Text: Zhang Yu, Assistant Director and Chief Macro Analyst of Huachuang Securities Research Institute (License No.: S0360518090001)
Contact: Xia Xue (WeChat SuperSummerSnow)
Core ideas
This issue of Overseas Papers Biweekly focuses on globalization and selects an NBER working paper. Is the Global Economy Deglobalizing? "discusses the deglobalization issues that have attracted much attention after the outbreak of the epidemic and the Russian-Ukrainian conflict, and mainly answers three questions: 1) Is the world economy de-globalizing? 2) If so, why? 3) If so, what are the consequences?
Report summary
Is the global economy de-globalizing?
Is the world economy de-globalizing?
Look at it from three perspectives: 1) Three key indicators for measuring the degree of globalization – global trade, global capital flows, and migration. 2) Changes in the trade policy environment. 3) the occurrence of certain terms in news or articles to analyze changes in public attitudes towards globalization.
The leading lag between the above three perspectives: policy changes may lag behind changes in public attitudes, and changes in key indicators of globalization may lag behind policy changes.
The conclusion is that changes in the policy environment and public sentiment could be a harbinger of a new type of globalization. Chief among these are concerns about national security, which stem primarily from geopolitical rather than economic factors, so we may be entering a new kind of globalization – one dominated by top-down political forces rather than driven by market forces.
(ii) What are the causes of potential deglobalization?
Policy changes, and policy changes reflect public anti-globalization sentiment. There may be 6 factors behind the public anti-globalization sentiment: 1) The financial crisis. There are two negative arguments for the hypothesis that anti-globalization sentiment originated from the financial crisis. See text for details. 2) Import competition from low-wage countries. 3) Climate change and carbon taxes. 4) The pandemic and the need for resilience. One of the keys is how to measure resilience, and the paper draws on the literature to give three indicators to measure supply chain resilience at the firm level, as detailed in the text. 5) Russia-Ukraine conflict and energy crisis. 6) Dual-use goods and national security concerns.
(iii) What are the possible consequences of potential deglobalization trends?
The paper considers 6 factors. 1) Impact on supply chain resilience: uncertain. 2) Impact on efficiency, innovation and long-term growth: decline. 3) Impact on inflation: up. 4) Impact on domestic inequality: uncertain. 5) Impact on global inequality: or exacerbation. 6) Impact on global peace: or unfavorable.
Risk warning: paper translation and understanding bias
Report Directory
The body of the report
This issue of Overseas Papers Biweekly focuses on globalization issues, and selects an NBER working paper "Is the Global Economy De-globalizing?" 》。 The paper explores the deglobalization issues that have attracted much attention after the outbreak of the epidemic and the Russian-Ukrainian conflict, and mainly answers three questions: 1) Is the world economy de-globalizing? 2) If so, why? 3) If so, what are the consequences?
Is the global economy de-globalizing?
The paper aims to answer three questions:
First, is the world economy de-globalizing? The paper offers three perspectives: 1) three key indicators for measuring the degree of globalization – global trade, global capital flows, and migration. 2) Changes in the trade policy environment. 3) the occurrence of certain terms in news or articles to analyze changes in public attitudes towards globalization. The conclusion is that changes in the policy environment and public sentiment could be a harbinger of a new type of globalization.
Second, what are the causes of potential deglobalization? Policy changes, and behind policy changes is the fermentation of public anti-globalization sentiment.
Third, what are the possible consequences of potential deglobalization? The paper considers 6 factors. 1) Impact on supply chain resilience: uncertain. 2) Impact on efficiency, innovation and long-term growth: decline. 3) Impact on inflation: up. 4) Impact on domestic inequality: uncertain. 5) Impact on global inequality: or exacerbation. 6) Impact on global peace: or unfavorable. Is the world economy de-globalizing? Look at it from three perspectives: 1) Three key indicators for measuring the degree of globalization – global trade, global capital flows, and migration. 2) Changes in the trade policy environment. 3) the occurrence of certain terms in news or articles to analyze changes in public attitudes towards globalization.
