Is the world economy deglobalizing? And if so, why? And what comes next?

The globalization of the world economy continued even during the COVID pandemic, but recent changes in government policies and public sentiment may herald a new era of deglobalization, suggests a paper published on the Brookings Papers on Economic Activity (BPEA)- Conference scheduled to be discussed on March 31 .

The authors – Pinelopi K. Goldberg of Yale University and Tristan Reed of the World Bank – use data on trade, capital flows and immigration to show that globalization, after two decades of rapid progress, slows after 2008-2009 , but has continued financial crisis.

Government policy and public sentiment began to shift toward deglobalization around 2015, with growing concerns about the labor market impact of US imports from low-wage countries, fueling a trade war between the United States and China. But the economic impacts, while significant, were not enough to reverse decades-old globalization trends, states the paper Is the Global Economy Deglobalizing?

The pandemic raised questions about the fragility of global supply chains and prompted calls for a domestic “relocation” of manufacturing. But after a temporary dip in 2020, trade picked up sharply. For the most part, US firms maintained their relationships with foreign suppliers and even established new ones.

“If anything, trade has increased the resilience of economies during the COVID pandemic,” the authors write. For example, imports of face masks from China and Korea met a demand that US suppliers could not meet.

However, Russia’s invasion of Ukraine in February 2022 has created new calls for reshoring and “friendshoring” (trade only with friendly countries) by exposing Europe’s energy dependency on Russia. For example, in October 2022, the United States imposed sweeping restrictions on semiconductor exports to prevent China from making technological advances.

“We are in a changing landscape.”

“These developments can plausibly be seen as signs of a new era,” the authors write. They conclude their paper with “highly speculative” thoughts about the possible long-term consequences once deglobalization actually begins. Below:

• Increased friendshoring could increase countries’ resilience to geopolitical shocks such as wars, but reduce resilience to other shocks such as pandemics.
• Growth and innovation could slow in a deglobalizing world economy, with a decoupling between the United States and China posing a particular threat.
• Less foreign competition in the form of trade and immigration could contribute to higher prices and wages in the United States.
• As advanced economies turn inward, poverty reduction and development in small, low-income countries that rely on exports could slow.

“We’re in a changing landscape,” Goldberg said in an interview with The Brookings Institution. “We clearly see a turning point in politics. We’re not seeing the results in the data yet, but given the shift in policy, one would expect a big impact later.”

CITATION

Goldberg, Pinelopi K., and Tristan Reed. 2023. “Is the World Economy Deglobalizing? And if so, why? And what comes next?” BPEA Conference Draft, Spring.

DISCLOSURE

The authors have received no financial support from any company or person for this article or from any company or person with a financial or political interest in this article. The authors are not currently an officer, director, or board member of any organization with a financial or political interest in this article.