Deglobalisation 2.0: Trump and Brexit are symptoms
We are in the midst of a deglobalisation wave of which Trumpism and Brexit are mere symptoms. Deglobalisation can be recognised in almost all countries and at the global level. How has deglobalisation occurred in the past and in this day and age? Professor of International Economic Relations and Macroeconomics Peter van Bergeijk analyses the concept of deglobalisation in this pre-publication of his book 'Deglobalization 2.0: trade and openness during the Great Depression and the Great Recession'.
Do we live in strange and unusual times? We seem to live in the times of Trumpism and Brexitism. Even in the Netherlands – a free trading nation par excellence – times are changing as popular support for the Dutch populist Baudet increases significantly. Baudet aims at a full-fledge Nexit: an end of Dutch EU membership. We thus seem to experience a new agenda, specifically aimed at the delinking of economies and deglobalisation everywhere. This is a shocking experience for the generations that grew up in the era of modern globalisation.
Admittedly, our epoch therefore feels like a unique one. However, it is not, as our grandparents have been in a similar situation before. Of course, the voices and characters on the world stage are different, but the stories of the Great Depression of the 1930s and the Great Recession that we are still experiencing today, are similar to a large extent.
The start of the story line as is presently being told, is a financial crisis that reduces demand and destroys confidence. Next follows a collapse of world trade and investment, that marks the end of decades of intensifying globalisation, which is characterised by increasingly free international trade and capital flows. This world trade (and investment) collapse starts a period of deglobalisation that remains hidden under the veil of initial recovery at first, but later becomes clear and measurable. This is what happened in the 1930s, and it is also happening today.
The share of international trade in global production is still below the peak level of 2007, and there is no apparent sign of approaching recovery. Similar forms of deglobalisation can be observed in financial flows (including bank lending, Foreign Direct Investment and recently also in development cooperation). It is important to note that the change from more globalisation to less globalisation occurred well before Brexit or Make America Great Again appeared on the horizon. Consequently, we should interpret Trump, Brexit and the other populist upsurges as symptoms rather than causes of deglobalisation. We need to delve deeper if we want to understand the challenges of the new deglobalisation phase.
The second significant deglobalisation
To some, it is especially worrying that the current retreat from globalisation started in democracies, because the Bretton Woods institutions (and likewise the European Union) have been built by democracies. Hence, the popular anti-globalist movements seem to hit the system at the heart.
While I do not want to downplay the issue of populism, it is, however, important to recognise that the turning point of globalisation in major economies occurred around the start of the Great Recession, well before the Brexit vote, the election of President Trump and the electoral success of Baudet’s Nexit platform. It is equally important to see that the phenomenon of deglobalisation requires a much broader conceptualisation than the ‘backlash from globalisation’ or the ‘retreat from globalisation’ phenomena that are already being recognised by many authors. Deglobalisation also occurs in countries where support for globalisation is still strong; a puzzle that has not yet been addressed.
Before the outbreak of the Great Recession, in the era of globalisation, multiple economic historians acknowledged that globalisation was not new. Many comparisons between the globalisation phases of 1870–1914 and the post Second World War wave that ended in 2008 exist. It is now time to acknowledge that the current deglobalisation is not new either, and that it is likely to stay for quite some time. For the world as a whole, economic globalisation is still below its 2007 peak level and, based on current projections, will remain so until at least 2024.
Similar patterns can be observed at the individual level for former (United Kingdom and United States) and potentially new hegemons such as China and Germany. This deglobalisation predates the populist attacks, and can be observed along many dimensions and in all regions of the world. Data convincingly show that globalisation and deglobalisation are recurring phases of our economic system. Because of this recurrence, it is important to both study the current situation, and look at its major predecessor to find similarities and differences.
Why does deglobalisation occur?
My basic argument is that phases of strong globalisation carry the seeds of their destruction. Such phases generate the forces that ultimately set limits and force a retreat from internationalisation.
A first mechanism that operates in national economies, is that redistributing the gains from further openness to the people who lost from globalisation, becomes more difficult at higher levels of globalisation. This is a double-edged sword. In the initial phase when a country starts to open up their economy, it experiences steep increases in productivity and welfare. However, once the low-hanging fruit has been picked, the same increase in the intensity of globalisation brings less benefits to the economy. At the same time, the costs of redistribution at a low intensity of globalisation are initially small, but they are on an increasingly steep path. At some point, further globalisation becomes a loss-making activity (namely when the economy moves beyond the intersection of costs and benefits).
