Lessons from the history of globalisation - Capital Economics
Emerging Markets Economics

Lessons from the history of globalisation

Emerging Markets Economics Focus
Written by Nikhil Sanghani
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History shows that waves of globalisation are driven by both technology and policy, but protectionist shifts alone tend to end them. In some cases, like in the 1970s, a moderate pushback by policymakers can cause globalisation to stall. But the experience of the 1930s shows that a large, widespread and sustained policy backlash can push globalisation into reverse. So far at least, the current trade war looks more like the former, but the risks of a more malign outcome akin to the 1930s are rising.

  • History shows that waves of globalisation are driven by both technology and policy, but protectionist shifts alone tend to end them. In some cases, like in the 1970s, a moderate pushback by policymakers can cause globalisation to stall. But the experience of the 1930s shows that a large, widespread and sustained policy backlash can push globalisation into reverse. So far at least, the current trade war looks more like the former, but the risks of a more malign outcome akin to the 1930s are rising.
  • There have been three main waves of globalisation over the past 150 years. The first ran from 1870 to 1913 and centred on Europe and America. This was followed by a period of de-globalisation from 1914 to 1945. The second wave, from 1946 to 1971, was facilitated by the Bretton Woods system and the reintegration of Europe. Globalisation stalled between the mid-1970s and the late-1980s, before a third wave took off around 1989, mainly driven by the integration of emerging markets into the world economy.
  • Each of these episodes is different, but three key points stand out. First, waves of global integration are driven by both technology and policy. Advances in technology have always enabled globalisation by bringing down transport and communication costs, from steam power in the first wave to the internet in the third wave. Policies have helped too, either by creating the conditions to adopt new technologies or by actively removing barriers to trade. Economies which did not pursue these policies were usually bypassed by previous waves, such as Latin America in the post-World War Two era.
  • Second, while globalisation boosts aggregate world GDP growth, it creates winners and losers. The main winners are economies away from the technological frontier, as exposure to global markets facilitates catch-up growth. In the 19th century this was the US, in the post-war era it was Europe, and more recently it has been emerging markets. However, cheap imports mean that capital owners and workers in relatively inefficient domestic industries can lose out. This is what drives demands for protection, from European agricultural tariffs in the late-1800s to President Trump’s current support for US manufacturers.
  • Third, shifts in policy are usually responsible for bringing waves of globalisation to an end. While the first wave was interrupted by World War One, it was ended definitively by ‘beggar-thy-neighbour’ policies in the 1930s. This began with the infamous US Smoot-Hawley tariffs which sparked retaliation worldwide, contributing to a 30% slump in global trade during the Great Depression. The second wave drew to a close following the Nixon shock of 1971 which effectively ended the Bretton Woods system that had underpinned post-war integration. This was followed up in the 1980s by President Reagan’s trade restraint policies to cap imports from Europe and Japan.
  • But only the large, widespread and sustained policy backlash in the 1930s was enough to drive a period of de-globalisation. The policy pushback in the 1970s and 1980s was small and short-lived compared to the 1930s, and other regions (primarily in Emerging Asia) continued to open up. This meant that globalisation merely stalled at the end of the second wave, rather than going into reverse.
  • Fast forward to today, and we think that President Trump’s protectionist shift is still a far cry from the 1930s slide to de-globalisation. The tariffs currently imposed in the US-China trade war are far smaller and affect less global trade than those used in the interwar period. Moreover, other economies have recently moved towards promoting rather than restricting trade. That said, the danger is that the current trade war escalates into something much more malign. We examine this prospect in more detail in a series of forthcoming Focus publications.

Lessons from the history of globalisation

This Focus is part of a series of reports about the end of globalisation and the impact of this on the global economy and financial markets. (See here for more.)

In this Focus, we look at the history of globalisation. We start by identifying waves of globalisation over the past 150 years. We then outline the forces that have that have propelled earlier waves of globalisation and, perhaps more importantly, discuss what has ended them. We then draw together the key lessons from history and sit them within the context of the current trade war.

