Mohamed A. El-Erian,
CAMBRIDGE – For three decades, businesses and governments around the world assumed that economic and financial globalization would continue steadily.
However, as the international order has come under strain in recent years, the concept of deglobalization – the decoupling of trade and investment – has become increasingly accepted by households, businesses and governments. But the available data suggests that globalization is not so much ending as changing.
Not so long ago it seemed that there were no limits to global economic and financial integration. For decades, the benefits of globalization seemed clear and unassailable.
The interconnectedness of production, consumption and investment flows offered consumers a wider range of choices at attractive prices, enabled companies to expand their markets and improved the efficiency of their supply chains.
Global capital markets have expanded access to credit and reduced costs for both private and public borrowers.
The governments of the world engaged in what appeared to be a series of win-win partnerships. And technology – including most recently the accelerating shift to remote working – made national borders seem largely irrelevant.
But while globalization made markets work better, policymakers lost sight of the detrimental effects on distribution.
Many communities and countries were left behind, contributing to a widespread sense of marginalization and alienation.
The result was a backlash against globalization, the most visible political manifestations of which were the United Kingdom’s vote to leave the European Union and the election of Donald Trump as US President in 2016.
Soon the United States had entered a tariff war with China, widening the rift between the two economic powers.
Western consumers, meanwhile, have increasingly resisted human rights abusers and countries that harm the environment.
And the invasion of Ukraine has led to unprecedented sanctions against Russia (a G20 country) and the weaponization of the international payments system.
It follows that many would conclude that globalization has ended. But rather than a sharp reversal of the past 30 years, it seems much more likely that we are entering an era of fragmented globalization characterized by replacement, not denial.
The sanctions regime imposed on Russia is a good example of this. Over the past year, EU and US-led restrictions have not materially reduced Russian oil exports, but redirected them elsewhere, mainly to China and India.
Similarly, instead of bringing Russia’s economy to its knees as many had predicted, the comprehensive sanctions shrank GDP by only 2% as Russian technocrats found ways to refocus and rewire both domestic and external activities.
More worryingly, Russia and some of its allies have also made progress in establishing a more or less parallel cross-border payment and settlement system, albeit rudimentary and inefficient.
This trend is likely to continue in the coming years as companies increasingly diversify their supply chains away from China and Western governments resort to near-shoring and friend-shoring to sustain production of critical inputs and sensitive exports.
In short, the combination of geopolitical shocks, business strategies and changing societal values will affect trade and investment patterns along four main axes.
As companies choose resilience over efficiency, they will increasingly shift their approach to supply chains from ‘just in time’ to ‘just in case’.
This comes at a time when security considerations are gaining greater weight over commercial considerations, and companies will move from risk-sharing and general partnerships to more closely designed arrangements.
Meanwhile, consumers will increasingly seek an emphasis on purpose in their commercial interactions.
While this process will produce winners and losers, their identities will depend significantly on how policymakers adapt to the new business model of the global economy.
Mexico, for example, can benefit from friendly support in the US and from the corporate shift to more diversified supply chains.
But, as the Mexican government itself has acknowledged, theoretical demand cannot be turned into actual demand unless policymakers make faster progress on infrastructure, clean energy, deregulation and the like.
In a world where households are actively avoiding certain commercial interactions, governments and companies will have to work harder to come up with alternatives.
Businesses must work with governments, both at home and abroad, to ease the inherently difficult process of rewiring supply chains and accelerate the green transition.
National and global policy makers need to rethink the way they think and work. And long-term investors should incorporate more sophisticated geopolitical, sociopolitical and environmental analysis into their allocation strategies.
While some may consider the phrase “fragmented globalization” an oxymoron, I believe this is the most likely scenario for the global economy.
As the world increasingly divides into blocs, some more fluid than most others, globalization threatens to become more inflationary, reducing potential growth.
Avoiding this outcome depends on how national governments and multilateral institutions navigate the new economic realities.
The world may not be deglobalizing completely, but that doesn’t mean we should assume everything is going smoothly.
Mohamed A. El-Erian, President of Queens’ College at the University of Cambridge, is a professor at the Wharton School of the University of Pennsylvania and the author of The Only Game in Town: Central Banks, Instability, and Avoiding the Next Collapse ( Random House, 2016).
Copyright: Project Syndicate, 2023.
www.project-syndicate.org
