Is the end of globalization nigh?

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The last twenty-five years have been the era of globalization. Fueled by the birth of the internet and the emergence of multi-national technology giants, it is a phenomenon that has driven an unprecedented expansion in trade and financial flows. But to many, globalization has now become a dirty word. Is the world about to turn in on itself once again?

Globalization has been the cornerstone of global growth in the new millennium. Facilitated by privatization and the deregulation of the labor market, it has, among many other things, encouraged the rapid expansion of the emerging markets and kept the price of goods down by allowing production to be outsourced to low-cost countries.

But is globalization now a victim of its own success? The pace of economic and, to a degree, social transformation has seen politicians from left and right attack it. On the left, there is anger against capitalism and rising inequalities — faceless global corporations exploiting workers and avoiding tax. On the right, growing populism rails against the centralization of power to the detriment of national interests.

There are other concerns about an increasingly borderless world too. Not least the controversy over Huawei, where the placing of vast amounts of personal data in the hands of a state-owned technology company is understandably viewed as a security risk.

It is rare for world trade to decline outside of recessions: the recent decline is therefore unusual.

Source: Bloomberg, CPB Netherlands Bureau for Economic Policy Analysis as at 25th September. Base year 2010=100, seasonally adjusted data

The challenge to globalization gathered force in the aftermath of the global financial crisis and is being accelerated by the retreat of the U.S. from global leadership. The rise of China, India and other populous emerging nations has seen the U.S.’ share of global gross domestic product (GDP) fall. The current U.S. administration does not wish to lead the world on issues such as climate change and, indeed, sees reduced benefits in maintaining global alliances. The recent move towards trade barriers and protectionism illustrates more clearly than anything its more insular attitude.

So with the U.S. no longer willing to enforce global rules, nation-states are starting to fall into regional arrangements. Asian countries, for example, are now developing closer trading ties in response to China’s own move to a more introspective economic model.

Any shift from globalization to regionalization will likely present increasing economic and political risks. Nation-states could gravitate to the largest influencer-country in their sphere and step back from the U.S.-led global system. And if countries decide to redress perceived imbalances, or even settle old grievances with their neighbors, the potential for intra-regional conflicts will rise.

The Global Investment Forum, London, 2019

Our Global Investment Forum addresses some of the key thematic medium term drivers of economies and markets from here.

The global financial crisis began the movement away from unfettered capitalism and globalization as economic ideals. The huge shift in production patterns associated with the entry of China into the modern economic system has left many people bewildered and frightened by the pace of change. Protectionism is on the increase and the growth in world trade has stalled.

The focus now is much more on sustainability, redistribution and regionalism. We do not expect the global system of production to go into reverse but, equally, the pace of advancement will remain subdued. The next decade will be one of consolidation and a shift in focus. Globalization is here to stay but the era of massive growth is behind us.

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November 2019

Themes from the 2019 Global Investment Forum

Episode 94: Every fall, BMO brings together investment strategists, economists, and leaders from across the industry to develop a medium-term outlook on the global markets.  With topics ranging from decarbonization and climate change to globalization and the risk of a U.S. recession, the Global Investment Forum helps paint a comprehensive picture of what may drive your clients’ portfolios in the years ahead.