A second mechanism operates in the international arena. We can observe that during both the Great Depression of the 1930s and the Great Recession, the leading power of the time (the hegemon) deserted the rules of the game that underpinned globalisation and were actually designed because of its interest in an open trade and investment climate. An open, stable and relatively peaceful system allows other countries to develop and grow faster, hence capturing a larger share of the benefits of globalisation.
In the early phase of globalisation, a smaller share from a larger economic pie may still be an improvement. At some point, however, the costs of being a hegemon outweigh its benefits. It is ironic but sad, that the United States and the United Kingdom (the hegemons that helped building a constellation in which trade, democracy and peace are reinforcing aspects of the world order) are spoiling global and European governance.
The challenge of deglobalisation
The timing of the retreat from globalisation is bad, because concerted action is necessary in view of many interrelated urgent challenges, including the need to feed a still increasing world population, global warming, the new scarcities of water and land, and mass migration. Coordination of policies in the economic domain remains essential, because the world economy is still fragile, the effects of the unwinding of quantitative easing are uncertain, and crises of confidence are recurring. International and regional differences suggest different policy mixes. Global leadership is urgently needed; what can we do?
If anything, the deglobalisation phases substantiate the need for protection against the power play by big economic nations. The procedures, rules and regulations of the World Trade Organization (WTO), although certainly not perfect, provide protection to the developing nations and the smaller advanced economies. It should be (and if not, it will become increasingly) clear that protectionism does not protect, and that the costs of deglobalisation are borne by those that lost from globalisation: low-skilled, low-income, ordinary people.
From a long-run perspective it is in particular problematic that the leading role is assigned to only one nation, and that this role is and will always be contested by new nations. Losing power is not an easy process, which we especially witness nowadays. Nostalgia for the grandeur of the past appears to be a strong force for building anti-globalist (election) platforms. Hence, strong globalisation carries the seeds of its own destruction. We thus need to get rid of the hegemon in a traditional sense, because the successive hegemon will probably not do better in the end.
A new hegemon?
Currently, there seem to be two candidates for the role of hegemon: China and the European Union. Both explicitly support the open multilateral trading system. Both are able to develop long-run policies (regarding the environment, for example). Both suffer from the actions of the previous hegemons. Moreover, both appear to be unwilling to play that role. The current disorder may therefore actually help to build a coalition of the unwilling that is needed to move the leadership of the world economy to the level where it belongs: the world community at large. Of course, this will not be an easy process, and I am well aware of the fundamental differences that exist between the European Union and China in terms of human rights and freedom.
The coalition of the unwilling should be based on a common understanding that with the United States’ retreat from global leadership, the world needs constructive and deep cooperation between Brussels and Beijing to change the rules of the game wherever necessary, in order to make global governance more transparent, fair and open to contestation. International organisations and institutions will remain important actors. Not just as the guardians of globalisation, but also of deglobalisation.
We are in the midst of a deglobalisation wave. Increasing trade uncertainty, diminishing returns of globalisation and increasing costs of redistribution underpin this wave. Our own deglobalisation period started with the Financial Crisis. Deglobalisation occurs in international trade, foreign investment and other global financial flows, including bank lending and Foreign Direct Investment. Deglobalisation can be recognised in almost all dimensions (except for social globalisation, that continues on its original growth path), for most countries and at the global level.
On top of this wave that is driven by purely economic forces, significant changes have occurred in world leadership. Handing over the role of hegemon is a painful political process for countries that lose economic power. Therefore, it is no surprise that the strongest breaches of the move towards international integration and cooperation have first occurred in the United Kingdom and the United States, where nostalgia and a cultural clash between conservatives and liberals provides a fertile breeding ground for economic nationalism. The politics of deglobalisation are especially important since, in contrast to the 1930’s, the current backlash against globalisation is driven by western democracies.
The current political movers of these global processes are not innocent, but it is relevant that we see that deglobalisation started well before they came to power. They are symptoms, because the opportunities for their election platforms arose from fragmentation and an increasing interest in populism that resulted from the financial crisis and its ensuing world trade collapse. As of yet, their power is significant, but not sufficient to enforce deglobalisation towards a level encountered in the early 1950s. This would, however, change if more countries were to follow beggar-thy-neighbour policies and profit shifting strategies.
A repositioning of the extent of internationalisation is still manageable, but then concerted action is necessary to make the required changes in the rules and regulations of the world economic system. Those rules and regulations should allow for changes in the composition of the group of countries involved in global governance. Furthermore, they should be redesigned to meet the requirements of globalisation and, as recent experiences have made crystal clear, also meet the challenges posed by a wave of deglobalisation.
Peter A.G. van Bergeijk
'Deglobalization 2.0. Trade and openness during the Great Depression and the Great Recession'
Edward Elgar Publishing, eISBN: 9781788973465
224 pages, £67.50