Can Globalization Be Rejuvenated?
By Yossi Sheffi
Globalization – in particular international trade — is under attack on so many fronts that its future viability is being called into question. At the World Economic Forum’s annual meeting in May 2022 in Davos, Switzerland – perhaps the most well-known cheerleading platform for global trade – the term “(de-)globalization” was high on the agenda.
Is globalization in terminal decline, or will it survive or even thrive in some other form?
The price of inequality
A key rationale for supporting globalization is that it lifts all economic boats. The basic hypothesis was argued by Adam Smith who introduced the concept of absolute advantage in 1776, and David Ricardo who added the concept of comparative advantage in 1817. Steadily declining poverty levels worldwide over the past 50 years or so demonstrate that global trade did raise standards of living around the world. Also, as I argue in my book The New (Ab) Normal: Reshaping Business and Supply Chain Strategy Beyond Covid-19 (MIT CTL Media, 2020), free trade, when done right, can bring both peace and corporate dividends.
However, the version of globalization that has transformed the economic fortunes of many people and countries is not perfect. While it lifted most economic boats, it did not lift all of them. Some workers lost jobs that were outsourced and so globalization also increased inequality within many countries, and notably in the US. The US income distribution Gini-coefficient (a common measure of inequality among populations) grew from 0.43 in 1990 to 0.49 in 2020.
Such inequalities have fueled the rise of populism and economic nationalism. These forces promote divisions between groups of people, fueled by those who view themselves as the “losers” of the process, smothering many of the benefits of free trade. A populist backlash has been throttling globalization over the last decade or so.
Many companies are struggling to navigate this volatile mix of nationalism and economic disruption. Responding to criticism that certain countries derive a cost advantage from lax environmental and labor laws, some companies are trying to limit their procurement spending and operations in countries with stringent laws. This movement gained steam when geopolitical differences and resentment over the limited sharing of medical supplies during the pandemic created tensions between countries.
As a result, the term “friend-shoring” has emerged, which refers to attempts by countries to confine their trading activity to a select circle of friendly trading partners that share the same values. The net effect is to constrain globalization.
Not surprisingly, this climate of mistrust is taking its toll on the free movement of goods and the prospects for international growth. The International Monetary Fund projects global growth to slow from an estimated 6.1% in 2021 to 3.6% in 2022 and 2023. Beyond 2023, the IMF expects growth to fall to about 3.3% over the medium term.
New approaches needed
Still, there are good reasons for keep the faith. Companies are still driven by the need to pursue growth opportunities, and global markets remain a top prospect in this regard. And enterprises will not simply abandon the huge investments they have already made in overseas markets. These include investments in supplier networks that are often difficult – if not impossible – to replicate domestically. Moreover, many countries will not allow foreign companies to sell products within their borders if some level of local manufacturing is not involved.
Beyond the arguments of Smith and Ricardo, restricting international trade limits citizens’ access to the innovations, new products, and best prices available from around the world. Such impediments to trade also hinder domestic companies’ access to global customers and therefore their ability to operate at scale, increasing their costs.
The challenge is how to develop a version of globalization that mitigates the inequalities within countries that give rise to trade barriers and both intra- and inter-nation tensions. One of the obvious avenues to achieving this goal is a fundamental upgrade of the US education system to refocus it on reading, writing, and arithmetic. With the widespread availability of online courses, K-to-12 education should focus on basic skills so workers can keep learning and upgrading their skills as job market requirements change due to outsourcing, automation, or other factors. Other ideas for rethinking globalization are welcome.
We have no time lose in the campaign to prevent global trade from becoming a spent force. As Bloomberg columnist Matthew Yglesias writes: “We’re going to miss globalization when it’s gone, and it’s not too soon to start thinking about what could take its place.”
By Yossi Sheffi