Globalization Goes Into Reverse
There’s a backlash against globalization underway in many Western countries. Although Americans still say positive things about international trade and immigration, political candidates like Donald Trump and Bernie Sanders have gotten a lot of support for opposing both to a degree that would have been unthinkable a decade ago. Meanwhile, trade deals like the relatively innocuous Trans-Pacific Partnership are suddenly in danger. Britain’s divorce from the European Union is also commonly interpreted as a rejection of globalization.
But there’s a likelihood that today’s anti-globalization warriors are fighting yesterday’s war. By many measures, globalization has been in full retreat since the crisis of 2008.
First, there’s trade. For many decades up until 2008, global trade volumes had been increasing at a healthy clip. But the crisis and recession stopped trade growth in its tracks, and it hasn’t recovered; 2008 was the all-time peak of world trade as a percent of total output:
Next, there’s immigration. Globally, the number of migrants living in other countries has continued to increase, just very slowly. In the U.S., the big immigration boom is over:
Immigration from Mexico to the U.S., the subject of so much political hand-wringing, has gone into reverse. From 2008 through 2014, the population of Mexicans living in the U.S. declined by more than 1 million. The reason? Undocumented immigrants have been going back to Mexico in large numbers.
Then there’s finance. As the Financial Times’ Izabella Kaminska showed with a series of charts from UBS, cross-border financial flows remain well below their pre-crisis peaks, and cross-border bank claims have actually declined.
In other words, the great globalization boom that marked the end of the 20th century and the beginning of the 21st is over, and may even be starting to unwind. The hysteria about globalization is cresting about a decade late.
Why is this happening? The recession is part of the answer. Slower growth, especially in developed economies, means less trade, which leads to less international finance. It also reduces the incentive for immigrants to move for economic reasons. China, the big engine of global growth and international investment, has also slowed down.
The regulatory curtailing of the financial industry might be another factor. The big global banks, mostly based in the U.S. and Europe, suffered huge losses in the crisis, but that was only the beginning. Since then, higher capital requirements, tighter regulatory oversight, and new rules like the U.S.’s Dodd-Frank Act have weakened banks’ business models and reduced their profitability. Humbler banks mean less cross-border financing.
Slower population growth may also be a drag on globalization. The end of the Mexican immigration wave in the U.S. probably has something to do with the dramatic fall in Mexico’s fertility rate, which began plunging in the 1970s. Fewer Mexicans are coming of age every year, leaving family businesses unattended and starving factories and stores of workers. That creates a gravitational pull that slowly calls Mexicans -- especially undocumented immigrants -- back from the U.S.
Elsewhere, low fertility throughout most of the world is undoubtedly a drag on growth. China’s working-age population is now falling by millions every year, and the rate is only set to accelerate. Europe and East Asia are graying rapidly, and fertility has fallen to replacement levels throughout much of the world. Only sub-Saharan Africa, the world’s poorest region, continues to see high fertility.
Yet another trend might be the end of the offshoring boom. Wages have begun to equalize around the world, with an especially steep rise in China. Some estimates even suggest that making things in China is no longer significantly cheaper than making them in the U.S. When you add doubts about quality, intellectual property theft and the sheer hassle of managing supply chains across borders, the case for offshoring looks weaker than it has in decades. Other countries like India might step up to take China’s place, but so far most haven’t shown the ability to marshal the infrastructure and education levels required to become the new workshops of the world.
A final issue might be politics. The increase in protectionism after the Great Recession was slower and subtler than the one that followed the Great Depression, but it’s there nonetheless. China, the offshoring superstar, may now be trying to reduce its economy’s dependence on overseas companies. Meanwhile, the Barack Obama administration has quietly presided over the largest number of undocumented immigrant deportations in U.S. history.
So there are lots of reasons globalization is sliding into reverse. Even if the political winds shift back toward an embrace of trade and immigration, the trends in population, financial regulation and labor cost equalization are unlikely to change course in the next few decades. Globalization’s detractors may make lots of noise, but they’re living in the past.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
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