Is globalization in retreat?

Globalization is facing an existential crisis. Is its influence waning, as we see increasing numbers of Western countries focusing more on prioritizing national economies over international co-operation?

The UK, after decades of a shift to a free market, service-led economy, voted to leave the European Union (EU) in 2016.  Fast-forward to July 2019, and Britain’s new PM has gone on record to say he would leave the EU without any sort of Free Trade Agreement (FTA) in place with Europe.

The US is facing a similar period of upheaval, with wildcard candidate Donald Trump storming to victory in the 2016 US elections. He earned his spot in the Oval Office by making promises like those espoused by the most fervent of Brexiteers – such as greater control over immigration and taking a hard-line with trade and tariffs.

The result is a global economy far more volatile than it has been for many years, with analysts BlackRock scoring Global trade tensions a ‘4’ on its risk indicator index.

In fact, it pinpoints the exact moment trade because a major issue, when Donald Trump placed tariffs on a raft of Chinese goods, in a move widely seen to reduce America’s trade deficit by replacing multilateral free trade agreements with bilateral arrangements.

In this blog post, we’ll explore globalization, explain the recent rejection of its ideologies and discuss why all is not as it seems.

The 2008 recession initiated globalization’s retreat

Globalization has enjoyed unparalleled success in the last thirty years. As free trade agreements between nations were thrashed out, the number of goods and services on offer increased exponentially.

The Internet further facilitated globalization by effectively making an already shrinking world even smaller, by improving communication between entire continents with tools such as Microsoft Messenger, Skype, VoIP-enabled technology and cloud-based technologies.

Until 2008, when the global financial crisis ended three decades of successive growth on goods and services around the world. In fact, ever since the banking crisis,  global capital flows have fallen by 65% according to a study by McKinsey & Company. This effectively means that almost two-thirds of money spend pre-crash is not being circulated or invested across the world.

But away from capital, the 2008 financial crash had real and tangible consequences for ordinary people. In the UK, house prices slumped across the country by an average of £35,580, leaving many homeowners in negative equity. While house prices have recovered in many parts of the UK, with the South East seeing the most gains, other parts of the nation have struggled to replicate its success.

Northern Rock, is perhaps one of the more long-lasting memories of the financial crisis in the UK, with concerned customers flocking to nearby branches in their droves, to withdraw cash from the stricken bank. The bank invested heavily in international markets, primarily in the US, which consequently, when investors and banks stopped lending to anything that might be over-exposed to the housing market, Northern Rock fell.

The great recession has come to dominate politics over the last decade. Numerous well-developed nations initiated fiscal stimulus packages to bolster their damaged economies. Most notably, the UK government in 2010 initiated what has come to be known as austerity, a series of policies designed to reduce government budget deficits through spending cuts, tax increases or a combination of both.

The UK isn’t alone in its pursuit of austerity, with Greece, Italy, Portugal, Ireland, France, Germany and many other countries opting to protect their economies this way.

Austerity has been linked to poverty. In 2018, UN rapporteur on extreme poverty and human rights ended a two-week visit to the UK with a damning assessment. He said government policies had: “systematic immiseration [economic impoverishment]" of a significant part of the UK population, meaning they had continually put people further into poverty.”

The UK Government said his report was “barely believable” but statistics produced by The Social Metrics Commission indicate that approximately 22% of the UK public are in poverty, which is around 14.2 million people.

Why Brexit, Trump and globalization are linked

These 14.2 million people - in poverty - could have been more likely to vote for Brexit, according to a study by Sascha O. Becker and others in their paper titled: ‘Who voted for Brexit? Individual and regional data combined’ in the European Journal of Political Economy.

It’s been argued that globalization hasn’t served everyone, everywhere equally – and the rise of populist figureheads such as Jeremy Corbyn, Donald Trump and Luigi Di Maio offers a way for the ‘left behind’ to have their voice heard.

The patterns emerging with the rise of populist politicians and an increase in poverty in developed nations is remarkable. Italy, who elected a populist government in 2018, has five million of its people in absolute poverty – which remains a record high. It’s a similar story in the US, where post-recession, impoverished Americans represent 12.3% of the population – higher than the 11.3% of 2000.

But it isn’t just those in poverty that are embracing populist policies, with data from an LSE study showing that an increasingly squeezed middle-class. The paper Competition & Change speculates that Brexit voting intention was based on worsening financial circumstances for the middle class.

So, what do Brexit, Trump and globalization have in common? Many see Brexit and Trump’s election victory as a rejection of free-market liberalism. They’re both protectionist, and likely consequences of the 2008 financial crisis where the working and middle class suffered the most.

Austerity, dwindling house prices, low-interest rates and jobs being outsourced and relocated to developing nations, such as China, has led to where we are now in 2019, where globalization, politically speaking, is being repealed.

But, is globalization in retreat?

On face value, it may appear that globalization is being rejected by many developed nations. But research by Susan Lund and Laura Tyson suggests something different is happening. While G20 nations - under pressure from their electorate – continue to pile on projectionist tariffs and sanctions, to the tune of 6,600 since 2008, globalization has gone digital.

As global capital flows continue to fall, digital flows or the movement of data has increased exponentially. In fact, according to Cisco Systems, cross-border bandwidth used grew 90-times from 2016 to 2016 and they reckon that will grow another 13-times by 2023.

This has upended the traditional model of trading goods and services. Indeed, music, video and other digital goods aren’t subject to the same tariffs and regulations as physical goods. It’s also opened opportunities for smaller businesses to muscle in on larger organization’s markets.

For instance, smaller organizations can reach consumers all over the world without using traditional retail shops, by using things like eBay, Alibaba, Amazon Marketplace and others. Approximately 50 million small and medium-sized businesses use Facebook for marketing and nearly 40% of their fans are foreign, offering ample employment opportunities for digitally-savvy workers.

Also, 3D printing is another technology that could transform globalization. Indeed, while the technology is in its infancy right now, Lund predicts a future whereby large, centralized manufacturing is decentralized and schematics for complex products are made available online to print either at a local center or in your own home.

Fundamentally, this inverts the existing premise of manufacturing, whereby items are mass-produced at a dedicated factory and then shipped to consumers all over the world.

Finally, global labor markets are undergoing transformation because of digital technology. Websites such as UpWork, boast vast pools of highly-skilled workers, offering their expertise on a consultative basis. According to research by The World Bank, roughly 48 million freelancers find their work on online platforms like UpWork, and it helps skilled workers in developing countries such as India, access higher wages.

Lund and Tyson suggest that this ‘new’ globalization will realign the world. Indeed, instead of globalization being trade-based and Western-led, digital services and developing nations such as China and other emerging economies will be leaders in this new era.

We could learn from the last era of globalization

In an interview with the McKinsey Global Institute, three CEOs were asked about the threat’s globalization faces and asked what business leaders can do to help sell the benefits of globalization. Bill Winters, CEO of Standard Chartered said this:

“I think there’s a real denial about the fact that individuals or large groups of individuals were fundamentally impacted and needed help. They needed help, and they needed hope and purpose. I think that, as a global community, we failed to recognize that, and we’re now experiencing some of that backlash, whether it manifests itself in “Brexit” or manifests itself in potentially populist trade policies in the US or elsewhere.

We need to do more work to help observers and citizens of our countries understand the benefits of trade, which are genuine and real, but at the same time recognize that people will be impacted by this. That could mean a significantly stepped-up focus on re-education—which is going to start with primary education, which we know is also lacking in a number of our communities—and then re-education, job training, and financial assistance to people through transition.”

Some have touted social enterprises as a potential solution to the issue facing globalization and we will discuss this in a future blog post.

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