The leading lag between the above three perspectives: policy changes may lag behind changes in public attitudes, and changes in key indicators of globalization may lag behind policy changes.
The conclusion is that changes in the policy environment and public sentiment could be a harbinger of a new type of globalization. Chief among these are concerns about national security, which stem primarily from geopolitical rather than economic factors, so we may be entering a new kind of globalization – one dominated by top-down political forces rather than driven by market forces.
1. Globalization metrics: or not "deglobalization", but "slow globalization"
First, global trade: imports, exports, imports of intermediate goods
(1) Import
Global imports have grown rapidly over the past 30 years (Figure 1). Although global imports briefly declined in 2020 due to the pandemic, they increased significantly after 2021.
However, global imports as a share of GDP have declined since the financial crisis, raising fears that the world has begun to deglobalise after 2009. But because the decline in global imports as a share of GDP is too small or insufficient to justify the existence of a trend toward "deglobalization," "slowbalization" seems to be a more appropriate term.
(2) Export
From the perspective of the ratio of exports to GDP of major countries (Figure 2 panel A), India's dependence on the global economy has declined, and its export-to-GDP ratio has declined, and it is now stable at about 20%. Germany's exports as a share of GDP have continued to rise, and are now around 50%. U.S. exports as a percentage of GDP have been stable at around 10 percent. Exports from the rest of the world account for about 30% of GDP.
(3) Import of intermediate goods
Looking further at the ratio of imports of intermediate goods to GDP (Figure 2 panel B). For countries participating in global value chains (GVCs), imports of intermediate goods are necessary inputs for exports (so a higher share of imports of intermediate goods may mean a higher level of participation in GVC). From the perspective of major countries, 1) India's intermediate imports as a percentage of GDP are declining, reflecting India's declining dependence on the global economy. 2) Germany and the United States also have a downward trend in imports of intermediate goods as a share of GDP (although not as pronounced as India). 3) Imports of intermediate goods as a share of GDP in the rest of the world increased slightly.
Second, FDI stocks (Figure 2, panel C), measure the degree of globalization of capital markets.
In the United States and the rest of the world, FDI as a share of GDP is as high as 60% and has not shown a significant downward trend.
Third, the number of migrants, which measures the degree of globalization of the labour market (Figure 2, panel D).
1) The share of immigrants in Germany and the United States in the total population continues to grow. In the 2010s, Germany experienced a "refugee flow", with immigrants accounting for more than the United States. 2) In contrast, India's immigrant population as a share of the total population is very low and appears to have remained stable with little change.
In summary, two main conclusions can be obtained:
First, from a trade perspective, it is clear that the growth of global trade as a share of GDP has stagnated since the financial crisis. However, capital and labor markets show different trends, perhaps indicating that it is too early to talk about "deglobalization". The slowdown in global trade-to-GDP growth seems to be a natural trend after previous rapid growth.
Second, there are large national differences in the development trend of deglobalization. While the U.S. appears to be reducing its dependence on global markets, the rest of the world is not. 2. The policy environment: Dramatic changes have occurred Although the trend of the three indicators of globalization has not changed significantly, the trade policy environment has changed dramatically over the past five years, especially in the United States. It is important to note that there may be a lag in the response of metrics to policy. There are three main changes in U.S. trade policy:
First, the United States imposed tariffs. Since the end of World War II, advanced economies such as the United States have played a leading role in the reduction of trade barriers and the formation of the world trading system. But in 2018, things changed dramatically. The United States announced the first tariff increases for several specific countries. Despite the subsequent U.S. administration, most of the tariffs imposed during the Trump era remain in place today.