Some definitions

Before we start, it’s worth defining what we actually mean by globalisation. At its core, globalisation is about the breaking down of barriers so that the globalised market behaves in the same way that the market does within a country. This breaking down of barriers is partly institutional and political – in other words driven by government. And it’s partly technological – in other words driven by new inventions that enable integration. But the results tend to manifest themselves in three ways: the integration of product markets, the integration of capital markets and the integration of labour markets.

There remains a lively academic debate about how to actually measure globalisation and it’s important to emphasise from the outset that doing so is more of an art than a science. But in what follows we’ll define a period of globalisation as one in which global trade or capital flows rise as a share of world GDP, or migration flows increase as a share of world population. Conversely, we’ll define a period of de-globalisation as one in which they fall.

Identifying waves of globalisation

Elements of globalisation have existed for centuries. For example, economic historian Andre Gunder Frank argued that it can be traced as far back as the growth in trade between the Sumer and Indus civilisations in the third millennium BC. China began to establish trade networks with the West along the ‘Silk Road’ around 130 BCE. And European imperialists developed extensive transoceanic trade routes during the 16th century.

However, it is the more recent waves of globalisation that are of greater relevance today. There have been three over the past 150 years. The first started in 1870 and lasted until 1913. The second wave came after World War Two and ran until the early 1970s. And the third wave began around the fall of the Berlin Wall in 1989 and gathered pace in the 1990s. These waves can be seen by the rise in global exports as a percentage of global GDP during these periods. (See Chart 1.)

Chart 1: Global Exports (% of Global GDP)

Sources: Klasing & Milionis (2014), Penn World Tables, World Bank

Three points are worth stressing. The first is that the two initial waves of globalisation ended rather differently. The first wave ended with a period of de-globalisations, with world exports falling as a share of GDP from 1914 until 1945. In contrast, the second wave didn’t so much end as pause. Exports stagnated as a share of GDP in the mid-1970s to late-1980s (which we have called the ‘stasis’ period). We’ll have more to say about this later.

The second point to note is that, while global migration flows were a key part of the first wave of globalisation, they have played a smaller role in the second and third waves. (See Chart 2.)

Chart 2: Total Global Inflow of Migrants (as a % of World Population)

Sources: DEMIG (2015), Our World in Data, Capital Economics

And the third point to note is that the latest wave of globalisation has had a much larger financial component than previous waves. (See Chart 3.) Alongside the globalisation of production, we’ve also seen the globalisation of finance. Again, we’ll have more to say about this later.

Chart 3: Advanced Economies’ Foreign Assets Held* (as a % of World GDP)

Sources: Obstfeld and Taylor (2004), Maddison, IMF, CE *Sum of UK, France, Germany, Netherlands, US, Canada and Japan.

In order to understand the differences between these waves of globalisation, we need to understand the key drivers. This is the focus of the next section and is summarised in table form in the Appendix.

First wave of globalisation (1870 – 1913)

Western European economies were at the centre of the first wave of globalisation. Their goods exports expanded rapidly from 8.8% to 14.1% of regional GDP during the first wave. These economies mainly exported manufactured goods to other European countries and the ‘New World’ in the Americas, often using primary product imports from the US, Latin America or their colonies.

New Industrial Revolution technologies enabled the rise in global trade. Steam power was central to the near-50% drop in ocean shipping costs from 1870 to 1910. Moreover, the expansion of railway networks in Europe and America reduced inland transport costs, allowing more goods to reach the ports cheaply, ready to be shipped abroad.

An earlier shift towards free trade policies also helped at the onset of the first wave. Britain was the pioneer when it repealed the Corn Laws in 1846. Another milestone was the Cobden-Chevalier Treaty between Britain and France in 1860. This deal reduced tariff barriers between both countries, and triggered a series of trade agreements across the continent later that decade. That said, there was a small protectionist backlash in the late-19th century. Therefore, policy was not supportive to global integration during the first wave as a whole.

