Globalization Threatened By International Tensions

Globalization has taken a beating during the last two years, as geopolitical tensions, such as the US-China rivalry, public backlash in many Western nations, and the long-effect of the Covid-19 pandemic weigh on optimism about global trade relationships this year.

Tensions between the US and China continue: the Biden administration has ratcheted up curbs on chip companies’ exports to the world’s second largest economy, while the tit-for-tat tariffs imposed during Dunald Trump’s presidency remain in place.

Russia’s invasion of Ukraine set back globalized commerce, as the US, the UK and the European Union sanctioned Moscow.

Once the champion of globalization, some in Washington are calling for “friend-shoring” as they seek to encourage companies to shift manufacturing away from authoritarian states and toward democratic allies.

The goal is to prevent nations like China and Russia from leveraging their market advantages in key raw materials, products or tech-industry inputs to disrupt the US economy, according to Bloomberg Quick Take.

This is having an impact on global trade which turned negative during the second half of 2022, with geopolitical frictions, persisting inflation, and lower global demand “expected to negatively affect global trade during 2023,” the United Nations Conference on Trade and Development (UNCTAD) said in a report in December. Global trade reached a record level of about $32 trillion for 2022, according to UNCTAD.

Prior to Trump’s election in 2016, there was little pushback against globalization. That changed after President Trump erected trade barriers and adopted his “America First” approach, tapping into frustration felt among the American middle class that the quality of their life had declined.

Cost, Benefits

In 2017, former Morgan Stanley strategist, Ruchir Sharma, who is now Chairman of Rockefeller International, wrote that the world was entering an epoch of "deglobalization," triggered by a populist backlash against the increase in global trade, migration and capital flows that took place from 1970 to 2008.

While globalization was great for upper-class citizens in rich countries, it was negative for the middle class in the United States, a key factor that created support for Trump. According to CPS, it has been in a downtrend for decades.

Size of the middle class in the United States, Source: Current Population Survey (CPS)

The American middle class has witnessed its per capita income decline as its jobs were exported to developing countries, such as China. According to McKinsey, the number of manufacturing firms and manufacturing plants in the United States has fallen roughly 25 percent since 1997.

Throughout many Western nations, the middle class has watched as their jobs were exported abroad. Germany, France and the UK have developed their own Rust Belts, a US term of once prosperous industrial regions that have since fallen into decay, often due to globalization.

Despite this sentiment, the benefits of globalization have been immense. Globalization gives all nations access to a wider labor pool and access to jobs. It also provides nations with the ability “specialize” and to tap much-needed resources, according to Harvard Business School.

“Through globalization, developing nations often gain access to jobs in the form of work that’s been outsourced by wealthier nations,” it said.

And it has improved standard living. Poverty has decreased by 35% since 1990, as 1.1 billion people have escaped extreme poverty, according to the World Bank.

Source: Milanovic, B., Lead Economist, World Bank Research Department, Global income inequality by the numbers. Annotations by James Plunkett.

History’s Warning

But if history provides an insight into the future, deglobalization should be a concern. The last period of deglobalization lasted from 1914 to 1945, coinciding with massive economic disruptions and two world wars.

Worldwide economic growth is projected to slow. The International Monetary Fund projects that global growth will fall to 2.9 percent in 2023 but rise to 3.1 percent in 2024. The 2023 forecast is 0.2 percentage point higher than predicted in October but below the historical average of 3.8 percent.

And the world appears to be splitting along strident geopolitical blocs. Chinese President Xi Jinping met his "dear friend" Vladimir Putin in Moscow on March 20 as he sought to deepen economic ties with an ally he sees as a useful counterweight to the West and to promote Beijing's role as a potential peacemaker in Ukraine.

Putin used the visit to criticize the US and its allies.

“Unlike some countries claiming hegemony and bringing discord to global harmony, Russia and China are literally and figuratively building bridges, Putin said. “Our countries, together with like-minded actors, have consistently advocated the shaping of a more just multipolar world order based on international law rather than certain ”rules“ serving the needs of the ”golden billion.”