Deglobalization: The New Normal?
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The World in 2022

Deglobalization: The New Normal?

Marc Levinson
22 December 2021

Globalization as we know it is destined to change. Disruptive changes in industrial production and global demand are contributing to this phenomenon.

 

The value chains that have bound the world economy together since the late 1980s are under unprecedented strain. The Covid-19 pandemic, severe disruptions to ocean shipping, the resurgence of populist nationalism, and rising tensions between China and all its major trading partners have led pundits to proclaim the death of globalization. But a less globalized world is not in prospect.

Rather than retreating, globalization is taking on an unfamiliar shape for reasons unrelated to the pandemic. The form of globalization we know today, emblemized by colorful container ships laden with thousands of metal boxes, has been driven by a rapidly improving material standard of living for a rapidly increasing population. Over little more than three decades, hundreds of millions of households have been able to acquire cars and television sets, clothes and air conditioners for the first time. Many of those goods are churned out mainly by factories in low-wage countries using inputs from other low-wage countries—the sort of activity that the term “globalization” now brings to mind. As manufacturing has shifted from Europe, North America, and Japan to China, Vietnam, and Indonesia, prices of many consumer goods are lower today than they were at the start of the century.

But the trends that have supported this sort of globalization are waning. Across the Americas, Europe, and most of Asia, populations are growing slowly and aging quickly. Fewer new families—the prime purchasers of consumer durables—are being formed in almost every middle-income and upper-income country. Older households, put simply, buy less stuff: they have had years to accumulate possessions, and they are more inclined to spend on vacation trips, restaurant meals, and medical bills than on dresses and dining room furniture, the sorts of manufactured goods that are shipped across borders.

Technology will also constrain goods trade. Over the past year, every leading auto manufacturer has announced major investments in electric vehicles. That may be wonderful for the environment, but it will be terrible for the tens of thousands of companies that are part of automakers’ supply chains: the average electric vehicle contains several thousand fewer parts than an internal combustion vehicle of similar size. Consumers don’t need stereo sets when they can purchase music as a service streamed to their smartphones. In the business sector, more than one-fifth of investment in many countries now goes into research, software, and other nonphysical expenditures rather than machinery and equipment. Updating industrial machinery often means downloading software rather than replacing hardware, taking a further bite out of factories’ sales. Innovations such as cloud computing allow companies to share computers just as bike-sharing allows individuals to share bicycles, holding down the overall demand for these sorts of physical assets. 

All of this means that manufacturing matters progressively less to the world economy. And by reducing the need for labor on factory floors, automation is eliminating one of the main rationales for welding far-flung value chains in the first place. There are few signs of “reshoring”—the “return” of manufacturing from low-wage countries to high-wage countries—but considerable evidence that manufacturers and retailers are looking to control risks by finding multiple sources of key parts and finished products rather than making everything in gigantic plants in Asia. For a multinational corporation, an export-oriented plant in Mexico or Morocco is likely to supplement, not replace, a plant in China.

It is in this sense that globalization seems to be waning, all the more as governments provide subsidies or erect barriers to protect markets for domestic manufacturers. But if the globalization of factory production counts for less, the globalization of products that do not physically cross borders is more important than ever. Banks underwrite loans in one country, approve the paperwork in another, and collect payments in a third. Industrial companies and software firms seed research centers around the world, turning many individual research projects into international ventures. A British book publisher can easily call on a copy editor in Pakistan, and a movie can be made anywhere, with the dialogue rendered into multiple languages by artificial intelligence.

Much of this burgeoning trade in ideas is missed in official statistics. So far, efforts in various countries to keep businesses from moving citizens’ data abroad have hardly affected it. Unlike goods trade, which can be reshaped by tariffs, quotas, and similar measures, trade in ideas will be difficult for governments to control, because blocking the flow of data may cut a country off from high-value economic activities in which it desperately wants a role.

 These changes in globalization will become more evident in 2022. The toughest economic challenge is likely to be damping the inflation that is quickly spreading from one country to another in a world economy that remains very tightly connected. Unlike in the early years of the twenty-first century, though, cheap imports will no longer enable central banks to control inflation with little pain for the public. Supply-chain disruptions will abate as households shift spending away from goods to services, causing trade in manufactured goods to grow more slowly than the world economy. But out of public view, businesses’ worldwide search for talent will drive globalization in a new direction, based steadily more on services and ideas rather than on physical goods.

 

Read The World in 2022

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Versione stampabile

AUTHORS

Marc Levinson
Economist and Historian

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