Aside from goods, cross-border capital flows also expanded during the first wave. Britain was the largest exporter of capital in this period, with over 50% going to areas of recent settlement such as the US, Latin America and Australia. The vast majority of these investments were linked to long-term infrastructure projects, particularly railroad building.

The rise in cross-border capital flows was driven in part by the invention of the telegraph. This drastically improved communications and lowered costs. Indeed, the first transatlantic cable was introduced in 1866 and communication times between New York and London subsequently fell from 3 weeks to less than a minute by 1914. This made it easier for investors to control their overseas investments. The gold standard was also a key driver of rising capital flows. Britain formally adopted this monetary system in the 1820s and most industrial economies followed suit by 1880. This system not only significantly reduced exchange rate risks, but acted as a signal that governments would pursue conservative policies which protected investors’ real returns.

Despite the rise in trade and capital flows, the surge in international migration was arguably the most prominent feature of the first wave. The most common route was from Europe to the ‘New World’, as workers sought higher real wages in the labour-scarce Americas. (See Chart 4.) This was enabled by the fall in transport costs from new railways and steam power, which made intercontinental travel more accessible to the masses.

Chart 4: Intercontinental Emigration From Europe
(5-year Average, 000s)

Source: Ferrie & Hatton (2013)

De-globalisation (1914 – 1945)

World War One halted globalisation in its tracks. Belligerent nations imposed strict limits on trade and capital flows and the gold standard was abandoned. Meanwhile, migration flows slowed dramatically. In the 1920s, there was a partial shift back towards global integration. World trade rebounded and the gold standard was re-established, albeit on shaky foundations. But this was short-lived. Global trade slumped by close to 30% during the Great Depression in the early 1930s. (See Chart 5.)

Chart 5: World Trade Volumes From 1870 – 1938 (1929 = 100)

Sources: Our World in Data, Capital Economics

While this was due in part to the extreme weakness of global demand, a crucial factor was a significant rise in protection. This began with the US Smoot-Hawley tariffs in 1930, which raised duties on over 20,000 products and was followed by a wave of retaliation. Britain imposed a 10% general tariff in 1932 and other countries followed suit. As a result, average tariff rates more than doubled in the 1930s. (See Chart 6.) These beggar-thy-neighbour policies exacerbated the economic slump during the Great Depression.

Chart 6: Effective Tariff Rates From 1870 – 1938*
(G7 ex. Canada, %)

Sources: Madsen, Capital Economics

Global capital flows also fell sharply during this period, partly because the US financial system stopped providing liquidity for the world, triggering a series of banking and currency crises in Europe. Moreover, with economic opportunities vanishing in the US, European intercontinental migration more than halved in the early 1930s. Unlike the fall in trade volumes, though, the drop in capital and migration flows was in response to the economic disruption of the Great Depression rather than a direct protectionist shift. World War Two followed soon after the Great Depression, so globalisation remained on the back foot until the mid-1940s.

Second wave of globalisation (1946 – 1971)

The post-World War Two reconstruction phase marked the start of the second wave of globalisation. A strategic decision by the US to build allies in the fight against communism led to a renewed sense of economic co-operation between the world’s major economies. This was exemplified by the establishment of new Bretton Woods institutions, including the General Agreement on Tariffs and Trade (GATT) in 1947. Through various GATT negotiation rounds, there was a steady fall in tariff rates in the post-war era. (See Chart 7.)

Chart 7: Weighted Average US Tariff Rates After GATT Rounds (Pre-GATT = 100)

Sources: Baghwati (1989), Siebert (1997)

The second wave was also characterised by the integration of product and labour markets in Europe during its ‘Golden Age’. Nominal goods exports from Europe grew by a factor of eight during the second wave, compared to a four-fold increase in US exports. (See Chart 8.) A growing share of these European goods went to other economies in the region, particularly after the 1957 Treaty of Rome. This created the European Economic Community – a customs union among six countries which was the forerunner to the European Union.

