First, the coronavirus crisis exposed cracks in our economic interdependency. Now, the war in Ukraine is blowing up commodity markets. These may be signposts on the road of deglobalization — which is reshaping our world.
Certainly, you've heard of globalization. But what about deglobalization?
Supply chain disruptions, surging costs, shortages — these daily realities could all be connected to a process known as deglobalization.
Some experts even see the war in Ukraine, combined with the pandemic, as marking a turning point toward a deglobalized era.
But what shape would this new world take?
A brief intro to globalization
Experts typically describe three types of globalization: economic, social and political globalization.
Economic globalization is the integration of the world economy in terms of trade.
This process certainly has its share of advocates and critics. Globalization lifts people out of poverty and increases their standard of living, proponents proclaim.
Extreme poverty declined from 1995 to 2020, but picked up once the pandemic began
Yet the rewards of economic globalization are not shared equally.
"Internationally as well as in industrialized societies, inequality has increased," confirms Andreas Wirsching, a history professor at LMU in Munich. Economic globalization has resulted in "many winners, but also many losers — that is undeniable."
Downsides of globalization also include social and ecological consequences, points out Cora Jungbluth, an economist and senior expert at Bertelsmann Stiftung, an institute in Germany.
Workers in high-income countries have seen jobs moving to lower-cost countries, while "multinational corporations have outsourced more dirty production steps to developing and emerging countries, thus contributing to environmental issues there."
Critics of globalization warn over ecological impacts, labor rights and the growing gap between rich and poor
Globalization in retreat since the Great Recession
Just as globalization reflects a process of increasing economic interdependency, deglobalization then marks a retreat from global economic integration. And there are indications this has been happening for some time already.
A key measure of globalization — trade's share of global GDP — peaked in 2008 at the start of the Great Recession.
"The ratio of exports to GDP around the world rose pretty significantly in the 1990s and 2000s. But since the 2008 and 2009 financial crisis, those measures have been flat or down," explains Douglas Irwin, an economics professor at Dartmouth College in the US.
Irwin and other experts also note that this has been linked to populism and protectionist economic policies. But there are other major factors puttingthe brakes on globalization.
Then came the pandemic
Economically, the coronavirus crisis was infamous for supply chain disruptions. Who could forget the resulting shortages, price increases, hoarding — that moment when you got down to your last roll of toilet paper?
Such disruption spurred a fundamental change to the design of those supply chains, explains Megan Greene, an economist and senior fellow at Harvard Kennedy School.
"The pandemic shifted a trend away from just-in-time manufacturing more toward holding inventories," Greene says. She describes this newer contingency system as "global supply chain plus backup plans," so firms are not left in the lurch when there are global supply chain disruptions.
Within this "supply chain plus" model, Jungbluth adds that countries and companies have been considering shortening supply chains: "Maybe take them back home, keep production of key input and technologies closer to their production sites."
German companies seek suppliers closer to home
This results in more resiliency on the supply side — which is, in essence, a move away from globalization, with its focus on efficiency and cost-effectiveness.
And now the war in Ukraine
Consumers have felt the impacts of Russia's invasion of Ukraine, along with subsequent sanctions, above all in the energy and agricultural product sectors.
"We have a lack of necessary energy imports, because Europe needs fossil energy from Russia," says Thiess Petersen, an economist and colleague of Jungbluth at Bertelsmann Stiftung. "And the entire world needs agricultural products from Russia and Ukraine."
Russia and Ukraine are very significant global exporters of wheat and sunflower oil.
Russian invasion of Ukraine to hit global supply chains
Irwin confirms that disruption of exports due to the war and sanctions is resulting in some price increases. "We've seen commodity prices going up quite a bit as a result of the war: wheat prices, oil prices (at least initially)." That drives up prices for consumers, which in turn fuels inflation.
On the flip side, sanctions against Russia are isolating that large economy from the rest of the world.
Russians flocked to McDonald's first restaurant in 1990 — now the US chain has closed hundreds of outlets there
Economists see here not only a disintegration of interconnected markets, but also an unspooling of the progress that globalization has brought with it.
Shortages and high prices of basic foodstuffs resulting from the Russian invasion of Ukraine will be felt not only in high-income countries, but also in developing and emerging countries. For countries highly dependent on such imports of cheap flour and oil, this "may even lead to famine," Jungbluth adds.
End of the globalization era?
The Great Recession, ensuing tariff-oriented protectionism, supply chain restructuring due to the pandemic, disintegration of interlinked commodity markets because of the Ukraine war — Petersen concludes, "Maybe now we are at the beginning of a kind of deglobalization."
Economist Greene points out that there is no index to measure globalization. She challenges a prevailing narrative, promoted when the pandemic began, of increased onshoring, nearshoring and regionalization of global supply chains. This narrative is not backed up by many gauges of globalization, for example survey data.
"In the latest survey conducted by the Shanghai Chamber of Commerce, zero US firms said that they were going to onshore operations — that is, move out of China and come back to the US," Greene points out.
