The fading era of hyperglobalisation is a study in success

Death notices for the surge in globalisation that started in the 1990s have been posted for about as long as the process itself. Covid-19, the US-China conflict, climate change and the struggle for green industrial supremacy are all being offered as reasons for globalisation coming to a stop. And yet it moves.

Now, it’s true that the era of “hyperglobalisation” from roughly 1992 to 2008, where trade grew markedly faster than global gross domestic product, is over — a shift very well described in this new paper from Arvind Subramanian, Martin Kessler and Emanuele Properzi.

Yet on close examination it appears some of the positive parts of globalisation have either slowed naturally or are still in train, and what has gone into reverse wasn’t much of a loss. There are some serious challenges ahead in navigating macroeconomic shocks, particularly in China, and always the risk that geopolitical tensions will escalate rapidly. But only those who fetishise the internationalisation of an ever-larger share of activity in every conceivable economic sector need worry much about what’s happened so far.

Globally, goods trade relative to GDP has flatlined or shrunk a little since the financial crisis in 2008. Services trade is still rising as a share of GDP, though at a slower rate than before, and in any case the numbers are distorted by inaccurate reporting for tax avoidance purposes.

But, as the study notes, the remarkable development isn’t that goods trade is slowing but that it’s remained as strong as it has. It has faced stiff headwinds, but they are more to do with the evolution of the world’s economies than with shocks such as Covid or meddling governments.

For one, the process of labour-cost arbitrage — rich countries sourcing from lower-income economies — has somewhat run out of space, at least in those countries (such as China) where good infrastructure has connected low-cost workers to global value networks. (There’s a lot more that could be done in countries like India, but poor infrastructure and business climate have held them back.) That’s a good outcome to be celebrated. Trade in goods postwar has played such a big part in reducing global inequality that there are fewer poor workers left for it to liberate.

Relatedly, although industrial output held its own as a share of global GDP in the 2010s, a smaller share of global manufacturing was traded internationally. China, getting economically more sophisticated and moving up the value chain, took more supply networks inside its own economy.

There is one part of globalisation that has definitely retreated, but that, if anything, is a cause for relief. Cross-border capital flows have never recovered their levels from before the global financial crisis. Good thing too: pre-crisis capital movements reflected a financial bubble. It was always a mistake for supporters of globalisation to equate free trade in goods and services with liberalised capital accounts. 

It’s somewhat concerning that flows of foreign direct investment have also fallen off, since that is more closely connected with economic growth. But a lot of FDI is merger and acquisition activity, which generates fees for lawyers and bankers but doesn’t do much for recipient economies.

Greenfield FDI, which adds to productive capacity, is of much greater help, and the number of new such projects has remained fairly constant since the financial crisis. Lots more investment in low and middle-income countries is needed, especially to effect the green transition. But that’s a failure of governments in not creating adequate incentives for climate finance, not the global financial system seizing up.

As ever when being optimistic about globalisation, it’s as well to offer chunky caveats. China’s economic travails — the failure of growth to pick up post-Covid, the collapse of FDI — look quite serious. The Chinese authorities, initially reacting to the 2008 financial crisis, moved their policy focus from export promotion to infrastructure spending, particularly in housing. (The country’s exports continued to gain global market share, however.) Shifting demand to the domestic economy is in general the right policy for China, but not through fuelling a property boom.

Of course, a fall in FDI to China need not be devastating to the creation of global value networks as international companies may simply switch their investments to other economies. But if China returns to actively promoting exports and creates more gluts in goods such as semiconductors and electric vehicles, the resulting flood of exports will heighten trade tensions. It may also do more to postpone a Chinese economic crash, rather than prevent it.

Still, the study by Subramanian et al should remind us why we care about globalisation. The integration of world markets in goods, services, capital, data and people is not something to be pursued at all costs. It is a means to an end. For 30 years, goods and services trade have promoted prosperity, including creating and (admittedly imperfectly) disseminating technologies to improve lives. Managed properly, it can help do the same to combat climate change.

Globalisation has certainly not failed. Nor, for the moment, has it hit a wall. It is evolving, partly in response to the changes wrought by its own success. The much-hyped era of hyperglobalisation has faded, but solid gains are still being made.

alan.beattie@ft.com