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VoxEU Column International trade

The peak globalisation myth: Part 1

‘Peak globalisation’ is shorthand for the assertion that rising openness is a thing of the past, that globalisation has stagnated or even declined since the Global Crisis. This first in a series of four columns argues that the ‘globalisation has peaked’ narrative is overly simplistic. Of the four largest traders in the world, one peaked well before 2008, while two peaked well after. The world’s largest trader – the EU – did not peak, even if its trade-to-GDP ratio has not risen for a decade.

‘Peak globalisation’ – a phrase coined by Bruce Nussbaum in a 2010 article in the Harvard Business Review – is shorthand for the assertion that rising openness is a thing of the past. The peak globalisation crowd claims that globalisation has stagnated (‘slowbalisation’) or declined (‘deglobalisation’). 1 The theme has been echoed or challenged by many analysts in recent years (Haass 2020, Bloomberg 2020). Also see the Vox columns by Bergeijk (2019) or Bekkers and Góes (2022), and Antras (2021) for a thorough investigation of deglobalisation and the role of value chains.

Some opinion writers use peak globalisation as evidence of sweeping changes in the world’s geoeconomics or as the death nell for the neoliberal order. Financial Times columnist Rana Foroohar, in a column titled “Davos and the new era of deglobalisation” writes: “business is simply getting on with the new reality of a post-neoliberal world”.

In this series of Vox columns, I argue that the ‘peak globalisation’ narrative needs a lot more nuance than it is usually afforded. If the question is ‘has globalisation peaked?’, the answer is twofold. For trade in goods, the answer is probably yes. The phase of globalisation that drove rising trade-in-goods ratios since 1990 has ended – a phase known by many names but best described as the offshoring expansion phase. Documenting this assertion is the subject of Part 1 and Part 2 in this series. In Part 3, I show that for trade in services, the answer is no – globalisation has not peaked.

The ‘lazy’ peak globalisation narrative in one chart

For a lazy analyst, the peak globalisation story can be told in one chart (Figure 1). The narrative asserts that:

1) Trade in goods expanded relative to world output at a gentle pace from 1960 to 1993; this was driven by reductions in transport costs as well as policy barriers like tariffs.

2) Around 1990, trade in goods started growing much faster than incomes.

This rapid globalisation was driven by the information and communications technology (ICT) revolution that launched globalisation’s ‘offshoring expansion’ phase (Grossman and Rossi-Hansberg 2006, 2008). The offshoring entailed factories crossing borders (not just goods crossing borders). As parts and components were now crossing borders multiple times (for example, first as parts and then as parts built into components or final goods), the trade ratio naturally rose.

Moreover, the offshoring expansion was accompanied by a massive shift of manufacturing knowhow to a handful of emerging markets that sparked unprecedentedly rapid industrialisation and growth (Baldwin 2016: Chapter 3). The resulting equalisation of the sizes of national economies mechanically raised the trade share as per the usual gravity equation logic (Helpman and Krugman 1985: Chapter 8).

3) In 2008, the Global Crisis and attendant trade shock – what I dubbed the ‘Great Trade Collapse’ (Baldwin 2009) – mortally wounded globalisation; the trade ratio has been declining ever since.

Figure 1 The ‘globalisation has peaked’ lazy narrative

Figure 1 The ‘globalisation has peaked’ lazy narrative

Source: Author’s calculations based on WTO (trade data) and WDI database (GDP data, current USDs).

I apply the label ‘lazy’ to this three-part narrative since it embeds myths of omission and commission. To start with, while it seems plain as day in Figure 1, the 2008 peak is false. It is a coincidental confluence of disparate peaks.

I turn now to a number of corrections to the lazy narrative.

Correction #1: 2008 is a false peak

Figure 2 (left panel) shows that the largest traders in the world either peaked before or after 2008. The chart shows indices of the national ratios rebased to 2008 = 100 to emphasise the trends. The world’s second largest trader of goods, China, peaked before 2008 (in 2006). The third and fourth largest goods traders, the US and Japan, peaked after 2008 (in 2011 and 2014, respectively). The world’s largest trader, the EU, has not clearly peaked, although it has clearly stagnated. To get a perspective on how important the four traders are in world trade, the right panel shows the shares of world trade in goods by nation in 2019 (i.e. the last year before the Covid-19 distortions).

The point here is that forcing these dissimilar peaks into one peak conveys a false impression. It is a myth to think that we need to find a single set of reasons why world trade in goods peaked as a share of income in 2008.

Figure 2 The false peak is made up of various pre- and post-2008 peaks of the largest traders

Figure 2a Pre- and post-2008 peaks

Figure 2b Largest traders of goods, 2019

Source: Author’s calculations based on WTO (trade data) and WDI database (GDP data, current USDs).
Note: EU trade includes intra-EU trade since intra-EU trade is part of world trade.

Correction #2: The peaking behaviour of the US, China, and Japan is not universal (France and Germany are peakers but Italy, Spain and Netherlands are not)

The flatline of the EU’s trade-to-GDP ratio in Figure 3 hides an important heterogeneity among EU members. Some EU members, for example, are relatively poor and fast growing while others are rich and slow growing. Some are very large, while others are smaller in terms of population and economic size than, for instance, the city of Marseille. Not surprisingly, EU members display very different peaking behaviours.

Figure 3 plots the rise in the goods trade ratio for each member from 1990 to 2008 on the horizontal axis, and the rise (or fall) from 2008 to 2020 on the vertical axis. Nations in the southeast quadrant are peakers as their ratios rose up to 2008 but have since fallen. Those in the northeast section are non-peakers, having seen their ratio rise in both periods. The biggest EU economy by far is Germany and it finds itself in the peaker category along with France. Three other large economies – Italy, the Netherlands, and Spain – are in the non-peakers basket. The dot representing the aggregate EU’s behaviour is basically on the line between the peakers and non-peakers categories.

