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Globalization vs. Deglobalization: Rethinking the World Economy

Are we moving toward a less-integrated world, or is deglobalization a short-term trend?

04/05/2023
Aerial view of shipping containers.

Key Takeaways

Globalization refers to the interdependence of economies, cultures and populations, while deglobalization is a shift away from integration.

The move toward domestic solutions has advantages but could hinder growth and efficiency, resulting in higher costs and inflation.

In our view, the broad benefits of globalization are likely to continue, and we see deglobalization as an anomaly in longer-term global trends.

Before we talk about “deglobalization,” we should define “globalization,” which has been a strong trend since World War II.

Globalization refers to the growing interdependence of the world's economies, cultures, and populations, brought about by cross-border trade in goods and services, technology, as well as relatively unfettered flows of investment, people, information and free exchange of currencies.

So, globalization encompasses economic, cultural and political elements. Want a good pop culture summary of the effects of globalization? Listen to the Red Hot Chili Peppers’ “Californication,” which chronicles Hollywood’s takeover of global media, language, culture and beauty standards.

Defining Deglobalization

Deglobalization is the movement toward a less-integrated world, characterized by local solutions, onshoring, nearshoring, tariffs and border controls. For example, buying goods “Made in America” and imposing tariffs on imported goods would be examples of deglobalization at work.

Maybe the single most famous recent example of deglobalization is Brexit, in which voters in the United Kingdom elected to leave the European Union. U.K. voters opted for political autonomy over the free movement of goods, services and people.

Reborn in the USA
Many companies are “reshoring,” or bringing their supply chains and operations back to the U.S.

Pros and Cons of Global Integration

In economic terms, the degree of global integration can be measured by the ratio of world exports to world gross domestic product (GDP). That ratio is in retreat for the first time since World War II. Over the last decade or so, the world economy has been deglobalizing. And there’s no question that the COVID-19 pandemic added fuel to this trend as a result of mitigation strategies and travel lockdowns meant to slow the disease’s spread.

In addition, countries have begun to explicitly reduce their dependency on foreign manufacturers in some key industries. This explains the recently passed bipartisan CHIPS Act in the U.S., which seeks to promote domestic manufacturing of semiconductors.

It can be argued that deglobalization has both positive and negative impacts. On the positive side, it may lead to the preservation of local cultures and the development of domestic industries, strengthening economic independence. This could also benefit national defense in times of emergencies.

On the negative side, deglobalization can lead to reduced economic growth and efficiency, higher costs and inflation, increased unemployment and potentially, increased conflict between nations. The legendary French economist Frederic Bastiat, considered one of the leading proponents of global free trade and integration, is purported to have said that “if goods don’t cross borders, armies will.” Of course, the real world is a bit more complicated—Russia was Europe’s energy supplier of choice, but that didn’t stop the Kremlin from invading Ukraine.

Measuring the Economic Impact

Sticking to the economic and financial implications, deglobalization viewed from an economic lens is suboptimal. Restricting production, trade, and the free flow of goods and services across borders reduces overall growth and productivity.

The best example I can give you is right here at home. Consider the United States as 50 separate economies and then the benefits of organizing them under one unified legal and regulatory framework:

  • Single national currency in lieu of individual state currencies

  • National banking system

  • No passports and border controls when traveling from state to state

The argument for efficient allocation of resources within the U.S. is the same argument you have for efficient allocation of resources globally.

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Globalization and Competition

On the whole, we believe globalization represents the greater good for more people. Of course, having said that, we have to recognize that not everyone benefits, or at least not equally.

I immediately think of the auto industry in the U.S. when forced to compete with overseas production. Consumers all over the country benefited from access to cheaper, more reliable, fuel-efficient cars. But the transition gave rise to the Rust Belt in northern U.S. states.

Another well-known example is the en masse displacement of local Mexican farmers by American agricultural imports in the wake of the North American Free Trade Agreement (NAFTA).

Redistribution of wealth to more efficient producers, wherever they may reside, can be shown to create efficiencies across the global economy. As a result, economically speaking, globalization represents a positive overall result.

But it should be clear that these gains come with real-world consequences for workers in industries and locales that are newly subject to global competition.

Deglobalization: A Short-Term Trend?

Add it all up, and I would argue that deglobalization is an aberration in a longer trend toward greater global integration. Trade along the Silk Road, Columbus sailing the ocean blue in 1492, the Bretton-Woods Agreement, China entering the World Trade Organization and many more events suggest a long, enduring history of global trade and integration.

Clearly, COVID-19 and its attendant supply chain disruptions highlighted the need to be more self-reliant at the margin, but in our view, that doesn’t negate the benefits of globalization on the whole. So while we would acknowledge we’ve recently been in a phase of “slowbalization,” we do not believe deglobalization can reverse the tide of global integration.

Author
Richard Weiss
Richard Weiss

Chief Investment Officer

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The opinions expressed are those of American Century Investments (or the portfolio manager) and are no guarantee of the future performance of any American Century Investments' portfolio. This material has been prepared for educational purposes only. It is not intended to provide, and should not be relied upon for, investment, accounting, legal or tax advice.