Globalization may be at a high, but the resilience of trade in the face of growing headwinds means that a reversal of the past three decades is not inevitable.
After the COVID-19 pandemic and Russia’s invasion of Ukraine disrupted global supply chains, the debate over how integrated the global economy will be in the future compared to the previous 30-40 years.
For many economists, globalization has stalled after three decades of low inflation, China’s integration into the world economy, and relative peace.
The pandemic, the rise of populist politics, the war in Europe, and China’s technological and military advances may make the world more inclined to look inward than outward.
World trade reached or approached record levels in nominal terms last year; perhaps surprisingly, inflation was the highest in 40 years in volume terms.
As a share of world GDP, trade should increase from 58% last year and exports.
The structure of world trade will inevitably shift towards deglobalization or regionalization, but the process will be selective across industries.
World trade in goods reached a high level last year. In addition, US and EU trade in goods with China is high, and global exports of digital services have tripled since 2005.
China’s exports and imports hit all-time highs last year at $3.58 trillion and $2.73 trillion, respectively, as did eurozone exports and imports at €2.899 trillion and €2.95 trillion. euro.
But disruptions to global supply chains since the pandemic and the war in Ukraine have forced countries and regions to become more self-sufficient in energy, food, resources, technology, and more.
Impact of regionalization on the supply chains of the global semiconductor industry
The Biden administration has crafted landmark fiscal packages, such as the Reduce Inflation Act and the Chip Finance bill, that include unprecedented subsidies and funding for the semiconductor and technology industries.
China is working on a 1 trillion yuan support package for its semiconductor industry, and Europe is sure to follow suit with similar projects.
JP Morgan economists point to the increasing regionalization of supply chains, with Asia now accounting for 78% of China’s total auto and transport equipment imports, up from 66% from 2017 to 2019.
It’s a small sample size, and Templeman stresses that economic, financial, demographic, and political factors were at play. But it is worth considering, as the forces of deglobalization will intensify in the coming years.
