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  August 14th, 2023 | Written by

Questioning the Merits of Globalized Trade

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Threats to global trade aren’t new. History is full of protectionist hyperbole coupled with good-faith arguments on the merits of trade solely between trusted partners. In the end, we come back to the safe harbor that is a globalized market. But that doesn’t mean the conversations in the other direction ever subside. In fact, we’re returning to the issue once again. 

Global Trade at a Glance 

If we zoom out and look at global trade growth, there is little evidence to suggest we are in a deglobalization moment. At the onset of the pandemic global trade growth slowed, but it has since rebounded and is arguably at its highest value ever. Yet, viewed solely as a share of GDP, here is where we see a dip. Most of the dip can be explained by China and India. From roughly 2003 to 2010 both economies were exporting goods and services at a steady clip. India continued to climb but eventually began declining by 2013 while China has experienced an unvarying decline since 2010. 

The 1990s was an era characterized by hyperglobalization. Economic indicators were broadly over-performing and extreme poverty was greatly reduced. East Asian countries witnessed dramatic growth and as a result standards of living globally increased. Electronic devices – smartphones and computers specifically – provided hundreds of millions of people ways to be more productive and of course, improve entertainment and communication options. Airline prices came down allowing more and more people to travel all thanks to market-oriented policies and openness. 

Peace Matters

Another often overlooked reason contributing to the boom of the 90s and early 2000s was a historically long period of peace. When countries are interconnected the incentive to play nice is substantial. War in this era would have equated to dreadful consequences. Yet, all along the tensions surrounding winners and losers, inequality, and the plain desire for something different were evident. This first began around 2015, later reemerged during the pandemic, and is now back in the news following Russia’s invasion of Ukraine. 

Our Parents Were Better Off

The age-old concept of parents putting everything in place so their children will have a better life seemed to have run its course by the late 2010s. The average worker globally was better off compared to their predecessors. Nevertheless, there is evidence pointing to some advanced economy workers underperforming the previous generation. There were also interesting geographic observations with communities importing freely from developing countries doing worse than those communities without the same amount of imports. This led to natural scapegoats (cheap labor abroad is stealing American jobs) and helped to fuel protectionist voices. 

In parallel, big firms became gigantic firms and a cohort of middle and upper-management people were getting extremely rich. People around the US especially blamed China for unfair competition due to the country’s use of subsidies and entry restrictions to doing business. Most economists at the time did not recommend protectionist policies, but rather some manner of redistribution from those at the top to those left behind. 

The COVID Effect

COVID was unique in that it brought about both a supply and demand shock. On the supply side, suppliers faced a series of lockdowns that hampered deliveries. From the demand perspective, cars, second homes, and medical supplies rose dramatically. Now, the delays we all faced in receiving goods and services were real. Yet, the US (and many other countries) proved very resilient and despite overall trade volume decreasing, importers and exporters collaborated with the same partners before the pandemic and actively sought out new ones throughout. This should have been enough to at least stave off deglobalization arguments for a short while. But what came next has fueled a resurgence.  

A Geopolitical Hot Bed

The most interesting outcome of Russia’s invasion of Ukraine had nothing to do with Russia or Ukraine. Germany, one of the world’s largest economies, depended on Russia for two-thirds of its natural gas, roughly one-third of its oil, and half of its coal. The invasion pushed Germany and many other European countries into a very difficult position where economic interests favored supporting Russia, but the political and social environment absolutely prohibited it. 

The alarm went off with leaders and influential actors publicly chastising certain countries for having cozied up to Russia in exchange for cheap energy. Others wondered how their shifts to a carbon-neutral future were possible without cheap energy subsidizing the path forward. In parallel China became increasingly hostile in its position with Taiwan, home to arguably one of the world’s most valuable industries – semiconductors. Should China seize control of Taiwan Beijing would reap the spoils of approximately 20% of the industry. At this point, most of the world would be pushed into doing business with an openly hostile aggressor.  

A Cold Status Quo

The future is notoriously impossible to predict. One direction could be a US/China split where respective allies choose their camps and trade within them. Yet, when we think about how new ideas emerge, population matters. Having the world’s largest countries (China, India, US, Indonesia, Pakistan, Nigeria, Brazil, Bangladesh, Russia, and Mexico) more or less aligned is a benefit to humanity. Looking at this list challenges certainly exist. 

Some are concerned about how these splits affect issues such as climate change. The cost to produce solar panels in the West is higher than in China. If you remove low-cost suppliers from the chain decarbonization efforts will stall. While climate change is an issue, making people richer (especially among some of the poorer nations in the previously mentioned list) would lead to communities being more resilient to climate shocks and better equipped to invest in adaptation measures. 

For the time being, we find ourselves in a new cold war of sorts. It would be foolish to forget what occurred during the interwar period in the 1930s. Multilateral trade shifted to trade within empires and friends. This ratcheted up the heat leading into World War II. Policymakers have their work cut out for them over the coming years. Until quite recently peace and open markets were an aberration in the human experiment. War and conflict had been the norm.