In the last century and after two world wars, an air of optimism spread like wildfire, with politicians declaring that another global conflict was impossible because free trade would make all countries very interdependent.
In the last three decades, globalisation became an almost dogma of faith of capitalist societies and communist ones. So why are so many analysts predicting that we will soon see the beginning of the end of globalisation and the dawn of the era of deglobalisation?
It would be mistaken to argue that global free trade that underpins the globalisation economic model will now ebb due to the Ukraine war. The tailwinds battering globalisation started two decades ago with technological advancement, protectionist political strategies and, more recently, COVID and, of course, the Ukraine war.
Globalisation was initially motivated by the urge of eastern economies to find cheap sources of labour, especially in the Far East and South America. Developing countries like China saw this as an excellent opportunity to raise the standard of living of its vast population that, up to a few decades ago, was mostly deprived of decent living conditions that are taken for granted by most western societies.
Today, the advancement of technology, especially in robotics, means that manufacturing has become more automated and labour costs have fallen as a proportion of total costs. A more skilled and technologically able workforce has enabled US and European companies to move back their operations onshore. This has reduced the need for goods to be shipped around the world when escalating fuel costs have increased shipping rates.
The importance of ESG issues – environment, social and governance – in strategic management is likely to accelerate the withdrawal of western investment from countries with little respect for human rights. Countries that still tolerate child labour are unlikely to prove attractive to most western international companies that are increasingly sensitive to ESG issues.
When US president Donald Trump started a trade war with China and the EU, many thought this was just a transitory phase that would soon be over once a new president took office. Joe Biden is, however, no less protectionist than his predecessor, even if he can make more sensible decisions when other issues are factored in trade strategies.
The bedrock of any new economic strategy must be the investment in human resources
One of the fundamental failures accelerating the demise of globalisation is the inability of most western leaders to effectively manage the disruption that the loss of manufacturing jobs brought in many people’s lives. Poor educational systems have made retraining redundant workers a theoretical solution rather than a pragmatic one.
The COVID pandemic accelerated the deglobalisation justifications in the minds of many political and business leaders. Global supply chains have become too complex. The onset of a health threat in China and a fall in demand for microprocessors at the beginning of the pandemic resulted in many western companies grinding to a halt. Carmakers and other high-end manufacturing companies could not source the microchips they needed to build cars and manufacture other consumer goods powered by microchips.
The war in Ukraine has added fuel to the fire that is consuming the dynamics of globalisation. Russia is a crucial supplier of oil, gas and other commodities like palladium and wheat, mainly to Europe and Africa. The war has caused the price of these commodities to escalate, and the general populations and the economies of most countries are feeling the impact of skyrocketing inflation. With oil prices unlikely to fall to more reasonable levels, there will be further obstacles to the growth of international trade.
Globalisation will not disappear suddenly. Consumers will have to get used to buying more expensive goods made nearer home. International trade may not be as global as it is today, but it will still be practised in well-defined regions. China may prefer to trade more with Russia than the US or the EU. US companies may look at South American states to source their commodities and manufactured goods. Still, the wave of onshoring will mean more investment in the US itself. EU countries will trade more among themselves.
The era of deglobalisation will mean increased costs. But it will also mean more food, fuel and political security. The EU will have to increase its defence costs as it will never again believe that World War II has meant that the continent will not go through another major military confrontation.
Most countries will have to rethink their economic models. The bedrock of any new economic strategy must be the investment in human resources.