Massey's Alison Brook investigates the current fad to decouple from globalisation. Are we about to jump from efficient but painful global settings into inefficient and even more painful policies?

There is mounting speculation that 2020 will mark the end of globalisation as we currently know it. Open borders and markets were already under threat even before the pandemic hit, but the COVID-crisis has made it clear that an over-reliance on global supply chains could pose a real threat to domestic resilience and domestic sovereignty.

The decades leading up to the global financial crisis may have been a heyday for globalisation, but post-2008 there has been an increasingly negative perception of its downstream effects. While globalisation has been one of the biggest drivers of global economic growth over the last forty years, lifting millions of people in the emerging world out of poverty, it is also linked to higher levels of inequality and unfair competition in developed countries.

There is evidence to back this up. It seems that while emerging countries become more competitive through globalisation, large developed countries like the US have experienced a loss of jobs for less-educated workers and with it a rise in income inequality. The World Bank confirmed this by acknowledging the winners have been  the “emerging ‘global middle class,’ mainly people in places such as China, India, Indonesia, and Brazil, along with the world’s top 1 percent. But people at the very bottom of the income ladder, as well as the lower-middle class of rich countries, lost out.”

Globalisation has also been linked to the painfully slow recovery from the GFC, with growth in the global economy declining from a post-war average of 3.5 percent to around 2 percent after the GFC. So has the pandemic been the final nail in the coffin for globalisation as many commentators are suggesting?

Global trade defies predictions

Despite the pandemic-precipitated recession and restrictions on the movement of goods and people, global trade has proven to be remarkably resilient – so far at least. The World Trade Organisation forecasts a decline in the trade of goods to 9.2 percent in 2020, much less than its original predictions of a plummet of anywhere between 13 and 23 percent.

The deglobalisation dilemma

The deglobalisation movement has come at an unfortunate time in a number of respects. An ageing population in developed countries coupled with falling birth rates has left many countries reliant on immigration to boost their working-age population.

And turning inwards during a pandemic can be particularly harmful, as economists Richard Baldwin and Simon Evenett point out, since the production and transport of many medicines and vaccines rely on a global network. Regardless of how enthusiastically proponents of deglobalisation may be to see its demise, it is only through multilateral action that the world will be capable of addressing some of the big issues it currently faces: disease, climate change, cyber-attacks and terrorism.

Small countries generally benefit from openness

For small trading nations like New Zealand, global trade is essential not only for the contribution it makes to GDP but also the international connections it brings. There are many studies that suggest global supply chains can boost productivity through increased competition and knowledge exchange. The late economist Alberto Alesina pointed out that small countries can benefit even more than large ones as long as they are open to international trade.

The World Bank looked at the impact of globalisation on small countries from the viewpoint of consumers, exporters and producers. They concluded that consumers in smaller countries almost always gain from globalisation through access to a wider variety of cheaper, higher quality goods. Exporters benefit through access to larger markets and more competitive inputs. The impacts on producers though can be mixed, as increased foreign competition may push less productive firms out of the market.

However, while small advanced economies have generally seen huge benefits from globalisation, David Skilling points out that public support is weakening where strong migration rates have placed pressure on labour markets and infrastructure. He also argues that “Ultra-loose monetary policy in the US and the Eurozone is having disruptive spillover effects on small economies”, such as New Zealand, leading to appreciating exchange rates, rapidly increasing property prices, and low or negative inflation rates.

There is no doubt that the pandemic has heightened trade tensions that were already brewing but it is unlikely to signal the demise of globalisation. As former EU Trade Commissioner and WTO Director-General Pascal Lamy said in a recent keynote address “Globalisation is efficient and painful while de-globalisation is inefficient and painful.” What is clear is that world leaders can no longer afford to ignore the disaffected groups in their societies who feel they have been left behind in the race for global prosperity.

*Alison Brook is from the Knowledge Exchange Hub at the Massey University campus at Albany, Auckland. She is on the GDPLive team. This article is a post from the GDPLive blog, and is here with permission. The New Zealand GDPLive resource can also be accessed here.