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The pandemic has turbocharged the deglobalization process towards increasing protectionism around the world. Anthony Okolie talks with Sohaib Shahid, Senior Economist, TD Bank, on the risks inward-looking policies may pose to the global economic recovery and geopolitical stability.
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- Sohaib, you wrote a great report called "Deglobalization and its Discontents" around how the pandemic is, in your words, turbocharging deglobalization. But before we get into the details, what is globalization, and how has it evolved in recent years?
- Well, globalization is the term we use to talk about the interconnectedness of economies, cultures, and population. And this includes the cross-border movement of goods, services, technology, people, and even ideas.
We can divide modern-day globalization into three waves. So the first wave started towards the end of the 19th century and lasted all the way until the First World War. And this wave was characterized by an improvement in technology which led to the introduction of the steam engine, which reduced trade costs and increased global trade.
The second wave started soon after the end of the Second World War, and this wave was characterized by the introduction of multilateral institutions which led to an increase, again, in global trade. And this wave ended towards the end of the 1980s when the Berlin Wall fell.
The third wave of globalization came soon after, and this wave was led by emerging markets such as India and China and was characterized by the introduction of global supply chains and a substantial improvement in technology.
I will say one thing here, which is that if you look at the period between the two world wars, that was a period which was characterized by a Spanish flu, global depression. It also was characterized by Russia exiting from the global trading system, also by monetary instability. Now if you look at all of these things, they have a lot of similarity to the period we live in today.
- And so was this shift towards deglobalization happening prior to when the pandemic hit?
- Well, soon after the global financial crisis in 2008, we saw trade stall as a share of global GDP. We also saw stagnation in foreign direct investment and also saw a stalling in remittances as a share of the global economy.
And if you also look at the two major economies of the world, the US and China, we saw them becoming more protectionist in recent years. So for example, the US in recent years has become more inward looking. And it's not just the US but also China since 2015 when it introduced its Made in China policy has also become more inward looking. So, yes, the deglobalization process had already started well before the pandemic had hit.
- So how's the pandemic, as you say, accelerating deglobalization?
- The pandemic has been accelerating deglobalization a lot, and one of the first things we've noticed is that it has allowed us to see our over-reliance on efficient rather than resilient supply chains. And it has also allowed us to see that a lot of countries are imposing protectionist measures while using national security and national health as justifications for their measures.
So for example when the pandemic first hit, we saw a lot of countries impose export bans on surgical goods and essential drugs. And when a vaccine comes on the market, we expect countries to do something very similar.
Now if you look at a lot of the rhetoric that is coming from world leaders, that tells us that the next few years will become more closed up, will become more protectionist. And this rhetoric is not just coming from particular leaders or particular parties, but it is coming from across the political spectrum.
- What role has the US-China decoupling played in exasperating this deglobalization trend?
- Well, the pandemic has accelerated the US-China decoupling, which was already taking place well before the pandemic had hit. And it was taking place in a world which was moving away from being a unipolar world led by the US and moving towards a bipolar world in which both China and the US are vying for economic dominance.
And this increase in economic decoupling has also exacerbated the deglobalization process. Now if you look at a lot of the US companies that were based in China, they're quickly finding ways to move back to the US or move to countries that are more allied with the US.
Now, I will say one thing here, which is that any kind of economic decoupling is dangerous business. The last time something like this took place towards the beginning of the 20th century between Germany, the UK, and, later on, the US, it led to the end of the first WAVE of globalization, contributed to two world wars, and also contributed to the Great Depression.
- I think that leads to my next question. What do you see as the dangers of deglobalization going forward?
- Let me start by saying that globalization has its flaws, and a lot of the changes to globalization were a long time coming. But too much deglobalization too soon can have devastating effects on the global economy, which can take decades to heal.
Yes, protectionist policies can keep jobs at home, make companies self-reliant, and also appeal to a certain part of the electorate, but they also contribute to reduced innovation, reduced productivity, and reduced economic growth.
And it's not just protectionism that leads to lower growth but lower growth also feeds into higher protectionism. So once countries are stuck in this vicious cycle of high protectionism, lower growth, it is very difficult for them to break free.