Chart 8: US & European Nominal Goods Exports From 1950 – 1971 (1950 = 100)

Sources: Refinitiv, Capital Economics

Intercontinental trade also expanded rapidly, with European nominal goods exports to the US growing at an average of 12% per year between 1950 and 1971. One reason for this was the growing use of air freight and a general improvement in maritime technology with bigger, more efficient ships. This reduced transport costs and increased the speed of moving cargo, particularly consumer goods.

As well as goods, international migration flows picked up markedly. The reconstruction of post-war Europe boosted demand for migrant workers, so the region turned from an area of net emigration to net immigration. In the US, a growing share of migrants came from Latin America rather than Europe. While absolute migration flows matched the first wave, they were far smaller relative to the growing population in the Baby Boomer era. Indeed, 15% of the US population were born abroad in 1910, but this share dropped to under 5% by 1970.

Despite the rise in trade and migration flows, global capital flows were relatively subdued during the second wave. The Bretton Woods monetary system of the time included the use of controls to limit cross-border capital flows. As a result, advanced economies’ foreign assets as a share of GDP was lower during the second wave than it was in 1900. (See Chart 3 again.)

The second wave drew to a close in the early 1970s. The trigger was the decision in 1971 by the Nixon administration to suspend the dollar’s convertibility into gold and impose a 10% surcharge on virtually all US imports. This move came in response to a deterioration America’s current account position, due in part to an increase in fiscal spending to fund the Vietnam War. What became known as the “Nixon shock” effectively ended the Bretton Woods system that had underpinned post-war integration. And while the surcharge on US imports was short-lived, it was followed in the 1980s by a period of so-called “trade restraint” under President Reagan. His administration imposed restrictions on imports such as textiles, steel and autos from Europe and – in particular – Japan. The result was that global trade essentially flat-lined as a share of world GDP during the 1970s and 1980s. (See Chart 1 again.)

Third wave of globalisation (1989 – present)

The third (and current) wave of globalisation emerged from the end of the Cold War and was shaped by the ‘Washington Consensus’. Among other things, this promoted an openness to both trade and capital flows. The focus was on bringing the emerging markets (EMs) of Asia, Latin America and Eastern Europe into the US-led capitalist system.

In some cases, notably China, liberalisation was the result of a domestically-generated policy shift. This culminated in the country joining the WTO in 2001. China’s share of world goods exports surged from around 4% in 2001 to close to 14% within 15 years. (See Chart 9.)

Chart 9: China’s Share of World Merchandise Exports (%)

Source: Refinitiv

In other cases, such as Latin America, liberalisation was a condition of various IMF bailouts. But the result was nonetheless the same. Tariff rates fell sharply in major EMs and they are now close to those in developed markets. (See Chart 10.)

Chart 10: Weighted Average Tariff Rates on Imports from other WTO Members (All Products, %)

Sources: Refinitiv, Capital Economics

One obvious consequence is that global trade is no longer dominated by advanced economies. Since the 1990s, there has been a marked pick-up in trade between EMs, and a steady rise in trade from emerging to developed economies. (See Chart 11.) This is due in part to the expansion of global supply chains over the past couple of decades, which has led to production becoming increasingly splintered across two or more countries.

Chart 11: Share of World Goods Trade Flows (%)

Sources: Refinitiv, Capital Economics

Stepping back, the latest wave of globalisation differs from previous waves in three important respects. The first is its sheer size. Previous waves focussed mainly on the US, Europe and a handful of smaller countries. In contrast, this wave has focussed on EMs with much larger populations. Over the past twenty years, three billion people have in effect been added to the global labour supply.

