Photo by Joshua Rawson-Harris on Unsplash
In the 1980s, and continuing until the international financial crisis of 2008, globalization seemed an irresistible force. Since then it seems to have been going into reverse. President Trump is not a fan.
This blog suggests that the apparent reversal will not last long. Beneath the churn we are beginning to see the emergence of a different kind of globalization.
The irresistible force
Globalization is the term used to describe the spectacular growth in international trade and capital flows between 1980 and the international financial crisis of 2008. Export volumes expanded from 2tr in 1980 to 16tr in 2008. Cross border financial flows grew from around $1tr in 1990 to over $12tr at their peak before the crisis.
Growth was stimulated by a supportive framework of international trade agreements and by the entry of the former Soviet bloc and China into the international system.
The concerns of political scientists centred on ‘governance’. The framework for global governance seemed weak in relation to the scale of trade and capital flows. The framework for international trade was strengthened by the transition in 1995 from arrangements under GATT to the stronger disputes settlements provisions of the WTO. However, efforts under the auspices of OECD to put in place a multilateral agreement on investment were abandoned in 1998. Previously, efforts in the 1970s to create a global currency for general use following the collapse of the post war Bretton Woods system had also failed. The dollar has remained as the world’s currency.
At the same time, the framework for governance provided by the ‘nation state’ or the ‘market state’ appeared to be ‘too small’. The traditional notion of a state that could offer its people ‘security’, both material and physical, appeared to be undermined and eroded by influences far beyond its borders and way outside its own control.
The concerns were muted by the positives of globalization. For most observers the net effect has been seen as benign. Millions have been lifted out of poverty. Inflation has been subdued.
The assertions of 19th century free traders that cross border trade provided a path to international peace did not seem so far-fetched.
The party ends
The 2008 international financial crisis brought this period of rapid expansion to an end. After a 12% fall in volume in 2009, export volumes have recovered but remain at around pre-crisis levels. International capital flows remain less than half their previous volume.
The strains of globalization have been most apparent in terms of the impact on people in OECD countries. Traditional jobs, along with job security, have been lost, immigrants face hostility, wage growth has been subdued, and income inequalities linked to globalisation have risen.
Secondly, there has been a move to re-impose social control through regulation and the tightening of borders. Financial institutions have become ring fenced according to the territory where they are based. Controls on inward investments have been tightened. Immigration is more restricted. Bilateral and regional trade agreements are favoured over global agreements. President Trump takes unilateral trade measures. The EU takes protectionist measures under different pretexts, such as health, privacy, and competition. China strengthens its great firewall.
Thirdly, ideology has resurfaced. The political centre has lost ground. The philosophy of the market is once again challenged.
It seems as though we have entered a period of churn – at best, a lack of clear direction emanating either from politics or the market, at worst, talk of trade wars. Markets fear the end of global growth.
Globalization in new clothes
If we look beneath the churn there are three main reasons to expect a resumption of globalization.
The first driver comes from innovation in science & technology. The main thrust can be loosely linked to AI and the so-called internet of things but there are many other tech driven areas that involve tradeable goods and services. The centers of innovation are widely dispersed in the world. The effects of forthcoming innovations are already apparent in new business to business relationships across the world.
The second driver can be understood in terms of the well-established notion of the hierarchy of needs. As markets for trade in basic, low value-added goods, such as textiles, become mature, new international markets open up in, for example, the leisure, knowledge, professional, and arts industries.
We can expect this new phase of growth to be led by services rather than by trade in goods. The international importance of London and New York law will continue to grow. Universities are becoming big global businesses in appeal and outreach. Africa may have missed out on industrialization. It faces a huge potential market for its tourism and a booming demand for contemporary art.
Thirdly, there is the impact, often underestimated, of peoples’ desire for convenience. The simplification of intermediation across borders through such services as cashless payments systems, trusted trader programs and cyber tracing systems, will also drive international transactions.
The carriers of this new wave of globalization are already forming. They are private not governmental carriers. It is about business to business tie-ups to exploit and market the new technologies. It is about the linked ecologies of professionals and entrepreneurs in business, academia, the professional and the arts worlds. It is about convergent platforms linking communication and transnational content. It is about the erosion of language barriers as English continues to spread as the world’s common language of commerce and technology, the social and natural sciences, of education and the arts.
A new governance?
The fly in the ointment of the new wave of globalization remains governance. There still appears to be a mismatch between the size of markets and the scale of governance structures. Global structures are weak. Nation states still appear too small.
The response very much depends on the behaviour of the large powers such as the US, Russia and China. Internationally accepted norms of behaviour enable small powers to flourish. They restrain the predatory temptations open to big powers. Thus, if we are going to see increasingly unilateralist behaviour by the big powers, then small countries will wish to group together to protect themselves. We will see further integration in the EU, and steps towards greater integration in other regions of the world, such as Africa. This response involves scaling up governance structures to the regional level.
However, if on the contrary, the large powers restrain their unilateralist and predatory instincts, then there may be an advantage accruing to countries that can be hosts to cosmopolitan centers with more focussed pulling power. They will offer scale, not in terms of the range of territory, but in terms of the range and depth of interconnected services.
In order to flourish, cosmopolitan service centers need to offer a supportive social and political hinterland. They need to have established immigrant communities of many different ethnicities already in place. They need to offer public order & safety. At the same time order is not the same as suppression. They will need to offer a predictable and reliable legal regime. They need to provide global communications, cyber security, financial, cultural and educational services. English has to be widely used and understood.
The most likely cities to offer this hinterland and to expand their cosmopolitan service roles in the new wave of globalisation include old centres such as London and New York, as well as cities such as Vancouver, Toronto, Auckland, Sydney, Singapore and possibly Dhubai. Other potential centers, such as Tokyo, Hong Kong and Shanghai, Mumbai and Bangalore fail some of the key criteria. Cities in the EU will likely miss out.
We have seen globalization halt and appear to go into reverse. Markets have the jitters as the period of quantitative easing by central banks comes to an end. Yet, out of the confusion of today’s churn, globalization is poised to take on a new momentum.