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Is deglobalisation on the way?

Duncan Weldon
Newsnight economics correspondent
@Duncanweldonon Twitter

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Does the changing nature of the global economy mean that the world is about to experience - or is already experiencing - a period of deglobalisation, as in the interwar period?

The closely integrated global economy of the late 19th century - a time of widespread and fast-growing trade, global capital flows and high migration - unravelled in the interwar period.

Understanding the last period of unravelling is crucial to judging the risks this time around.

This is a question I've blogged on before myself.

Since the financial crisis, the pace of integration of the global economy certainly looks to have slowed.

World trade growth, which, over the 1990s and 2000s, easily outpaced global GDP growth, has been expanding at a slower rate than global output.

Various factors can be pinpointed as the cause: the changing nature of global supply chains, a lack of trade liberalisation (the lack of further liberalisation has been more important than rising protectionism) or banks and financial services firms choosing to pull back from international operations.

A regional future?

It certainly looks like that this slowing is more than merely a cyclical downturn in global trade. Something structural and longer lasting appears to be at work.

The consultancy firm Capital Economics today asks, "is globalisation dead?", concluding that it isn't dead but merely resting, and that the pace has slowed but the process will continue.

There are signs, though, that the nature of globalisation may be beginning to change - and that is as much about geopolitics as raw economics.

Even Capital Economics' relatively optimistic take today notes that:

"Trade and investment agreements should eventually unleash a fresh wave of economic integration, even if they are formed on a regional rather than global basis."

The future of the world economy may be less about "globalisation" and more about "regionalisation".

image copyrightReuters
image captionChina is on course to outstrip the US economy

To understand why, it is worth starting with China. According to IMF data (adjusting for relative prices) in 1980 the Chinese economy represented around 2% of the global economy, while the United States represented around 23%. Last year they each amounted to around 16%.

That, in just over a generation, is a striking change.

Even if China's rate of growth dips in the coming years by weight of population alone China is set to be the largest economy in the world, even if Chinese living standards remain low compared to the West.

Many observers have been tempted to compare China's eclipse of the US (economically at least), to the US's eclipse of Britain in the 20th century.

Just as the Pax Britannica gave way to a post-World War Two Pax Americana, talk of the "Chinese Century" has been commonplace.

But that is to misunderstand the economic history of the last two centuries.

Multipower global outlook

The extent of American economic dominance over the last few decades has been truly exceptional , as has the extent of US power.

From the 1870s until the First World War, the height of British imperial power, the British economy never represented more than 10% of global GDP.

Even adding in the Empire doesn't get the total share to the levels of the levels the US achieved in the 1950s and 1960s.

While the British Empire was a major factor in world politics, Britain always had to share power globally.

The new geography of global economics is far more similar to that of the late 19th century than the late 20th.

Adam Posen, a former member of the Bank of England's Monetary Policy Committee, has noted before that the "new normal" is really the "old normal".

Specifically, a world of multiple economic powers would see less strict rule enforcement and greater volatility than a world dominated by the US.

More than one major currency would play a decisive role, intellectual property rights would be harder to enforce and yet globalisation would continue.

image copyrightReuters
image captionWould world trade benefit from the eclipse of the US as the single economic superpower?

All of which would suggest the decline of US economic hegemony and the rise of China is perfectly compatible with an increasingly integrated global economy.

But that doesn't mean globalisation in an era of multiple economic powers will be like globalisation in a unipower era.

The roots of the deglobalisation of the 1920s and the 1930s can be found well before the Great War.

British policymakers in particular began to fret about the relative decline of the UK economy and the rise of other powers from the 1870s onwards.

The reaction of many was to drop their traditional desire for an open, trading world economy and turn towards the empire.

As one historian has put it: "[In the 1880s and 1890s] international exhibitions were replaced by colonial exhibitions; companies reorganised on an imperial basis; even education and patterns of travel to some extent became imperial, rather than cosmopolitan."

As Capital Economics have argued the future of global trade deals may well be regional, rather than global.

It's hard not to detect the whiff of geopolitics in the US attempt to sign a grand deal in Asia, excluding China. Meanwhile, China's international economic strategy (as analysed by former UBS chief economist George Magnus) is following a similar regional pivot, aiming to bind together diverse countries in a "New Silk Road Economic Order".

The globalisation of the 1980s to 2000s was genuinely global; the globalisation of the 2010s and 2020s may be much more regional.

The globalisation of the last 30 years may have contributed to lower interest rates, slower wage growth and booming asset markets.

It remains unclear if "regionalisation" would do the same.

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