Second, the United States prevented the WTO's Appellate Body from appointing new judges, leading to the ineffectiveness of the WTO's dispute settlement mechanism. The US blocked the selection of new judges to the WTO's Appellate Body, resulting in the WTO's dispute settlement mechanism being paralyzed by a lack of staff when the last two judges expired at the end of 2019.
Third, the United States has recently shifted from liberalization and multilateralism to industrial policy in the name of strengthening supply chain resilience and ensuring national security.
At the same time, others have acted against the United States, leading to a regionalization of trade. For example, 1) ASEAN member states signed the RCEP, which came into force on January 1, 2022. 2) The membership of the CPTPP continues to expand. 3) Launch of the African Free Trade Area (AFCFTA).
In addition, the research of Fajgelbaum et al. (2022) shows that although the trade between the US and the US of the targeted products of the tariffs has decreased due to the US-China trade friction, its trade between third countries other than the US and the rest of the world has increased, with the largest increase in exports to the rest of the world from countries participating in a wide range of trade agreements. Therefore, the trade conflict between China and the United States will not only lead to the redistribution of global trade (export substitution), but may also bring new trading opportunities for other countries. Based on this, the impact of changes in the U.S. trade policy environment on globalization appears to be more subtle (i.e., not necessarily entirely de-globalized), given that many countries are struggling to take advantage of the new opportunities that a reversal in U.S. trade policy could create. 3. Public sentiment: There are three stages in the development of anti-globalization sentiment, and PEW's survey data on globalization attitudes show that the public still believes that global trade is conducive to economic development. News reports, however, suggest that public skepticism about globalization has grown.
Observe the frequency of specific keywords in news reports (expressed as a proportion of the number of articles in which the keywords appear in the total number of articles) to analyze changes in public attitudes towards globalization.
1) "Resilience": The word "resilience" has been appearing in the news more frequently since the financial crisis (Figure 3 panel A), possibly reflecting a growing awareness that global supply chains put the supply chains of countries and firms at risk.
2) "National security": The increased frequency of its use may reflect growing skepticism about globalization. Surprisingly, "national security" appears more often in articles today than after "911," the Arab Spring, and NATO's military intervention in Libya in 2011. It is difficult to pinpoint the reason for the surge in the frequency of "national security" in 2013 and 2017, for which the rise to power of the nationalist Trump is a possible explanation. However, while the use of the term "national security" declined sharply after Biden's election as US president in 2021, it is still nearly twice as much as it was in 2000.
3) "Reshoring": Since 2010, "onshoring" or "reshoring" has been used frequently, or to indicate that the fermentation of public skepticism about globalization occurred before Trump took office.
4) "Friendly shore outsourcing": In 2021, US Secretary of Commerce Gina Raimondo introduced the concept of "friendly shore outsourcing", which reflects a milder attitude towards globalization than "repatriation", that is, globalization should and may continue to deepen, but only for some "friendly" countries.
4. Summary: Changes in the policy environment and public sentiment may be a harbinger of a new type of globalization, and while the main measure of globalization shows a slowdown (not a reversal) in globalization, the data on foreign direct investment and migration reflect the opposite (still growing rapidly). Overall, so far, there is no conclusive evidence at the data level that we have entered a new era of deglobalization.
Second, profound changes in the policy environment and public attitudes toward international trade (especially in the United States) could be a harbinger of a new type of globalization. Chief among these are concerns about national security, the need to diversify supply chains away from "non-friendly countries," and the belief that trade with "friendly countries" should only be promoted. These concerns stem primarily from geopolitical rather than economic factors, so we may be entering a new kind of globalization – one dominated by top-down political forces rather than driven by market forces. (ii) What are the causes of potential deglobalization? 1. What leads to possible deglobalization: technology or policy? (1) Technology
Some suspect that the decline in trade-to-GDP since the financial crisis has been technology-driven. Two arguments have been made for this argument:
First, the fragmentation of production due to global value chains (GVC) and trade expansion has reached its technological limits.
