We argued some time ago that globalisation had peaked but that the jury was still out on what form a subsequent period of deglobalisation might take. Two years and one pandemic later and it is starting to become clear what to expect.
The era of globalisation that turbocharged world growth in the 1990s and 2000s was underpinned by the twin props of politics and technology. Both were starting to falter well before the pandemic struck.
The political pushback against globalisation tends to be associated with the election of President Trump, but its roots are inevitably much deeper and more complex. It has been driven in part by a growing recognition of the substantial adjustment costs that globalisation has imposed on some social groups. But it also reflects a realisation in political circles that China is not going to become the liberal democratic country that Western governments of the 1990s and 2000s had hoped. China has become a strategic rival rather than a strategic partner.
Meanwhile, the technological drivers of globalisation have faded. Complex supply chains have reached their limit. At the same time, advanced manufacturing techniques mean that the location of manufacturing no longer hinges on where labour costs are cheapest.
The pandemic is likely to have intensified some of the pushback against globalisation – although not in the ways that seemed most likely twelve months ago.
When lockdowns began, there were reasonable concerns that supply chain dependencies would amplify and extend the disruption around the world. In practice, these fears proved to be overdone. Supply chains have not only continued to function well, but have been part of the solution rather than the source of problems over the past year. They facilitated the rapid distribution of PPE in the early stages of the pandemic and have since coped remarkably well with a shift in spending within advanced economies from (non-traded) services to (traded) goods.
More fundamentally, one of the rare pieces of good news over the past year has been that governments have not responded to deep recessions by embracing protectionism. For these reasons, early concerns that the pandemic would lead to the dismantling of global supply chains and the widespread reshoring of production have eased. (See Chart 1.)
Chart 1: Google Searches for “Reshoring” (Normalised Index, Maximum = 100)
Sources: Google, Capital Economics
However, the pandemic has intensified strains between the west and China. What’s more, while the election of Joe Biden might have cooled some of the rhetoric around trade, it has broadened the dispute into new areas (including environmental and labour standards) and added an ideological dimension to the relationship’s strains. While President Trump was a transactional politician who was willing to “do a deal” on trade and tariffs, President Biden is motivated instead by restoring America’s role as leader of the free world. This puts his administration on a collision course with Beijing – something that was on public display in a fractious first meeting between the two governments in Alaska last month.
This gives an insight into how the pushback against globalisation is likely to develop over the coming years. There are many ways that events could play out but as things stand perhaps the most likely is that the US and China decouple and the world begins to splinter into US- and China-led blocs. At the same time, the focus is likely to expand beyond trade and towards other areas, including investment, technology, security and finance.
This raises two questions. First, which countries are likely to ally with the US and which with China? The most obvious answer is that liberal democracies will align with the US while autocracies (including Russia) will align with China. But the EU’s apparent eagerness at the end of last year to conclude an investment treaty with China shows how in reality things are unlikely to be as straightforward. And several countries, including India, Australia and much of South East Asia, will face even more difficult economic and political trade-offs when managing relations with the US and China. In practice, any splintering into US- and China-led blocs is likely to fluid across different interests areas and will not fit neatly into a one-size-fits-all narrative of a new “cold war”.
This brings us to the second question: what are the implications of all of this for global economic growth? The immediate answer is “not good”. A reduction in technology transfer hampers overall technological progress. Lower inward investment dampens domestic competition. And industrial policy driven by security concerns is unlikely to lead to the most economically efficient outcome.
But the degree to which growth is negatively affected will clearly depend on how big the barriers get. It’s possible that the headwinds to growth from US-China decoupling are more than offset by new tailwinds to growth, such as increased investment in digital technology. But the omens are not good, particularly in China where decoupling is driving a push towards self-sufficiency and a doubling down on its inefficient state-led model of innovation. And even if the hit to overall global GDP growth is small, the consequences for individual companies that find themselves caught in the crosshairs could be significant.
Two years on from our call that globalisation had peaked, the worst fears of a wholesale retreat into deglobalisation have receded. Instead, the world’s two largest economies are effectively decoupling. The economic consequences may be less severe than a period of 1930s-style beggar-thy-neighbour protectionism. But this will still be a defining global theme of next decade.
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