Financial Professionals

December 19th, 2022

Assessing Fears of De-Globalization

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Depending on who you ask, the globalization trends of the last 30+ years are either still pushing forward, grinding to a halt, or are in the early stages of outright reversing. But I think committing to just one of these narratives is problematic.

That’s because globalization is not an on-off switch – it’s a complex and layered set of relationships between countries regarding trade, investment, financial systems, immigration, technological networks, supply chains, and so on. At any given time, a country may be seeing more cooperation in some of these areas, and less cooperation in others.1

Much of the consensus that de-globalization is underway comes from the rippling effects of the pandemic and the Russia-Ukraine war. The proximity of these two shocks has led many corporations and some western governments to prioritize the resilience of supply chains – i.e., domestic production – over the benefits that globalization affords, like efficiency and low costs. For readers who have heard the term “reshoring,” that’s what this trend refers to.

But the other key factor driving de-globalization fears is the increasingly strained relationship between the U.S. and China. Some worry that the global economy will become fragmented into two blocks – countries that do business with the U.S., and countries that do business with China. With the U.S. and China currently levying tariffs and ‘playing defense’ when it comes to capital flows and access to technology, these concerns are certainly warranted.

It should be noted, too, that history is playing an important role in how economists and other experts are viewing current globalization trends. If we look back to the early 1900s, globalization was accelerating with tailwinds from the industrial revolution and the adherence of major economies to the gold standard, which the U.S. joined in 1900.

What brings nations together economically can sometimes drive them apart in political and social terms, however, as nationalism and other domestic priorities push back against the forces of globalization. In the early 1900s, World War I essentially thwarted all of globalization’s momentum, with global trade as a percent of GDP peaking in 1914. Trade wouldn’t return to those 1914 levels until the mid-1970s.

The 2008 global financial crisis, the Covid-19 pandemic, and the Russia-Ukraine war may be the new factors that will ultimately drive a secular slowdown in global trade. No one can know for sure. What I can say is that there is not much hard evidence that de-globalization – at least in terms of global trade – is firmly underway. In 2021, global trade growth accelerated so quickly that it shot back up to the pre-2008 trendline.  It’s also true that in 2022, global trade volumes reached a new record, posting figures nearly 10% higher than they were pre-pandemic. If de-globalization is happening, it cannot be explained by trade.

The U.S. economy fits into this global trade pattern as well. As readers can see in the two charts below, total U.S. exports and total U.S. imports have recovered from pandemic lows and are now well into record territory. I have written before that in my view, it’s total trade – not trade surpluses or deficits – that paint a clearer picture of how robust overall activity is.  

U.S. Exports at Record Levels

Source: Federal Reserve Bank of St. Louis
Source: Federal Reserve Bank of St. Louis

Finally, I think it’s important to make the point that many tend to think of globalization as the free movement of goods and labor across borders, but it is also true that services can be imported and exported between economies. More so than ever, countries are cooperating and trading by opening access to technology, financial markets, and other services that exist in the non-goods economy. By these measures, one could argue that globalization is not reversing or corroding, and may even be accelerating.

Bottom Line for Investors

De-globalization would be a major negative for the global economy if the worst fears come to fruition, and it would also be longer-term inflationary. Turning inward economically generally means paying higher input costs, which would also imply having to charge more to consumers.

These trends are worth watching closely, but the worst-case scenario outcome is far from assured. Global trade data suggests it should not currently be an economic fear at all.

Disclosure

1 Goldman Sachs. May 2, 2022. https://www.goldmansachs.com/insights/pages/de-globalization-ahead.html

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