Is the current era of globalization coming to an end?

John Maynard Keynes vividly portrayed the heyday of the first golden age of globalization (1870-1914) in his prophetic book, “The Economic Consequences of Peace,” as follows: “The inhabitant of London could order by telephone, sipping his morning tea in bed, the various products of the whole Earth, in such quantity as he might see fit, and reasonably expect their early delivery upon his doorstep. He could at the same moment and by the same means adventure his wealth in the natural resources and new enterprises of any quarter of the world, and share … in their prospective fruits and advantages.”

The first wave of globalization was driven by a confluence of events that led to a substantial increase in the cross-border flow of goods, capital and labor. Steamships and railroads reduced the cost of shipping goods across vast distances. Widespread adoption of the gold standard along with the resultant adherence to gold convertibility tied much of the trading world together under a fixed exchange system and encouraged global capital flows. There was also a substantial increase in labor migration (especially between Europe and North America).

World War I brought about a dramatic end to the first era of globalization, and the inter-war period saw heightened levels of protectionism that contributed to the Great Depression. Following World War II, the institutionalization of multilateral trade talks saw the emergence of a Western-centric framework aimed at re-establishing trade ties (initially focused on goods trade as capital and labor flows were largely restricted until the 1970s). The Soviet-bloc, China, India and much of the global south did not truly partake in the post-World War II revival of trade flows.

The coming together of technological and geopolitical forces in the early 1990s saw the emergence of the second age of globalization. On the tech front, the information communication technology (ICT) revolution proved pivotal. Key breakthroughs in the global shipping industry, along with the ICT revolution, enabled the creation of global supply chains supported by sophisticated logistics and operations management.   

The collapse of the Soviet Union and implementation of economic liberalization programs in China, India and elsewhere gave rise to global offshoring and outsourcing. The controversial push by the International Monetary Fund (IMF) and the U.S. Treasury to liberalize capital accounts boosted international financial integration. Footloose capital sought out cheap labor and high-return investments worldwide.

Unlike the first wave of globalization, which saw a considerable degree of divergence in the economic fortunes of the world’s population, the second wave of globalization helped create an extraordinary degree of global convergence. For the first time in the modern era, the fortunes of the average citizen of the world saw a substantial improvement. Specifically, inequality between countries came down (even as inequality within countries widened).

The entry of hundreds of millions of people into the middle class in China, India and other parts of the emerging world and the rapid decline in extreme inequality was an enormously positive outcome associated with the second era of globalization. But the adverse impact on the relative fortunes of the middle class in the advanced world gave rise to a populist backlash against the second wave of globalization. In particular, the so-called “China shock,” which exacerbated the already in-progress de-industrialization trends in the U.S. and UK, created political support for more protectionist policies.

Furthermore, rising concerns regarding the volatility of cross-border capital flows has now convinced even the IMF to reconsider its stance of free capital mobility. The recent weaponization of finance threatens to further erode support for a U.S. dollar-centric global monetary order and may eventually lead to a reversal of the decades-long trend towards greater financial integration.

The backlash against labor migration has also been a noticeable factor in the post-financial crisis era. More broadly, as a recent article in the journal International Organization noted: “Trade, offshoring, and automation have steadily reduced the number of available jobs and the wages of industrial workers since at least the 1970s. The decline in manufacturing employment initiated the deterioration of social and economic conditions in affected communities, exacerbating inequalities between depressed rural areas and small cities and towns, on the one hand, and thriving cities, on the other. The global financial crisis of 2008 catalyzed these divisions, as communities already in decline suffered deeper and longer economic downturns than metropolitan areas, where superstar knowledge, technology, and service-oriented firms agglomerate.”

In the aftermath of the pandemic, will countries focus on re/near-shoring production facilities and force companies to create more resilient supply chains? Will the geopolitical shocks (associated with Russia’s invasion of Ukraine and the ongoing tussle between the U.S. and China on multiple fronts) lead to the recreation of economic blocs? Can democratic systems work towards smoothing out the hard edges of the economic changes that arise from globalization and reestablish strong public support for greater cross-border engagement?

Following the peak of the recent globalization wave, we are now entering the de-globalization phase. As Kevin O’Rourke wisely noted in an article: “Economic historians have always known that globalization is neither new nor irreversible. …When globalization unravels, this is typically because some perturbation to the system has disturbed either existing domestic political equilibria favoring openness, or the geopolitical system as a whole.”

Even as we ponder the potential ramifications of de-globalization, it is nevertheless worth noting that future technological breakthroughs will inevitably create fresh impetus for global integration. Declining fertility rates, labor shortages and rising inflation in the advanced world may still reshape the political calculus in favor of globalization.

Vivekanand Jayakumar is an associate professor of economics at the University of Tampa.