Unlock Editor's Digest for free
FT editor Roula Khalaf has chosen her favorite stories in this weekly newsletter.
What are the prospects for a still highly integrated global economy? To answer this question, we must start with the underlying forces at work.
The most fundamental is changes in economic opportunity. These include reducing transportation and communication costs, changing comparative advantages, leveraging economies of scale and changing learning opportunities through practice. Changes in economic ideas and geopolitical realities are equally important, especially in the short and medium term. Finally, shocks such as wars, crises, and pandemics also change the perceptions of businesses, citizens, and politicians about the risks, costs, and benefits of cross-border integration.
The history of cross-border integration, especially trade, highlights the interactions between these forces.
The long-term story is greater consolidation. Between 1840 and 2022, the ratio of world trade in goods to world output rose approximately fourfold. However, openness to trade has fluctuated dramatically, with the ratio of merchandise trade to world output tripling between 1840 and 1913, and then increasing by about a third between 1913 and 1945. 2, then tripled again between 1945 and 1990, exceeding pre-1914 levels.
A snapshot of the interactive graphic is shown. This is most likely because you are offline or have JavaScript disabled in your browser.
After the collapse of the Soviet Union and the Empire in the early 1990s, the world economy experienced two eras. The first concept until around 2010 was his one of the label “hyperglobalization” applied by Arvind Subramanian and Martin Kessler in their 2013 paper at the Peterson Institute for International Economics.
The main feature was the rapid growth of international trade compared to world output, with cross-border direct and portfolio capital flows growing even faster than trade in goods and services. By the financial crisis of 2007-2009, the global economy was more integrated than ever before.
Recommendation
After that, the world economy entered an era called “slowbalization.” Subramaniam and Kessler (along with Emanuele Properzi) analyzed this in a November 2023 Peterson Institute article. During this period, trade grew roughly in line with world output, but the share of cross-border investment in world output fell by more than half.
What was the cause of the overglobalization before the crisis? Why did it result in slow balancing? What happens next? The answer to the first question is that since 1990, all three driving forces have come together. That is to say. First, nearly a century and a half of economic growth divergence has created a huge gap in productivity between the most advanced economies and less developed countries, especially China. This created a huge opportunity to take advantage of cheap labor.
Second, container ships, jumbo jets, and advances in information and communication technology have enabled unprecedented cross-border business integration and supply chain disruption. Finally, the shift to a global belief in market liberalization and cross-border opening has led to policy changes. Transformative moments include the rise to power of Margaret Thatcher, Ronald Reagan, and Deng Xiaoping in Britain, the United States, and China, respectively. Highlights in world trade include the completion of the Uruguay Round of multilateral negotiations in 1993, the establishment of the EU single market in 1993, the creation of the World Trade Organization in 1995, and China's accession to the WTO in 2001.
A snapshot of the interactive graphic is shown. This is most likely because you are offline or have JavaScript disabled in your browser.
What ended this period? All the main driving forces have weakened or reversed. As labor costs converged, opportunities for further trade using differences in labor costs increased, but declined. As China's economy grew, its dependence on trade naturally declined. The shocks caused by the pandemic and war have also highlighted the risks associated with widespread reliance on trade for essential goods.
At least as important are ideological changes, including the rise of protectionism and nationalism, particularly in the United States, caused by China's economic rise and the “China Shock” to industrial employment. Similar changes are occurring in China under the Xi Jinping administration. There too, policy shifted from reliance on free markets and private enterprise to increased government control.
Perhaps most importantly, the global financial crisis, the pandemic, and today's great power tensions have turned trust into doubt and risk-taking into “risk aversion.” There has been no substantial global trade liberalization for over 20 years.
What happens next? Continuing with the chaotic status quo seems like the most reasonable answer. The world economy will remain relatively open by historical standards, and trade will grow roughly in proportion to world output. There will be some degree of decoupling of the direct relationship between the United States and China. But if the United States (and other countries) try to shift to other suppliers, it will remain indirectly dependent on imports from China. Many countries will continue to maintain trade with the United States and its close allies on the one hand, and China on the other.
The most likely alternative would be more fundamental destruction. Attempts to limit U.S. actions toward China over national security concerns (Jake Sullivan's “Small Gardens and High Fences”) may result in big gardens and high fences. The election of Donald Trump as president may be the trigger. The dispute over the EU's carbon border adjustment mechanism could be a new trigger for global protectionism.
An integrated global economy is here to stay. But nationalist rivalry between the great powers could cause major disruption. Will this era be an exception? We must work to ensure that happens.
