Cambridge — After the pandemic, the world economy seems to become much less globalized, as the political leaders and the society reject economic openness, and with such force, which was not observed since the tariff wars and competitive currency devaluations in the 1930-ies. A byproduct of this phenomenon will not only be a slowdown in economic growth, but also a significant drop in national income in all countries, except, perhaps, those who possess the largest and most diversified economies.
In his insightful book 2001 “the End of globalization” economic historian from Princeton University Harold James showed how a previous era of global economic and financial integration has failed under the weight of unexpected events during the great depression of the 1930th years — they culminated in the Second world war. Today, the pandemic сovid-19 clearly accelerates new withdrawal from globalization.
The current retreat began with the victory of Donald trump on the American presidential election of 2016, followed by the tariff war between the US and China. The pandemic will probably have an even stronger negative impact on international trade, including because governments begin to perceive the provision of health care as a national security imperative.
Today, the risk of debilitating the economy of the surge of deglobalization in the style of the 1930-ies is enormous, especially if relations between the US and China will continue to deteriorate. And it is foolish to hope that the chaotic, crisis-driven retreat from globalization will lead to new and much more serious — problems.
Even the United States, with their highly diversified economy, the world’s leading technology and strong base of natural resources could suffer significant downturn in real GDP because of deglobalization. But for countries with smaller economies and developing countries that are unable to achieve the necessary critical mass in many industries and often do not have natural resources, the decline of international trade will turn back progress made in decades of economic growth. And here it is still not considered the long-term effects of measures of social distancing, and quarantine.
The late economist Alberto Alesina, a prominent figure in the field of political economy, argued that well-managed country in the era of globalization small to be beautiful. But today, small countries with close economic Alliance with big government or some Union threatens huge economic risks.
Indeed, globalization has contributed to the growth of economic inequality among about a billion people living in developed countries. Trading competition affected workers with low wages in some industries, though, and made products less expensive for everyone. Financial globalization has probably had an even stronger effect, increasing the profits of transnational corporations and rich people offering high-yield instruments investments abroad, especially after 1980.
In his 2014 best seller “Capital in the twenty-first century” Thomas Piketty refers to the growing inequality of income and wealth as a proof of the failure of the capitalist system. But who is she failed? In developing countries home to 86% of the world population, and global capitalism has pulled billions of people out of desperate poverty. It is therefore obvious that the surge of deglobalization likely to damage a much larger number of people than those he will help.
No, of course, the current model of globalization needs to be corrected, in particular, due to the significant strengthening of social protection systems in developed countries and — to the extent possible — in the developing world. But the creation of sustainability does not mean that it is necessary to destroy the whole system and start again.
America will lose from the deglobalization more than, apparently, according to its policy, and both right and left. Start with the fact that the global trading system is part of the overall deal, which allowed the United States to hegemony in the world, where most countries, including China, are interested in maintaining a workable international order.
In addition to political consequences, de-globalization also creates economic risks for America. In particular, many favorable factors that today enable the U.S. government and American corporations to take a lot more than any other country is likely to be associated with the role of the dollar in the centre of the existing system. And as shown by many economic models, the growth of tariff and trade contradictions of financial globalization will collapse at least proportionally. Not only will this lead to a sharp decline of profits by transnational companies and wealth of the stock market (to some it might sound great even), but perhaps to a major drop in foreign demand for us debt.
This decline will be extremely out of place in a time when the US needs to actively take, for the sake of social, economic and political stability. In addition, globalization is the main reason for today’s low inflation and interest rates, so the shift process in the opposite direction may eventually push prices and rents in a different direction, especially given the obviously long-lasting negative shock on the side of the market supply caused by сovid-19.
Needless to say that there are other battles that require international cooperation, not least climate change. Developing countries will be much harder to motivate to limit emissions of carbon dioxide, if the collapse of global trade will be deprived of their main and most powerful General stimulus to support the global peace and prosperity.
And last (but not importance): although сovid-19 has hit Europe and the United States is stronger than for most countries with lower incomes, there is great risk of a humanitarian tragedy in Africa and other poor regions. Is now the right time to deprive these countries of the ability to take care of themselves?
Even if the US turn a blind eye to the consequences of de-globalization for the rest of the world, they should remember that the current abundant demand for dollar assets is highly dependent on enormous trading and financial system that some American politicians are seeking to reduce. If de-globalization will go too far, no country will be able to avoid damage.