Being thankful for globalization's resilience
The "death of globalization" has been supremely exaggerated
Great working paper from the International Monetary Fund. It basically blows out of the water both the globalization-is-dead argument and the geopolitical-risk-is-killing-globalization argument.
I know. That’s bad news for a lot of pundits who make their living trying to scare the hell out of everyone.
From the abstract:
Are we really witnessing the death of globalization? A multitude of shocks over the past three years has unsettled the conventional wisdom on economic integration and fueled widespread calls for protectionist and nationalist policies. Using an extensive dataset with more than 4 million observations, I develop an augmented gravity model of bilateral trade flows among 59,049 country-pairs over the period 1948–2021 and find that the much-debated geopolitical alignment between countries has contradictory and statistically insignificant effects on trade [emphasis mine], depending on the level of economic development. Moreover, the economic magnitude of this effect is not as important as income or geographic distance and it diminishes significantly when extreme outliers are removed from the sample.
That’s the call, based on some big data. Geopolitical re-shufflings do not have a consistent or profound effect on trade patterns. Levels of economic development are a far stronger indicator of what’s what, which means market/development logic holds sway.
Now, let’s dig in.
From the intro:
Are we really witnessing the death of globalization? A multitude of shocks over the past three years, starting with the COVID-19 pandemic and cresting after Russia’s invasion of Ukraine, has unsettled the conventional wisdom on economic integration and fueled widespread calls for greater protectionism and nationalist policies. Some analysts equate recent developments to how the Spanish flu pandemic of 1918 and the World War I brought an end to the era of globalization in the early 20th century. Zeihan (2022), IMF (2023) and Aiyar et al. (2023), for example, draw attention to an impending “geoeconomic fragmentation” as a potential threat to globalization—a catalyst for economic development and prosperity across the world. That would undoubtedly cause frictions and losses throughout the global economy, but are there actually systemic signs of deglobalization in trading ties after decades of integration across the world?
Okay then, lots of big talk about a world coming apart. But what actually happens to trade?
Globalization has long evolved in waves—and recent developments triggered by the COVID-19 pandemic and geopolitical tremors reverberating from the war in Ukraine are not necessarily an exception.
In others words, we’ve seen worse and globalization has continued marching on — just like now.
Globalization is a complex phenomenon … This is why it is not easy to measure the extent of economic globalization with a single metric.
The most common indicator of globalization is trade openness as measured by the sum of exports and imports divided by GDP. As shown in Figure 1, there is no sign of structural retreat, but only occasional oscillations caused by cyclical factors and global supply chain disruptions experienced during the COVID-19 pandemic.4 But since then international trade as a share of GDP has rebounded strongly, rol for potential endogeneity and the local projection (LP) method to trace out the dynamic response to geopolitical shocks.
This is basically my argument in the book:
A good measure of globalization’s advance is found in “trade openness,” or the value of world exports and imports as a combined percentage of gross world product. Pre-nineteenth-century globalization was driven primarily by Europe’s murderous colonization of weaker nations around the world, allowing those powers to pillage local resources and transfer that wealth back home. As a result, trade openness never exceeded 10 percent. The subsequent century of British world domination, extending to World War I, was defined by an explosion of intra-European trade, boosting the index to 30 percent before that conflict and the Great Depression sent it plunging. Once America stepped up to forge a truly globe-spanning system, the world’s trade openness steadily increased to its 2008 peak of 60 percent, retreating to the mid-50s since.
Despite the flatlining of the global goods trade following the onset of the Great Recession, in 2018 there were still 125 nations (out of 173 reporting to the World Bank) enjoying trade-openness indices of 100 percent or more in relation to their national gross domestic product (GDP). This demonstrates just how widely internalized our global trade ruleset has become among smaller and midsized economies now left highly dependent on globalization’s post-COVID survival—unlike big-market superpowers. A quintessentially American achievement, we fostered a world system within which those lacking military power could nonetheless thrive economically.
What the chart above (which extends slightly beyond the data I posted — by four years) shows is that the world’s trade openness index has actually gone up since 2018. This means that, at the height of this boom in doom-and-gloom reporting and analysis of how geopolitical risk (to include a pandemic!) is killing globalization, the trade openness index is actually back up to as high as it has ever been in human history!
Understand this, though: this is no known ideal level of trade openness, so ~60% might actually be the ideal for all we know.
Back to the IMF report, here is the bottom line for geopolitical risk-mongers:
International trade relationships have proven to be, by and large, resilient to occasional shifts in the geopolitical landscape.
Not only that, but trade agreements seem to matter more than geopolitical risk:
… international trade agreements are a key factor in shaping bilateral trade patterns across the world. Countries with membership to the General Agreement on Tariffs and Trade (GATT) and the World Trade Organization (WTO) and with free trade agreements (FTA) tend to have higher level of international trade.
To sum up this gratifying news:
The empirical results presented in this paper—robust to different specifications—show that the world economy remains deeply interconnected [emphasis mine].
Here’s the kicker for the bevy of freak-out artists out there:
This should not be viewed as an unexpected finding, even under the current circumstances. First, although the war in Ukraine certainly elevated geopolitical risks as shown by a news-based indicator of geopolitical events and associated risks (Caldara and Iacoviello, 2022), the recent increase has not even reached the level of previous spikes after the 9/11 terrorist attacks or during the Cuban Missile Crisis, let alone the two world wars (Figure 2). Second, this high-frequency indicator shows that geopolitical tensions have already dissipated below the historical average.
Get that? We are not living in the most uncertain times in human history — not by a long-shot. Nor the most conflicted. Nor the most [INSERT FRIGHTENING MODIFIER HERE].
Yeah, stuff is still evolving …
This does not mean that trade linkages and supply chains remain constant throughout the global economy. These networks evolve over time with economic and technological developments—and occasionally due to political considerations. What history has shown, however, is that beyond sporadic geopolitical fissures, no country—or region—in the world can be completely self-sufficient to achieve sustainable economic development. That is why global integration has continued to advance and brought prosperity to a growing number of people across the world.
So yes, be grateful this Thanksgiving. Despite all the recent tumult, globalization is stronger than ever and radically evolving in new ways thanks to its pervasive digitalization. There are ruleset clashes galore, but the notion of the world system fracturing into chaos is complete and utter bullshit.
Remember that the next time some doom-and-gloom pundit tells you to … Be afraid! Be very afraid!!!
There remain futures out there worth creating.
Serenity now!