1) Some cite the decline in intermediate trade as a share of GDP (as shown in Figure 2) as evidence that the split in production has ended. However, as Goldberg (2019) suggests, this evidence is not strong enough. On the one hand, the current decline in the proportion of intermediate goods to GDP is too small; On the other hand, the trade volume of intermediate goods is also affected by factors such as changes in bulk prices.
2) The second indicator that can be used to measure the fragmentation of production is the share of manufacturing trade in the volume (note, volume) of trade in parts and components. The indicator has continued to grow modestly since the 90s and has not shown any signs of reversal after the financial crisis.
To sum up, for the first argument, there are both supporting arguments and negative arguments, which is difficult to verify.
Second, recent technological advances, such as automation and 3D, can support the return of production activities because they reduce the demand for low-educated labor in production. However, this argument does not stand up to scrutiny for three reasons:
1) According to the World Bank's World Development Report 2020, recent technological advances have also created additional trade space. In fact, as the scale of production expands, imports of intermediate goods in sectors most affected by the development of automation technology (such as automobiles) have expanded, especially from developing countries.
2) The presence of sunk costs in FDI means that the scale of outsourcing and repatriation will be asymmetrical – even though the incentives for overseas production may not be as strong as in the 90s (e.g., the relative cost advantage of overseas production is not as high as in the past), GVC (Global Value Chain) will not directly abandon overseas production activities due to the huge sunk costs generated by past OFDI (Antras, 2021).
3) Advances in information and communication technologies have the potential to catalyze a new wave of globalization driven by trade in services.
In summary, there is no convincing evidence that the trend against globalization is driven by technological development.
(2) Policy
Given that there is no convincing evidence that changes in technology are driving the trend towards deglobalization, policy may be the main explanation for the change in the trend of globalization. But this begs another question: if the trend towards deglobalization is driven by policy changes, what can explain policy changes? State policy is actually a response to public sentiment. As discussed in Chapter 1, the American public's attitude toward globalization has deteriorated since the mid-2010s. The main reasons for the change in public attitudes towards globalization are discussed below. 2. What Causes Public Backlash Against Globalization: Consider 6 Factors: The development of strong anti-globalization has gone through about three stages: The first phase began in the mid-2010s, when far-right and far-left politicians blamed international trade, particularly the North American Free Trade Agreement (NAFTA), for declining U.S. manufacturing employment and stagnant real wage growth. The second phase, during the pandemic (2020-2022), raised concerns about international trade amid reflections on the resilience of global supply chains. The third phase began with the outbreak of the Russian-Ukrainian conflict in February 2022, and the core issue is national security. It can be seen that at each stage, it is the specific factors rather than the common factors that drive the anti-globalization sentiment.
(1) Financial crisis
Given the slowdown in global trade growth since the financial crisis, it is easy to attribute the surging anti-globalization sentiment to the financial crisis. However, there are two counterarguments for the hypothesis that anti-globalization sentiment originated from the financial crisis:
First, the time is misaligned. Although international trade as a share of GDP declined sharply in 2008/09, it then recovered immediately as a share of GDP and did not decline rapidly again until 2015/16.
Second, the suffering caused by the financial crisis was not universal, and it was not concentrated among those who had previously aversion to globalization. On the one hand, during the financial crisis, some countries (especially some developing countries) performed well in terms of economic growth and poverty reduction. On the other hand, the financial crisis did not lead to a fundamental shift in public attitudes towards globalization in the United States and Europe, and one possible explanation is that while the financial crisis caused economic difficulties, they were not concentrated among the previously very globalization-averse, low-educated and conservative groups.
(2) Import competition from low-wage countries
Initially, the anti-globalization public was concentrated in communities affected by import competition, and these communities were characterized by the situation described by Bonomi et al. (2021): made up of low-income, low-education, conservative families that became increasingly polarized and conservative after major economic shocks, rejecting globalization.