The second difference is that the current wave of globalisation has had a larger financial component than previous ones. Between 1990 and 2017, there was a five-fold increase in cross-border bond and equity flows and a seven-fold increase in foreign direct investment flows.

Finally, whereas previous waves of globalisation focussed almost exclusively on trade in goods, this wave has seen an increase in the trade of services. While goods still account for the lion’s share of global trade, the share accounted for by services has almost doubled since the mid-1990s. (See Chart 12.) One consequence is that trade is no longer regulated simply by tariff or quotas – regulations governing things like product standards and market access for services matter too.

Chart 12: World Services Trade (as a % of World GDP)

Source: Refinitiv

The lessons from history

Bringing all this together, there are three lessons from the history of globalisation over the past 150 years.

Lesson 1: Globalisation is driven by both technology and policy

Advances in technology have always tended to push countries together over time. The advent of steam power and the telegraph pushed down transport and communication costs in the first wave. This trend continued throughout the 20th century and into the 21st century with developments including air freight, containerisation and, more recently, digital technologies. (See Chart 13.)

Chart 13: Transport & Communication Costs
(1930 = 100)

Source: OECD

Policy has also played a crucial role in driving globalisation. For a start, it influenced which countries adopted the new technologies that enabled globalisation. Those with functioning market economies and strong legal systems, principally in Europe and North America, were at the forefront of the first two waves of globalisation. Others, which are now in the emerging world, generally missed out.

In other ways, policy has played an active role in promoting integration. This was especially the case in the second and third waves, with multilateral tariff reductions under the GATT and a swathe of trade and financial liberalisation policies in EMs respectively. The point is that a combination of technological progress and, at the very least, conducive policies are required to break down barriers to bring the world closer together.

Lesson 2: Globalisation creates winners and losers.

Economic theory suggests that globalisation benefits the world economy. The absence of trade barriers should allow each country to specialise in the production of goods and services in which they are relatively efficient, thus leading to global productivity gains.

This theory seems to have played out in reality. On average, global per capita incomes have risen fastest at higher rates of global trade growth in the past 150 years. (See Chart 14.) Admittedly, there are many other factors which have influenced the global economy over this time, but it is fair to say that globalisation has contributed to productivity gains at the aggregate level.

Chart 14: Average Annual Growth of World GDP per Capita & World Trade Volumes Since 1870

Sources: Our World in Data, Maddison, World Bank, CE

While the world economy benefits from globalisation, the biggest winners are the economies away from the technological frontier. When exposed to global markets, these countries gain from the transfer of technology and knowledge from world leaders. For example, the US experienced rapid capital deepening from rising British investment into infrastructure projects during the first wave. This allowed the US to absorb more foreign workers and overtake the UK as the world’s largest economy (on a per capita basis) in the early 1900s. (See Chart 15.)

Chart 15: Real GDP Per Capita (2011 US$)

Source: Maddison Project Database

Similarly, in the second wave, Western European countries and Japan opened their borders and per capita incomes converged with the US. But countries which did not reduce trade barriers were bypassed by previous waves of globalisation and failed to catch-up with world leaders. This was the case for various Latin American countries in the post-war era as they implemented import substitution policies. (See Chart 16.)

Chart 16: Real GDP Per Capita (2011 US$)

Source: Maddison Project Database

In a similar vein, communist (and isolationist) China failed to converge with the US in the second wave. But the handbrake was released by Deng Xiaoping’s market reforms in 1978, and this process of catch-up growth accelerated when China joined the WTO in 2001. (See Chart 17.)

Chart 17: China’s Real GDP Per Capita as a % of
US Real GDP Per Capita

Sources: Maddison Project Database, Capital Economics

So open borders tend to boost productivity at a global and national level (particularly for developing countries). However, globalisation has distributive consequences within economies. Workers and capital owners in competitive export-orientated industries tend to gain, while consumers’ purchasing power rises from access to cheaper imports. But relatively inefficient domestic industries can lose out to more productive foreign competition.