Figure 3 Goods trade ratios: Peakers and non-peakers in the EU

Figure 3 Goods trade ratios: Peakers and non-peakers in the EU

Source: Author’s calculations based on WTO (trade data) and WDI database (GDP data, current USDs).
Note: EU trade includes intra-EU trade since intra-EU trade is part of world trade.

Correction #3: China is normalising its trade share (with Chinese characteristics)

Although not strictly part of the peak globalisation story, the time pattern of China’s trade-to-GDP ratio is often held up as a sign that China is doing something highly unusual. The inference is that the Chinese state must be intervening forcefully. Of course, the Chinese government is intervening forcefully – that’s the heart and soul of state-led capitalism – but it is a myth to use the time path of its macro trade ratio as evidence of this.

Figure 4 shows that China’s openness ratio is not acting abnormally; it is converging to the ratios that are common to all mega-economies like the US, Japan, and the EU (focusing only on extra-EU trade). What is unusual is the asymmetric way China’s globalisation is evolving in terms of selling to and buying from global supply chains.

Figure 5 presents indicators of China’s engagement with global supply chains that are based on the OECD TiVA database. 2 The data, which are available only from 1995 to 2018, show that China is rapidly becoming the ‘OPEC of industrial inputs’ for the whole world. Chinese-made inputs account for about 3% of the entire global gross output. By contrast, China is scaling back its purchases of intermediate goods from the rest of the world, relying more on its own industrial base to provide the inputs.

Figure 4 China is converging to openness of a normal mega-economy

Figure 4 China is converging to openness of a normal mega-economy

Source: Author’s calculations based on WTO (trade data) and WDI database (GDP data, current USDs).
Note: EU trade excludes intra-EU trade since here we take the EU as a mega-economy.

Figure 5 China’s very asymmetric engagement with global value chains (GVCs)

Figure 5 China’s very asymmetric engagement with global value chains

     

Sources: Calculations undertaken by Rebecca Freeman and Angelos Theodorakopoulos using concepts developed in Baldwin et al. (2022).

Concluding remarks

The ‘globalisation has peaked’ narrative – a narrative that almost jumps straight out of Figure 1 – is overly simplistic. Of the four largest traders in the world, one peaked well before 2008, while two peaked well after. The world’s largest trader – the EU – did not peak even if its trade-to-GDP ratio has not risen for a decade.

In short, the ‘globalisation has peaked’ storyline is lazy, but there is a highly energetic reality behind it. The globalisation of markets for goods is no longer rising as it had been between the 1990s and the mid-2000s.

The next column in this series looks into some of the reasons the goods trade ratio has declined.

Author’s note: This column is based in part on a paper I wrote for the 2022 ECB Forum on Central Banking (Baldwin 2022).

References

Antras, P (2021), “De-globalisation: Global Value Chains in the Post-COVID-19 Age”, paper written for the 2020 ECB Forum on Central Banking. 

Baldwin, R (2009), The great trade collapse: Causes, consequences, and prospects, CEPR Press.

Baldwin, R (2016), The Great Convergence: Information technology and the New Globalisation, Harvard University Press.

Baldwin, R, R Freeman and A Theodorakopoulos (2022), “Horses for Courses: Measuring Foreign Supply Chain Exposure”, manuscript.

Baldwin, R (2022), “Globotics and macroeconomics: Globalisation and automation of the service sector”, paper presented at 2022 ECB Forum on Central Banking in Sintra.

Bekkers, E and C Góes (2022), “The impact of geopolitical conflicts on trade, growth, and innovation: An illustrative simulation study”, VoxEU.org, 29 March.

Bloomberg (2020), “Have we reached peak globalization?”, 25 January.

Foroohar, R (2022), “Davos and the new era of deglobalisation”, FT opinion piece, 22 May.

Grossman, G and E Rossi-Hansberg (2006), “The rise of offshoring: it is not wine or cloth any more”, in The New Economic Geography: Effects and Policy Implications, Jackson Hole Conference Volume, Federal Reserve of Kansas City, August, pp. 59-102.

Grossman, G and E Rossi-Hansberg (2008), “Trading tasks: a simple model of offshoring”, The American Economic Review 98: 1978-1997.

Haass, R (2020), “Deglobalization and its discontents”, Project Syndicate, 12 May.

Helpman, E and P Krugman (1985), Market Structure and Foreign Trade: Increasing Returns, Imperfect Competition, and the International Economy, The MIT Press.

MGI (2019), Globalization in transition: The future of trade and value chains, McKinsey & Company.

Nussbaum, B (2010), “Peak globalization”, Harvard Business Review, 20 December.

O'Rourke, K (2019), “The end of globalisation”, interviewed by Tim Phillips, 1 February.

Ruta, M (2022), “How the war in Ukraine may reshape globalisation”, VoxEU.org, 5 May.

Van Bergeijk, P (2019), “Brexit delay will not postpone deglobalisation”, VoxEU.org, 18 March.

Footnotes

  1. As Nussman put it, “We, in fact, are living in an era of Peak Globalization as the costs and benefits of globalization begin to diverge according to country, class, and constituency. The international political consensus of the universal economic benefits of globalization that defined much of the 20th and early 21st centuries is breaking down. The centrifugal forces drawing nations toward globalization are giving way to centripetal forces pulling them away from it.”
  2. An inter-country input-output matrix that allows researchers to track global sources and destinations of intermediate inputs by nation and sector.

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