- Sohaib, thank you very much for your insights.
- Thank you.
[MUSIC PLAYING]
- Sohaib, you wrote a great report called "Deglobalization and its Discontents" around how the pandemic is, in your words, turbocharging deglobalization. But before we get into the details, what is globalization, and how has it evolved in recent years?
- Well, globalization is the term we use to talk about the interconnectedness of economies, cultures, and population. And this includes the cross-border movement of goods, services, technology, people, and even ideas.
We can divide modern-day globalization into three waves. So the first wave started towards the end of the 19th century and lasted all the way until the First World War. And this wave was characterized by an improvement in technology which led to the introduction of the steam engine, which reduced trade costs and increased global trade.
The second wave started soon after the end of the Second World War, and this wave was characterized by the introduction of multilateral institutions which led to an increase, again, in global trade. And this wave ended towards the end of the 1980s when the Berlin Wall fell.
The third wave of globalization came soon after, and this wave was led by emerging markets such as India and China and was characterized by the introduction of global supply chains and a substantial improvement in technology.
I will say one thing here, which is that if you look at the period between the two world wars, that was a period which was characterized by a Spanish flu, global depression. It also was characterized by Russia exiting from the global trading system, also by monetary instability. Now if you look at all of these things, they have a lot of similarity to the period we live in today.
- And so was this shift towards deglobalization happening prior to when the pandemic hit?
- Well, soon after the global financial crisis in 2008, we saw trade stall as a share of global GDP. We also saw stagnation in foreign direct investment and also saw a stalling in remittances as a share of the global economy.
And if you also look at the two major economies of the world, the US and China, we saw them becoming more protectionist in recent years. So for example, the US in recent years has become more inward looking. And it's not just the US but also China since 2015 when it introduced its Made in China policy has also become more inward looking. So, yes, the deglobalization process had already started well before the pandemic had hit.
- So how's the pandemic, as you say, accelerating deglobalization?
- The pandemic has been accelerating deglobalization a lot, and one of the first things we've noticed is that it has allowed us to see our over-reliance on efficient rather than resilient supply chains. And it has also allowed us to see that a lot of countries are imposing protectionist measures while using national security and national health as justifications for their measures.
So for example when the pandemic first hit, we saw a lot of countries impose export bans on surgical goods and essential drugs. And when a vaccine comes on the market, we expect countries to do something very similar.
Now if you look at a lot of the rhetoric that is coming from world leaders, that tells us that the next few years will become more closed up, will become more protectionist. And this rhetoric is not just coming from particular leaders or particular parties, but it is coming from across the political spectrum.
- What role has the US-China decoupling played in exasperating this deglobalization trend?
- Well, the pandemic has accelerated the US-China decoupling, which was already taking place well before the pandemic had hit. And it was taking place in a world which was moving away from being a unipolar world led by the US and moving towards a bipolar world in which both China and the US are vying for economic dominance.
And this increase in economic decoupling has also exacerbated the deglobalization process. Now if you look at a lot of the US companies that were based in China, they're quickly finding ways to move back to the US or move to countries that are more allied with the US.
Now, I will say one thing here, which is that any kind of economic decoupling is dangerous business. The last time something like this took place towards the beginning of the 20th century between Germany, the UK, and, later on, the US, it led to the end of the first WAVE of globalization, contributed to two world wars, and also contributed to the Great Depression.
- I think that leads to my next question. What do you see as the dangers of deglobalization going forward?
- Let me start by saying that globalization has its flaws, and a lot of the changes to globalization were a long time coming. But too much deglobalization too soon can have devastating effects on the global economy, which can take decades to heal.
Yes, protectionist policies can keep jobs at home, make companies self-reliant, and also appeal to a certain part of the electorate, but they also contribute to reduced innovation, reduced productivity, and reduced economic growth.
And it's not just protectionism that leads to lower growth but lower growth also feeds into higher protectionism. So once countries are stuck in this vicious cycle of high protectionism, lower growth, it is very difficult for them to break free.
- Sohaib, thank you very much for your insights.
- Thank you.
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