, Globalization is not so much ending as it is changing. ,
For three decades, businesses and governments around the world operated under the assumption that economic and financial globalization would continue to accelerate. As the international system has come under strain in recent years, the concept of globalization – the separation of trade and investment – has increasingly gained traction with households, companies and governments. But the available data suggests that globalization is not so much ending as it is changing.
Not long ago, it seemed that there was no limit to global economic and financial integration. For decades, the benefits of globalization seemed clear and inescapable. The interconnectedness of production, consumption and investment flows has provided consumers with a wide range of choices at attractive prices, enabled companies to expand their markets and improve the efficiency of their supply chains.
Global capital markets have expanded access to credit and reduced its cost for private and public borrowers alike. The governments of the world appear to be a series of win-win partnerships. And technology – including, most recently, the rapid shift towards remote work – made national boundaries seem largely irrelevant.
But while globalization has allowed markets to function better, policymakers have overlooked its adverse distributional consequences. Many communities and countries were left behind, leading to a widespread sense of marginalization and alienation.
The result was a backlash against globalization, the most obvious political expression of which was the United Kingdom’s vote to leave the European Union and the election of Donald Trump to the US presidency in 2016. Soon, the United States entered a tariff war with China, deepening the divide. Meanwhile between the two economic powerhouses, Western consumers have increasingly pushed back against countries that violate human rights and harm the environment. And the invasion of Ukraine has led to unprecedented sanctions on Russia (a G20 country) and weaponization of the international payment system.
After this, many would conclude that globalization is over. But, rather than the sharp reversal of the last 30 years, it seems far more likely that we are entering an era of fragmented globalization, characterized by substitution, not inhibition.
Globalization is not dead, experts say, but it faces a major risk
The sanctions imposed on Russia are a case in point. Over the past year, EU-US-led sanctions have not materially reduced Russia’s oil exports, but have redirected them elsewhere, mainly to China and India. Similarly, instead of bringing Russia’s economy to its knees as many had predicted, the sweeping sanctions reduced its GDP. just 2%, as Russian technocrats sought ways to reorganize and reorganize activities, both domestic and external. Even more worryingly, Russia and some of its allies have also made progress in building some parallel cross-border payment and settlement systems, albeit rudimentary and inefficient.
This trend is likely to continue for the next few years, as companies increasingly diversify their supply chains away from China and Western governments use near-shoring and friend-shoring to maintain production of critical inputs and sensitive exports. Takes support
A combination of geopolitical upheavals, corporate strategies and changing societal values will influence trade and investment patterns along four main axes. As companies choose flexibility over efficiency, they will increasingly change their approach to supply chains from “just in time” to “just in case”.
It will come at a time when security concerns gain more prominence in business considerations, and companies move from risk-sharing and general partnerships to more narrowly designed arrangements. Meanwhile, consumers will increasingly seek an emphasis on purpose in their business relationships.
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While this process will produce winners and losers, their identity will largely depend on how policy makers embrace the new operating model of the global economy. For example, Mexico would benefit from US friend-shoring as well as the corporate sector’s shift to more diversified supply chains. Yet, as the Mexican government itself has acknowledged, projected demand will not be translated into effective demand until policymakers accelerate progress on infrastructure, clean energy, regulation and the like.
In a world where families actively avoid certain business interactions, governments and businesses will need to work hard to create alternatives. Companies should work with governments, both at home and abroad, to facilitate the inherently difficult process of reconnecting supply chains and accelerate the green transition. National and global policy makers need to revise how they think and act. And long-term investors should incorporate more sophisticated geopolitical, socio-political and environmental analysis into their allocation strategies.
While some may consider the phrase “fragmented globalization” to be an oxymoron, I believe it is the most likely scenario for the global economy. As the world increasingly divides into blocs, some more liquid than most others, globalization becomes more inflationary, reducing potential growth. Avoiding this outcome depends on how national governments and multilateral institutions navigate the new economic reality. The world may not be fully globalized, but that doesn’t mean we should take the road ahead for granted.
President of Queen’s College at the University of Cambridge, Mohammed A. El-Arian is a professor at the Wharton School at the University of Pennsylvania and the author of The Only Game in Town: Central Banks, Volatility, and Avoiding the Next Collapse (Random House, 2016).
This comment was published with permission Project Syndicate-
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