The coronavirus has emerged as the most serious challenge to the wave of globalisation which has been underway since the 1990s. The pandemic has led to calls for new restrictions on flows of trade, capital and people and has increased strains between the US and China.
Globalisation had peaked even before the virus hit and would have been in retreat in many areas, even without the headwind from the pandemic. Technology drove this most recent wave of globalisation as it became easier to outsource production to places where the cost of labour was low. As production techniques have become more capital intensive, that driver of continued globalisation has faded.
Globalisation was a political development too, underpinned by a belief in the major powers that increasing integration served their strategic interests. That belief has been fractured by the emergence of an autocracy as an economic superpower and geopolitical competitor to the West.
As the chart shows, the first wave of globalisation ended in a period of de-globalisation, while the second wave was followed by a period of stasis. Are we now at the end of the third wave, and if so, will we see globalisation stall or actually be rolled back?
Globalisation may just stall over the next decade, but a period of de-globalisation – with cross-border flows of trade and capital falling as a share of GDP – is increasingly likely.
If this is driven by new technologies, it will not be bad for the world economy, though it would make it much harder for poor economies to sustain rapid growth.
But it could take a more malign and policy-driven form, exacerbated by the social, political and economic changes wrought by the coronavirus.
In particular, if we are right that growing bilateral tensions reflect China’s strategic threat to the US, then some form of decoupling is inevitable, and this will have an adverse effect on global GDP.
Capital Economics Snapshot
Listen to our Senior Economic Adviser Vicky Redwood discuss the End of Globalisation with Jackie Lilinshtein, our Head of Digital.