Globalization: Just Stumbling, or in a New Phase?

Practical Economics

Globalization: Just Stumbling, or in a New Phase?

The decades-old push toward a global economy has taken a hit during the latest recession. Has it downshifted permanently?

Since 2008, it seems as though globalization has stalled.

For at least 30 years, it has been the most pervasive force in the world economy -- the melding of national economies into a single trade and financial system. Government barriers have fallen. Financial markets have been internationalized. Businesses now rely on a global supply chain. Even labor has become more mobile.

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By and large, globalization has been a positive phenomenon, spurring trade and investment around the world, adding to economic output, helping to tame inflation and pulling millions of people out of poverty. At the same time, it has hurt workers whose companies outsourced low-end manufacturing jobs to lower-wage countries.

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More recently, however, some of the gains have begun to erode. The recession has pinched trade flows worldwide, and the collapse of the financial system has spawned a tightening of credit around the globe. Although both of these problems are cyclical, forecasters say that the world economy is likely to be anemic for several more years and that the financial system is still healing from the crisis.


Potentially longer-term developments also raise serious questions about how globalization will fare in years ahead:

•Natural disasters such as the tsunami in Japan, combined with soaring shipping and airfreight costs, have given many corporations pause about relying on a global supply chain. Some firms are seeking suppliers closer to their markets, but that approach often costs more, reducing some of the advantage in steady supplies.

•Under pressure from regulators, many large banks in Europe, the U.S. and Japan are cutting back on lending outside their home countries, making it more difficult to finance big international projects. Even big U.S. banks are being pushed to spin off some of their businesses.

•China -- for years the leading beneficiary of outsourcing by industrialized countries -- is becoming a less attractive investment destination as it moves up the economic ladder. Wage levels there have risen so sharply that many Western companies -- and Chinese manufacturers -- are moving to lower-wage countries.


•With larger emerging market countries such as China, Brazil and India now major export powers, it is becoming increasingly difficult for newcomers to export their way up the development ladder the way Taiwan, South Korea and Thailand did during the 1970s.

"Globalization, at least for the near term, is slowing -- or even reversing," says Harald B. Malmgren, a former U.S. trade official who's now a consultant keeping close tabs on Asia and Europe. "We're still going through the unpleasant aftermath of the financial market collapse," he says, "and that leaves globalization going nowhere."

No one is predicting that the globalization genie will be put back in the bottle, however. Many of the recent setbacks will diminish as the world economy recovers. World trade will rebound, albeit gradually. Banks will retrench for a while and then begin to expand again. Governments don't seem likely to reinstitute trade barriers.

The financial collapse and resulting recession "have subjected the world trading system to an amazing stress test," and it has come through essentially intact, says Robert Z. Lawrence, a Harvard University economist who has been studying the globalization phenomenon.


Even so, the globalization that emerges after the world economy recovers is likely to be visibly different from what Americans have been experiencing over the past few decades.

For one thing, China, India and Brazil, among others, are rapidly moving into the export of higher-end products, such as autos and aircraft, that once were solely the domain of U.S., European and Japanese manufacturers. They're also competing for a bigger share of world energy resources.

Competition will be more disciplined and more intense. Companies will be making more decisions based on the relative costs of doing business in various parts of the world, heightening the competition among countries for jobs and export business.

The number of U.S. manufacturing jobs will continue to shrink, partly because of automation in American factories. America will have proportionally few workers left whose jobs are vulnerable to outsourcing, but U.S. producers will need better-educated, more highly skilled workers to compete in global markets.


Banks will have less incentive -- and fewer opportunities -- to operate as global institutions, in part because of governments' concerns about their stability. Financial markets may be global, but the costs of the collapse have been borne mainly by governments, in the form of bailouts and aid to those hurt by the crisis, Lawrence says. Regulators "can't look at banks the way they used to."

China's model of state capitalism, in which all or most major industries are owned by the state, will continue to challenge U.S. firms, whose government subsidies, if any, are minuscule.

All of this suggests that though globalization won't be halted by the latest recession, it's likely to emerge with some scars and face ongoing challenges. We believe that globalization will continue to knit businesses and consumers closer together, but that the proliferation of major economic powers brings tougher competition that could mean less dramatic gains for U.S. firms and potentially greater conflict with these new powers.