Trendspotting: Is This the End of Globalization?

NewsWire: 4/11/22

• The economic blacklisting of Russia marks a new phase in the retreat from globalism. The basic trading framework established under the GATT and WTO nearly 75 years ago seems to be disintegrating. (The Wall Street Journal)
  
• NH: High prices. Supply-chain shocks. A newly isolated Russia. The war in Ukraine has roiled the global economy, and Wall Street investors are saying we’re on the verge of a new world order. In a letter to shareholders on March 24, BlackRock CEO Larry Fink warned that the invasion of Ukraine marks “the end of the globalization we have experienced over the last three decades." This was echoed in another letter from Howard Marks of Oaktree Capital Management, who sees “the pendulum [swinging] away from globalization and toward onshoring.”
• Both letters cite the war as the tipping point against globalization. What they don’t say is that the erosion has been underway for a long time--and that as tough as things are for the economy now, it’s nothing compared to what might be on the horizon.
• The real turning point was the GFC. So what we're seeing now is a further acceleration of trends that began nearly 15 years ago. Global trade as a share of global GDP (exports plus imports, including both goods and services) peaked in 2008 at 61.0%. By 2019, it had declined 56.3%. In 2020, it shrank further to 51.6%. Looking just at global exports tells the same story: After peaking at 2008 at 31.0% of global GDP, they hit 26.5% in 2020.

• Even at current dollar values, recent global export growth has been anemic. From 2008 to 2020, they grew by a mere 13%, which is half the growth of the US GDP deflator over those twelve years. Had the dollar value of global exports continued on its exponential growth path from 1970 to 2008, it would have been over 3x larger by 2020 than it actually was.

• Over this same period, nations have been raising tariff and non-tariff barriers on imports. Since 2010, the total share of trade covered by tariffs and other barriers has rocketed from $126B to $1.5T.

• Since the GFC, anti-globalism has proceeded in four successive phases. The first phase was the Great Recession and its aftermath, when the backlash against globalization was driven by voter outrage over workers who had lost jobs to outsourcing (see “Globalism in Retreat”). Back then, progressives took the lead in attacking the WTO, the IMF, and the Davos plutocrats. The "anti-globalist left" galvanized support for Bernie Sanders in his strong challenge to centrist Hillary Clinton in the 2016 Democratic primary.
• Then came the Trump phase, which refashioned anti-globalism as a core principle behind MAGA populism. It became the means by which the president would protect America's interests and promote national security, while also "looking after" America's working classes. Trump kept the issue hot by launching a trade war with China. (See “America Threatens a Trade War with China.”)
• The pandemic phase sent countries scrambling to close their borders and brought international commerce grinding to a near-halt. (See “The COVID-19 Recession of 2020 Puts Globalization into Deep Freeze.”) It also renewed bipartisan calls to shore up domestic manufacturing. President Biden recently invoked the Defense Production Act to encourage domestic production of raw materials used by renewable energy and electric-car companies. This came soon after Congress passed the $52B CHIPS Act, which aims to bring microchip manufacturing back to the US. While Trump set the precedent of barring Huawei from bidding on government contracts, Biden has proposed (in his recent SOTU address, in a line that drew audible cheers from both parties) cross-the-board "Buy American" rules.
• And now, of course, comes the Russia phase. Since Russia invaded Ukraine, almost 500 companies have announced they will withdraw from or scale back operations there. Many are doing so in response to popular movements to boycott purchases of Russian exports. Among them are a dozen Wall Street banks, including Goldman Sachs, Deutsche Bank AG, and Citigroup. Such rapid “deglobalization” of a country is unprecedented. And in mid-March, House lawmakers voted overwhelmingly to strip Russia of its preferred trade status with the US. 
• The compounding effects of these four phases--the GFC, Trump, Covid-19, Russia--have been destabilizing enough. Investors are already on edge worrying about the timing and severity of the next recession. But the invasion of Ukraine has also sparked widespread apprehension that there's an even bigger phase coming: the separation of Western economies from China.
• Before, we could only speculate on whether or how this would happen. We could point to entirely hypothetical events like China attacking Taiwan and wonder, even if that happened, how effectively the West could actually respond to it.
• Well, now we have answers to both questions. President Biden has already identified the new red line: Any move by China to aid its new ally, Russia. Unlike an assault on Taiwan, a violation of this red line is not only possible. It is probable. Most foreign policy experts believe that Xi is very likely to assist Putin--and the more desperate Putin becomes, the more certain China's assistance becomes. We have also learned how effectively the West can respond. Very effectively, with crippling economic sanctions that can be turned on practically overnight.
• Should this happen, the global impact of isolating China would be massive--dwarfing what we have seen in the wake of the Russia sanctions. Russia is the world’s 11st-largest economy. China is the second-largest and the world’s top exporter. In 2019, China's exports of goods and services totaled more than 5x Russia's.
• Economists typically describe the economic effects of deglobalization in terms of near-term plus long-term costs.
• In the near term, deglobalization translates into the sudden "adjustment costs" of moving to a different pattern of global production and consumption. Relative prices and wages change. Sunk capital investments lose value. Workers are forced to change industries. Many highly efficient exporters get clobbered. Many domestic firms engage in inefficient import substitution. The anti-Russian sanctions are already forcing the global economy to bear these adjustment costs. Obviously, these will be much higher if China also becomes a sanction target.
• In the long term, even after the adjustment challenges are overcome, the world will suffer from a lower rate of economic growth with less trade than it would have had with more trade. Such is the logic of comparative advantage: Imagine a world, after all, in which Japan must drill domestically for oil and Nigeria must build its own smart phones. Such also is the overwhelming evidence from history. To quote from the IMF: "The evidence on this is clear. No country in recent decades has achieved economic success, in terms of substantial increases in living standards for its people, without being open to the rest of the world."
• Yet deglobalization, clearly, is more than just an exogenous event. It is itself the consequence of changing social attitudes and national policies. While globalization raises living standards, it also tends to raise within-country inequality--which, eventually, will prompt a policy backlash against more trade and in favor of more autarkic and even autocratic regimes that protect people against economic insecurity and loss. We've been seeing this response around the world.
• Unfortunately, once deglobalization starts to undermine living standards growth, it begins to encourage more of the insecurity and fear of loss ("precarity" has become the defining English word of the post-2008 era) that fosters still more autarky and autocracy. This will merge with national feelings of humiliation and lost sovereignty that can motivate people in dictatorships and democracies alike.
• That's why rising trade and economic liberalism go hand in hand historically with spreading democracy. It's no coincidence that today's wave of deglobalization coincides exactly with the decline in global freedom as measured by Freedom House. 2005 was the last year that more countries' freedom scores improved rather than declined. In 2007, more declined than improved, and the decliners have outnumbered the improvers in every year ever since.
• As we begin to ponder the implications of a global economy divided into two "free" and "unfree" camps, we notice that the "unfree" camp has been economically buoyant (in part by gaining new members) and is now surprisingly large as a share of global GDP.

• Yet even in the "free world," public support for globalization as either an economic or cultural ideal has been steadily cooling. Even in prosperous democracies, neither the left nor the right bothers much any longer to defend it. Many of these democracies are the same western hegemons--including the United States, Britain, France, Germany, and Japan--that worked so hard to institute liberalized global trade as the foundation for a more peaceful world in the first several decades following World War II. And if they no longer care, as David Brooks suggests in his excellent recent essay, "Globalization Is Over. The Global Culture Wars Have Begun," then maybe that world is destined to pass away in any case, no matter what China does.

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