Can economic globalisation be reversed? Economic historians would agree that deglobalisation has undoubtedly happened before.
The 19th century was marked by a rapid increase in both trade and migration. But it came to a sudden halt with the outbreak of World War I. In 1914, globalisation ended in one week – between July 31, when the London Stock Exchange closed, and August 4, when the British government declared war on Germany. International trade and capital flows subsequently collapsed, not only for the duration of the war but for more than six decades.
To understand the dynamics that drive globalisation, we must first define what most economists mean by the term.
Globalisation is a state of the world economy in which strong competitive pressures force firms to behave like a single world market. Put simply, it is a world in which firms, above all else, seek to lower costs and prices.
The golden era of globalisation of the last six decades is now facing three significant challenges: the socio-political reactions to job losses arising from imports, the lessons people drew from COVID-19, and the war in Ukraine and rising geopolitical risks.
While globalisation has helped reduce extreme world poverty levels in the last 60 years, it has disrupted the lives of millions of workers in Western economies.
Globalisation, for instance, was not great for American blue-collar workers, who lost six million jobs because of cheap imports, mainly from Asia. Parts of the US states that were basically single-industry towns became wastelands. The same degradation happened in Europe. This is undoubtedly one reason why many workers today support populist parties who exploit people’s anger about how traditional politicians failed to shield them from the impact of globalisation.
For decades, business students were indoctrinated by their university professors, who would tell them that for firms to survive and prosper, these had to adopt a business model based on just-in-time production, zero inventory and extended supply chains.
The Six Sigma process improvement methodology paradigm emphasises the importance of businesses focusing on core competencies and outsourcing everything else. The mantras that most students were encouraged to follow were lean manufacturing, eliminating waste, eliminating inventory and liberalising labour markets.
Vertically integrated firms like IBM, Motorola, Dupont, Texas Instruments and GE were some of the US companies that adopted this model. Under pressure from financial markets, they broke apart into core competence firms and outsourced whatever they could. They became highly dependent on suppliers.
The costs and dangers that the end of globalisation will likely bring are again greatly underestimated
COVID-19 exposed the vulnerability of their supply chain model. The importance of resilience in business models is now the rock base that business leaders invest in to ensure long-term sustainability.
After the pandemic, some manufacturing firms were too weak to revamp their business model. The manufacturing ecosystem has been thinned out, drained and depleted.
Relatively late, political leaders in Western economies tried to address the widespread discontent of millions of workers, who felt shortchanged by globalisation, by adopting policies that raised trade barriers and adopted protectionist tactics.
Some politicians like to coin new euphemistic terms to endear themselves to ordinary people and refer to this trade restriction phenomenon as ‘economic patriotism’.
US President Donald Trump’s escalating threats against the US trading partners are unsurprising. He is transactional, not ideological, and is prepared to change tactics quickly if this leads to achieving his objectives.
While some economists are urging firms to respond to political actions, not rhetoric, when deciding how best to revamp their business strategies, the golden age of globalisation is now behind us.
The costs and dangers that the end of globalisation will likely bring are again greatly underestimated. There isn’t even an agreement in the EU on whether globalisation is over. An Italian minister, for instance, argues that once the Ukraine war is over, Italy will start importing gas again from Russia.
Is deglobalisation really happening? Or is there something like half-globalisation, with trade in goods and foreign direct investment falling but trade in services rising? Will the EU leaders take up Mario Monti’s recommendation to focus more on organic growth in the internal market and depend less on exports? Or will member states find ways of circumventing trade barriers by resorting to exporting by long detours through countries not affected by trade tariffs to get to the US?
Geopolitical uncertainties will continue to create pressure on the dynamics of globalisation. For the past six decades, the US has been an ‘indispensable’ partner in sustaining international order and cooperation.
Europe now has to learn to live with the nation the US is becoming.