Since then, anti-globalization sentiment has further fermented over time, and trade and globalization have become the main topics of the 2016 election campaign, which eventually led to the 2018-19 Sino-US trade friction. And commentators had expected a reversal of U.S. trade restrictions after Biden took office, but this is not the case, indicating that the change in attitudes towards globalization has been more durable than originally expected.
(3) Climate change and carbon taxes
Globalization can be a potential contributor to higher carbon emissions, mainly for three reasons: 1) Cross-border movement of goods in global value chains (GVC) means additional packaging and transportation fuel consumption. 2) Countries have different environmental standards that can lead to the creation of "safe havens of pollution" (although so far, there is no evidence to support this hypothesis). 3) Trade is about growth, and at present growth means more pollution.
However, due to the Russia-Ukraine conflict and the resulting energy crisis, the issue of climate change has been temporarily suspended. Thus, while climate change may be one of the main factors affecting international relations in the future, it is not yet playing a major role.
and (4) the pandemic and the need for resilience
The outbreak has brought up a new trade issue: the resilience of global value chains. Some argue that the resilience of a multi-link value chain depends on the resilience of its weakest link, and that global value chains are affected when a link located in a foreign country is interrupted by local shocks. Therefore, one way to increase supply chain resilience is to "rebacycle" supply chains, that is, to make supply chains as dependent on domestic production as much as possible.
Indeed, this is not the first time that the fragility of global value chains has attracted attention. Boehm et al. (2019) and Carvalho et al. (2021) studied the impact of the 2011 earthquake in Japan on global supply chains, while Barrot and Sauvagnat (2016) studied the impact of special shocks caused by natural disasters at the company level. However, neither the earthquake nor the natural disaster in Japan has led to continued public criticism of global value chains and globalization similar to that seen during the pandemic. In particular, we must also consider that the impact of the epidemic is not a country-specific but a global shock, which actually weakens the rationality of "return".
So is the need for supply chain resilience really driven by concerns about global supply chain vulnerabilities, or is it just a novel and convenient excuse for seeking old-style protectionism (behind concerns that global trade affects domestic job markets and inequality)?
In order to answer this question, it is first necessary to define the concept of "resilience". Referring to the definition in The Resilient Society, toughness refers to the ability to "bend but not break" in the face of impact. In an economic sense, bend but not break may mean that if an economic entity (e.g., business, industry, etc.) can survive an economic shock, it is a sign of resilience; If it ceases to exist after an economic shock, it is inadequate. Furthermore, even economic entities that survive an economic shock may mean that they are not resilient if they take a long time to fully recover to the pre-shock period. But this raises a new question, how long does it take to be "very long"? In short, we still lack a clear definition of the "resilience" criterion. However, we can clearly list some factors that need to be considered when judging the resilience of economic entities: the nature and extent of the shock. Supply shock, demand shock, or both.
ii. Sector-specific shocks, country-specific shocks, or both.
iii. Special shock or systemic shock. l Time frame (short, medium or long-term) Sector-dependent (for food and medicine: time is of the essence)
ii. depending on preferences (consumers in rich countries with underdeveloped public transport may consider cars necessary) l Level of observation i. Economic level
ii. Industry level
iii. Corporate Level
iv. Family level
Give examples of the need to consider the above factors.
1) Consider demand shocks. For example, when unemployment rises or health problems lead to lower aggregate demand, it does not matter whether the supply chain is national or global.
2) Consider supply shocks, such as a natural disaster or an outbreak of an epidemic. If shocks occur in a specific country, then diversification of supply chains will make them more resilient; If supply shocks occur in multiple regions, diversification of supply chains does little to improve their resilience. If the shock originates from the domestic economy, then the "reshoring" of the supply chain will make it less resilient; If the shock comes from abroad, then the "reshoring" of the supply chain will increase its resilience.
Use the above thinking framework to analyze the resilience of economies to the impact of the pandemic. Observe changes in the volume of global trade in key commodities. For example, masks, global mask imports increased sharply in 2020, in this case, without international trade, the demand for masks of those major mask importing countries will be difficult to meet by domestic suppliers (Figure 4 panel A).