Crucially, the actual (or perceived) losses from global integration can lead to political backlashes. During the first wave, aggrieved land owners in Germany and France, facing cheaper grain imports from the US and Russia, pushed for higher agricultural tariffs. And US manufacturers sought protection from European industrial imports. This led to a rise in tariff rates in all three countries at the end of the 19th century. (See Chart 18.)

Chart 18: Average Tariff Rates From 1870 – 1913 (%)

Sources: Madsen, Capital Economics

Later on, the struggles of the US agricultural sector in the interwar period prompted Henry Hoover to campaign in favour of higher tariffs during the 1928 presidential election. In the event, the Smoot-Hawley tariffs went much further than anyone – including President Hoover – had originally suggested. But it seems likely that, even without the Great Depression and the broad protectionist backlash that followed, targeted protection to help shield the main losers from foreign competition may have happened.

More recently, increased foreign competition has been blamed for US manufacturing job losses over the past twenty years. In practice, while the integration of several billion workers into the global economy has contributed to both a loss of manufacturing jobs and a more general squeeze on labour’s share of income in the developed world, most academics agree that other factors, including technological change, have played a bigger role. Nonetheless, the perception that US workers have lost out to China has helped to fuel the Trumpian backlash to globalisation.

Lesson 3: Policy shifts tend to end waves of globalisation.

The third and final lesson from history is that, since technology has always tended to push countries closer together, it has been policy shifts that have brought waves of globalisation to an end. While the first wave was halted by World War One, it only really went into reverse following the spread of protectionist policies of the 1930s. What’s more, the second wave drew to a close following the Nixon shock in the 1970s and Reagan’s policies of trade restraint in the 1980s.

As we noted at the start, one key point to make is that the first and second waves of globalisation ended rather differently. While the first wave was followed a period of de-globalisation, in which the world retreated from integration and global exports fell as a share of GDP, the second wave didn’t so much end as pause – rather than going into reverse, globalisation stagnated. Global exports flat-lined as a share of GDP in the 1970s and 1980s.

There are several reasons for these different outcomes. One is that, while the 1930s saw a broad pushback against globalisation by several countries, the backlash in the 1970s was less widespread. Indeed, most other regions continued to open up even as the US pushed back. Europe continued to integrate and economies in Asia – such as Hong Kong, Korea, Taiwan and Singapore – joined the global trading system. The share of global exports accounted for by the “Asian Tigers” tripled between 1970 and 1990. (See Chart 19.)

Chart 19: Asian Tigers’ Share of
World Merchandise Exports* (%)

Source: Refinitiv

What’s more, the scale of the pushback from the US under Nixon and Regan was much smaller than in the 1930s. Tariffs were lower, more targeted and shorter-lived. And the absence of retaliation by other nations meant that the share of world trade affected was relatively small. (See Chart 20.)

Chart 20: Share of World Trade Affected by Protectionist Measures (%)

Sources: Refinitiv, UNCTAD, USA Trade Online, Crandall, Irwin, CE

Accordingly, the key message is that it takes a large and sustained push by policymakers to cause a period of de-globalisation. With this in mind, Chart 20 also shows the tariffs imposed and threatened by the US and others in the current trade war. The good news is that we’ve not yet reached 1930s levels. This is partly because, like in the 1970s, other countries have continued to integrate even as the US has pushed back. The EU and Japan signed a trade deal in 2017, which came into effect this year. And the Trans-Pacific Partnership (TPP) deal was signed by 11 countries last year even though the US pulled out of the agreement.

Yet the dispute between the US and China is, in our view, more intractable and will continue to cast a long shadow over the future of globalisation. This will be the focus of forthcoming work in this series – see here for more as it’s published.


Appendix: Overview of the history of globalisation

Sources: Various, Capital Economics


Nikhil Sanghani, Assistant Economist, +44 20 7808 4998, nikhil.sanghani@capitaleconomics.com