Globalization turned China into the world's factory — and companies are not in a hurry to pull out
She adds that although long-term investments in China have continued apace, short-term investmentsstarted being pulled once Russia invaded Ukraine, as one indication of a possible turn.
But even Greene concedes, "The peak of globalization is well behind us — I would say that we're seeing globalization progress much more slowly than we had before, but we're not in deglobalization territory yet."
Brave new blocs
Western sanctions against Russia and capital flight from China point to an overarching trend, Jungbluth believes. "In recent years, countries have been trying to reduce so-called critical dependencies, which can also lead to deglobalization."
Irwin draws parallels to the Cold War era, when "certain countries that were politically aligned also became more economically aligned, and not as integrated with others."
Jungbluth, Petersen and other economists believe the world is currently headed toward two distinct geopolitical economic blocs: one consisting of democratic, market-economy countries (the US, European Union, Japan, South Korea, Oceania, North and South America) and another bloc of autocratic states (China, Russia and their most important trading partners).
"What we've been seeing is a comeback of geopolitics, and these trends also lead to deglobalization — trying to reduce economic dependencies from less like-minded countries," Jungbluth says.
So far, only 'hot money,' or short-term investments, have reversed in China since Russia invaded Ukraine
So, are we on the cusp of a new era?
That's a popular discussion, concludes historian Andreas Wirsching.
"You can almost think of these two moments together: the 2020 pandemic, and now this war of aggression in 2022. We have the feeling, we have the impression as cohabitants here and now, that something is fundamentally changing."
"But how the various factors can be seen together, that will only become apparent later."
Edited by: Stephanie Burnett, Andreas Illmer
- AuthorSonya Angelica Diehn
- Related SubjectsCoronavirus
- Keywordsglobalization,deglobalization,geopolitics,pandemic,supply chains,commodity markets,economy
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These institutional foundations may have been weakened of late, but enough rules and organizations remain to ensure that the current global economy is unlikely to suffer the same fate as the last. In other words, although globalization has passed its peak, it is unlikely to unravel completely.
Peak globalization is a theoretical point at which the trend toward more integrated world economies reverses or halts. Peak globalization is a similar concept to peak oil, which is the point where global oil production enters a permanent decline.
The rate of globalization has increased in recent years, a result of rapid advancements in communication and transportation. Advances in communication enable businesses to identify opportunities for investment.
Globalization isn't in decline; it is simply changing. Although the COVID-19 crisis has seen a dramatic decline in goods trade, investments and the movement of people, a new type of globalization is emerging.
Globalization enables countries to access less expensive natural resources and lower cost labor. As a result, they can produce lower cost goods that can be sold globally. Proponents of globalization argue that it improves the state of the world in many ways, such as the following: Solves economic problems.
Technological advancements reduce costs of transportation and communication across nations and thereby facilitate global sourcing of raw materials and other inputs. Patented technology encourages globalization as the firm owning the patent can exploit foreign markets without much competition.
Which statement best describes how globalization connects the world? Globalization helps create new forms of transportation, communication, and technology.
The answer is simple: technology is essential to globalisation. Technology is the physical and organisational enabler; without appropriate technology, there would be no globalisation because it is through technology that we extend social control across the dimensions of space and time.
Globalization has benefits that cover many different areas. It reciprocally developed economies all over the world and increased cultural exchanges. It also allowed financial exchanges between companies, changing the paradigm of work. Many people are nowadays citizens of the world.
Developments in IT, transport and communications have accelerated the pace of globalisation over the past 40 years. The internet has enabled fast and 24/7 global communication, and the use of containerisation has enabled vast quantities of goods and commodities to be shipped across the world at extremely low cost.
Globalization involves the increasing interconnection of local and nationalistic economies across the world. It increases border movement of goods, people, technologies, ideas and services throughout the world. It lets other countries to join the rest of the world and become part of worldwide interrelatedness.
This slowdown can be traced to variation in supply chains, accounting principles, escalating protectionism, and most recently Covid-19. Global financial openness slowed after the financial crisis in terms of cross-border capital flows and bank lending.
Globalization has a positive impact because it enables the US to increase trade in services, manufacturing, agricultural and food products, it enables Americans to buy cheaper and more abundant consumer goods, and it creates more U.S. jobs.
Without globalization, the would be a closed system. A closed system meaning we would not know what was going on in other countries. This also means no sharing of inventions and discoveries.
In reality, globalization likely reached its peak in the mid-2000s, according to research by the McKinsey Global Institute. While trade tensions and a growth in populism are contributing factors, several secular changes have been at work behind the scenes for more than a decade.
When did globalization begin? Many scholars say it started with Columbus's voyage to the New World in 1492. People traveled to nearby and faraway places well before Columbus's voyage, however, exchanging their ideas, products, and customs along the way.
- Countries now rely on each other for new industries. - Countries now rely on one another for chances to import. - Countries rely on each other for cheaper products. - One way to measure economic growth is by using GDP, which stands for Countries now rely on one another for chances to export.
Based on the map, which is the best conclusion that can be drawn about the economies of the US and Western Europe? The US and Western Europe are strong because they have high GDPs.