Khanna et al. (2022) propose two indicators to measure resilience through interfirm transaction volumes: (1) whether firms can easily find new suppliers; (2) Whether the company maintains contact with suppliers.
The (1) metric can be expressed as:
It represents the number of new suppliers to the total number of suppliers in a company. If the entry rate does not decline after the shock, the market is resilient.
The (2nd) metric can be expressed as:
It represents the number of suppliers exiting a company's supply chain as a percentage of the total number of suppliers in that enterprise. If the separation rate does not grow after the shock, the market is resilient.
Combining the two indicators of entry rate and separation rate, you can define Net separation rate as:
To assess the resilience of U.S. supply chains during the pandemic, the authors measured the entry rate, separation rate, and net separation rate of U.S. imports. The data source is Panjiva.
From the perspective of entry rate and separation rate, the US supply chain was resilient during the first wave of the pandemic (March to May 2020). At that time, although the number of U.S. imports fell 13% year-on-year, the entry rate soared to 42%, the separation rate also declined, and the net separation rate also declined. This suggests that during the pandemic, U.S. companies seem to be maintaining supply links with their existing trading partners and are even seeking new supply relationships (entry rate soaring).
One possible explanation for this is that the pandemic hit both supply and demand. On the one hand, international suppliers are facing lockdowns, bringing about a decline in supply. On the other hand, households have expanded consumer spending on durable goods in anticipation of prolonged lockdowns, while buying up health care related supplies such as masks in large quantities, leading companies to seek new suppliers, leading to an increase in entry rates.
In short, as can be seen from the previous analysis, the US supply chain is resilient during the epidemic.
In conclusion, to date, there is no evidence that global supply chains were not resilient during the pandemic, or that the world economy would be more resilient if it reduced its dependence on foreign inputs and international trade.
(5) Russia-Ukraine conflict and energy crisis
The need for resilience fueled by geopolitical turmoil in the Russia-Ukraine conflict has been one of the main reasons for rethinking globalization, which has led to the need for "reshoring" of supply chains and a new concept in trade policy – "friendly outsourcing", that is, trade mainly with friendly countries.
At this stage, the catalyst for the fermentation of public anti-globalization sentiment was the Russia-Ukraine conflict, which raised widespread concerns about the vulnerability of global supply chains under geopolitical risks, leading to the decoupling of the United States from countries deemed "unfriendly" by the United States. In this context, one question is: in addition to government sanctions, are market factors driving trade with "friendly" countries?
First, as a whole:
Use a YouGov (2017) poll to assess whether the U.S. is really doing "friendly shore outsourcing." In Figure 7, the horizontal axis is the proportion of U.S. imports from a country to total U.S. imports in 2022 (normalized), and the vertical axis is the proportion of Americans who believe a country is friendly. A significant positive correlation between the two variables can be found, indicating that Americans consider most of America's trading partners to be friends of the United States.
Second, from the perspective of key commodities, focus on medical products and other strategic products (Figure 8).
First, looking at the dependence of the United States on "unfriendly" countries in terms of imports of key goods, there are three findings:
1) Among medical products, masks are unusually high in dependence on non-friendly countries. However, for penicillin, the United States imports less than 20% from "non-friendly" countries; For infant formula, the U.S. imports from "unfriendly" accounts for less than 5 percent.
2) For masks, U.S. imports from "non-friendly" countries have strengthened the resilience of its supply during the pandemic (in Q2 2020, the proportion of U.S. imports of masks from "non-friendly" countries surged). Thus, decoupling from "unfriendly" countries, while potentially enhancing the resilience of one's supply chains to specific geopolitical shocks, may undermine its resilience to other non-politically related shocks.
