Is globalization in retreat?

Production and investment have now become more global and interconnected and services are increasingly being traded across borders

The 45th president of the US has declared war on globalization. The Brexit vote did something similar in Great Britain. The two countries underwriting the postwar international order have declared their intention of putting their national interest above all else. Multilateral trading, investment, and even visa, agreements face new threats. Might this assault succeed? 

Globalizing forces have been rampant ever since the first men migrated out of Africa. The Roman empire was a globalizing force in the classical age, as was the expansion of Islam during the Middle Ages, and the British empire in more recent times. So was the overland silk route and Indian Ocean trade, from China, via India to the Horn of Africa and the Mediterranean, trans-Atlantic trade, and more recently the World Trade Organization (WTO).

The cost and risk of travelling long distances through little-known lands or seas on slow animal and wind-propelled power constrained the pace of globalization. Most people lived and died near their place of birth. Only ruling elites could afford to buy the small quantities of international goods, such as Chinese silk and porcelain, or Indian muslin and pepper, transported over long distances in modest quantities. This trade nevertheless enhanced the incomes of the artisans producing these high-value goods, and the quality of life of those consuming them. Countries connected to this international trade, such as China and India, were the most affluent. There were ebbs and flows on account of war and invasions, but world exports and imports together never exceeded 10% of global gross domestic product (GDP) till the 19th century.

The technology of the industrial revolution enabled rapid movement of large volumes of factory-produced goods, and people, over long distances at sharply reduced costs. International trade made rapid strides in the 19th century, peaking at around 30% of global GDP on the eve of World War I. There was, however, a dramatic retreat in the interwar period, as it plummeted back to around 10%. But it resumed its triumphal march in the postwar era, recovering to 30% by the 1970s, and crossing 60% in the first decade of the 21st century. 

The benefits of globalization could now be more widely shared. First, industrial products were produced more cheaply and available in greater abundance than those produced by local artisans. Second, the range and quality of goods increased, enriching material life, with even the poorest enjoying a better material life than pre-industrial elites. Third, large external demand raised the prospect of hyper growth and, therefore, a more rapid rise in the standard of living, which had inched forward at a glacial pace for millennia.

But there were also losers over the short term. Traditional industry became uncompetitive and unviable. A large number of people in the colonies lost a source of income through ‘deindustrialization’. At a time when agriculturists in industrializing countries were moving into more productive and higher income yielding jobs, workers in the colonies were compelled to fall back exclusively on low-productivity agriculture. Their material life nevertheless improved as they shared the productivity gains through the increased availability of cheap industrial wage goods.

The spread of the industrial revolution to the erstwhile colonies in the postwar era is slowly reversing this great divergence because it is now cheaper to produce there. This has accelerated growth even as it has fallen off in advanced countries, improved overall well-being and facilitated the spread of liberal democracy. With declining growth in advanced countries has come higher structural unemployment and a declining labour participation rate. This is fuelling a backlash against globalization and undermining liberal democracy. It was older and semi-skilled workers in outlying, less cosmopolitan areas who voted to leave the European Union. Likewise, Donald Trump’s most trenchant supporters are relatively less-educated blue-collar poor white males in rural backwaters and crumbling industrial areas. 

Ironically, this backlash is occurring at a time when the argument for extending the scope of globalization beyond free movement of goods to movement of people across borders, has never been stronger, owing to the ageing of advanced economies. It is easy to forget that the current losers were among the first beneficiaries of globalization during the colonial era, and even today their material life continues to improve despite stagnant real incomes. Like their former colonial counterparts, they also share in the productivity gains through free trade such as cheaper wage goods, and, increasingly, services enabled by the communications revolution.

The anti-globalization movement and the retreat of liberal democracy are reminiscent of the economic nationalism that brought the colonial era to an end, culminating with the unsustainable high cost ‘Import Substitution Industrialization (ISI)’ model of growth that turned its back on free trade. Unsurprisingly, it was the East Asian Tigers, and then China, who returned to the welfare-enhancing embrace of international trade that forged ahead. History seems to have turned full circle, with the former colonies defending globalization even as the original proponents turn their backs on it. There is a lesson in this for the anti-globalization movement, as a low-growing, high-cost economy is the inexorable outcome of turning our backs on international trade. 

The march of history is rarely linear. But long-term trends are nevertheless discernible. The origin and persistence of international trade, and its bounce-back with renewed vigour each time it retreated, lies in the undeniable case for its welfare effects, made over two centuries ago by the economist David Ricardo. Its expansion has been accompanied by robust growth, and its retreat, with stagnation. Its welfare benefits outweigh short-term disruptive effects, which often make the former counter-intuitive. The future is unlikely to be any different, the current tide against globalization notwithstanding. Production and investment have now become more global and interconnected, services are increasingly being traded across borders, and social media is spawning a global civil society. Attempts to roll this back are as likely to succeed as the abortive Luddite assault on industrialization. The world awaits new statesmen who can articulate the counter-intuitive case for globalization to domestic constituencies, and harness its benefits.