Source: NASA
World

What It Will Take to Stop Globalization

A trade war would threaten interconnectedness and could make the world poorer.

This year has been full of news about the slowing or perhaps even end of globalization. The main evidence is that global trade volumes appear to have stopped rising, something that hardly ever happens outside of a recession. Still, if you step back a little, you can make a case that the globalization train is still chugging -- slowly -- along.

Globalization Rolls On, For Now

Global connectedness relative to 2005

Source: DHL Global Connectedness Index

This is from the latest edition (released Tuesday) of the DHL Global Connectedness Index, prepared every two years by Pankaj Ghemawat and Steven A. Altman of the Center for the Globalization of Education and Management at New York University's Stern School of Business. Ghemawat, a leading corporate-strategy scholar, also teaches at the IESE Business School in Barcelona. He's a global guy! But for the past decade (since Thomas Friedman came out with "The World Is Flat" in 2005), he's been making the case that the world isn't nearly as interconnected as globalization's prophets make it out to be -- and isn't increasing its interconnectedness all that rapidly.

The above chart, for example, measures global flows of trade, capital, people and information by depth (volume, basically) and breadth (how widely distributed around the world the flows are). The depth of interconnectedness and the overall connectedness have both more than recovered from the sharp downturn of 2008, but the breadth hasn't changed much at all. If you look just at the flows that make up the depth index, another divide emerges:

It's All About the Information

Depth of global connectedness relative to 2005

Source: DHL Global Connectedness Index

Information flows (internet traffic and telephone calls, mainly) have exploded, while trade and capital flows are still below their pre-recession peaks. Last February, the McKinsey Global Institute put out a report on this rise of "digital globalization" and declared that:

Flows of physical goods and finance were the hallmarks of the 20th-century global economy, but today those flows have flattened or declined. Twenty-first-century globalization is increasingly defined by flows of data and information.

Ghemawat is dubious of this digital-takeover angle. "If you looked back to the 1930s, information flows probably kept rising then, too," he told me when I visited his NYU office last month. His overall take was that on the whole, while things had slowed down since the 1990s and early 2000s, global integration was still fitfully increasing. "We're neither inevitably headed for a great reversal or a renaissance," he said. "Times were bad then, and they're bad now. But if we hadn't done dumb stuff like Smoot-Hawley ..."

Smoot-Hawley was the tariff act passed in 1930 by the U.S. Congress that some economists blame for turning a recession into the Great Depression. Now the U.S. has elected a president who has said some pretty Smooty things about trade. "I wasn’t quite as worried before the election because ... I couldn’t see a trigger equivalent to the Smoot-Hawley tariff act," Ghemawat e-mailed when I asked him this week about the potential implications of Donald Trump's victory. "Now I can."

What Ghemawat fears is a global trade war. As he wrote last week in the Harvard Business Review:

Trump has effectively tapped into a vein of U.S. anger, and his actions are likely to stir up anger overseas as well. U.S. exporters in particular have to watch out for retaliation by other countries.

By gumming up the global economy so much that they throw growth into reverse, these kinds of actions risk making everybody poorer. That said, there are other potential responses to anxieties about trade that wouldn't necessarily be so bad. Pressuring trading partners to buy U.S. products and pressuring companies to demonstrate that they're creating jobs in the U.S. could actually be healthy, Ghemawat argued in HBR.

Treating globalization as an all-consuming, unstoppable force hasn't worked out very well for political elites in the U.S. and Europe. Trying to roll it back is a risky, possibly economy-killing strategy. Working harder to manage globalization with domestic political considerations in mind, though, could actually help save it.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

    To contact the author of this story:
    Justin Fox at justinfox@bloomberg.net

    To contact the editor responsible for this story:
    Stacey Shick at sshick@bloomberg.net

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