3) For other strategically important products:
(1) Chips, in recent years, the proportion of U.S. imports from "non-friendly" countries has increased sharply, behind the growing popularity of the "foundry" model, and many foundries are located in Malaysia and Vietnam, both of which are considered "non-friendly" countries by most Americans in the YouGov survey. However, in recent years, due to the United States formulating the "friendly shore outsourcing" policy of the semiconductor industry, the proportion of chips imported by the United States from "non-friendly countries" has declined rapidly.
(2) Batteries, in recent years, the import dependence of the United States has become more and more obvious.
(3) Crude oil, the dependence of the United States on imports from "non-friendly" countries has declined in recent years. Shale gas development has made the United States a net exporter of crude oil, and its share of imports from "non-friendly" countries has fallen from 60% to about 20%.
Second, looking at the concentration of imports of key commodities in the United States, measured by the share of U.S. imports from the largest importing country, the concentration of imports of a commodity is too high may mean that the supply chain of that commodity is not resilient.
U.S. imports of priority commodities are highly concentrated, although given that the main suppliers of these commodities are currently "friendly" countries to the United States, this may mean that its supply chains are less susceptible to geopolitical risks, but it is also important to be aware of country-specific risks and potential changes in future international relations (e.g., friendly countries becoming non-friendly countries) (Figures 9 and 10). For example, Ireland (45%) and Mexico (30%) together account for about 75% of total US imports of infant formula. For crude oil, 70% of U.S. imports in 2022 came from two "friendly" countries – Canada and Mexico.
In summary, there are mainly the following findings:
1) In general, the United States does not have a strong dependence on imports from "non-friendly countries".
2) U.S. dependence on "non-friendly" countries may be high for some key commodities, but empirical data from the pandemic suggests that supply from "non-friendly" countries has helped ease tensions in U.S. supply chains, rather than causing serious bottlenecks.
3) In recent years, even without government intervention, the private sector seems to be slowly decoupling from "unfriendly" countries, especially in semiconductors and crude oil.
4) It is important to note that the high concentration of imports of key U.S. products in a few countries (albeit "friendly" countries may result in U.S. supply chains being vulnerable to country-specific risks beyond geopolitical risks. (iii) What are the possible consequences of potential deglobalization trends? There are four points to note:
First, with the world economy slowly transitioning to a new state, the potential deglobalization trend is not expected to have a significant impact in the short and medium term.
Secondly, there is a need to distinguish between the impact of changes in the level and direction of globalization. Although the direction of globalization may be downward, the absolute level of globalization is still very high.
Third, as global supply chains reorganize at the regional level, a new international system may emerge that relies heavily on bilateral agreements, regional agreements, and partnerships between "friends." This process may create new trade opportunities for some countries, such as Fajgelbaum et al. (2022) research shows that Sino-US trade frictions have led to an increase in the trade volume of third countries with the rest of the world.
Fourth, in the long run, the impact of potential deglobalization trends on the global economy may mainly include the following points: 1. Impact on supply chain resilience: Uncertain theoretical analysis and data arguments so far show that under the potential deglobalization trend, future supply chain resilience is likely to increase or decline.
In terms of theoretical analysis, a recent study by Elliott et al. (2022) analyzed how modern production networks lead to potential supply bottlenecks. In this context, supply chain "reshoring" in critical industries may be justified (helping to increase supply chain resilience).
In terms of data, the conclusions are mixed. On the one hand, existing supply chains in almost all sectors have proven resilient to pandemic shocks. On the other hand, during the Russian-Ukrainian conflict, Europe's energy supply became very fragile.
