientated economies, notably China, Brazil, and Australia. Moreover, global collaboration will be instrumental if we are to address some of the biggest challenges that confront the world in the 21st century. Most notably, there is the growing reality of climate change, which if it is to be tackled effectively requires increased global governance and cooperation, throughout both the developed and developing world.