A common view is that international trade may lead to countries becoming more vulnerable to sector-specific shocks (because of the specialization of the division of production), but it can also lead to countries becoming more resilient to national shocks (because they are less dependent on domestic inputs). Caselli (2020) found that shocks have been predominantly national in recent decades, so international trade has helped reduce economic volatility in most countries. In short, unless a sector is highly dependent on a single source of imports (as in the case of Russia, the European energy sector), international trade may help strengthen supply chain resilience. Therefore, trade-restrictive policies are unlikely to improve the resilience of countries. 2. Impact on efficiency, innovation and long-term growth: The decline is mainly in the following aspects:
First, future growth prospects are worrying. According to a 2021 US Chamber of Commerce research report on the cost of decoupling between China and the United States and its impact on the industry, the cost of decoupling between China and the United States is huge. For example, a 25 percent tariff on all trade between China and the United States would mean that the United States would lose about $190 billion a year in GDP by 2025.
Second, rebuilding industries with highly complex characteristics in the United States would take many years to complete, potentially slowing growth in the U.S. and global economies. 3. Impact on inflation: One of the main benefits of rising free and open trade is to reduce the CPI, mainly because international procurement and the use of low-wage labor in other countries can reduce the cost of enterprises. As a result, wages and commodity prices are likely to rise along with potential deglobalization trends. 4. Impact on domestic inequality: Uncertainty is difficult to determine the impact on domestic inequality. However, the data from the United States over the past two years can provide some information. From January 2021 to December 2022, nominal incomes in the United States increased by 10%, but due to inflation up to 14%, real wages for US residents fell by 4%. While there may be other factors besides deglobalization, it is certain that American workers will be no better off in 2022 than before. 5. Impact on global inequality: In the past 30 years, driven by the economic growth of East Asia, the number of global poor people has decreased sharply, and the degree of global inequality has declined, among which the opening of long-term closed borders, the growth of international trade, and the establishment of a modern trading system have played a positive role.
Looking ahead, the trend towards weakening global inequality is unlikely to continue in the potential process of deglobalization. There are three main points:
1) Large developing economies, such as India, may still find a path to development if they rely on large domestic markets and adopt appropriate policies to promote economic integration with the rest of the world. But for small, low-income countries, the outlook is bleak.
2) Emphasis on environmental, labour and product regulatory (e.g., sanitary and phytosanitary standards) standards will raise barriers to entry for poorer countries, potentially leading to more and more trade taking place between high-income countries rather than between high- and low-income countries.
3) Policies to address climate change are likely to further exacerbate divisions between developed and developing countries. If countries with similar interests and similar characteristics, such as the G7, form a climate club, high-emitting countries like India may be excluded and punitive tariffs may be imposed. 6. Impact on Peace: Or the view that one of the strongest motivations for promoting the development of free trade is the belief that free trade promotes peace and political stability. Martin et al. (2008) argue that the validity of this view depends on whether trade is bilateral or multilateral. Bilateral trade increases the opportunity cost of declining trade between the two countries, so war between the two countries is unlikely. But multilateral trade reduces a country's dependence on any given country, thereby reducing the cost of bilateral conflict, which may ultimately lead to greater vulnerability to war.
There is also a view that the rupture of the world trading system (the erosion of multilateralism) led to the outbreak of the Russian-Ukrainian conflict. Judging from the current trade data, the decline of multilateralism does not seem obvious. World War II provides an example, though. De Bromhead et al. (2019) studied the global trade between the two world wars and found that in the 2030s, countries had shifted from multilateral trade to intra-imperial trade. In 1929, Britain accounted for 30% of imports from the British Empire, rising to 42% in 1938. Some argue that this change in the trade situation not only reflects the international tensions at that time, but also serves as a catalyst. It is now called the "pre-belligerency" state. The changes in globalization trends over the past five years bear a striking resemblance to the "pre-belligerent" state of the pre-World War II period.
[1] Pinelopi K. Goldberg & Tristan Reed, 2023. "Is the Global Economy Deglobalizing? And if so, why? And what is next?," NBER Working Papers 31115, National Bureau of Economic Research, Inc.
For details, please refer to the report "[Huachuang Macro] Is the global economy de-globalizing?" released by Huachuang Securities Research Institute on July 5. ——Overseas Essays Biweekly No. 19.
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