Has the Third Era of Globalization Ended?

by Joseph Joyce (Capital Ebbs and Flows)

Has the Third Era of Globalization Ended?

Behind the headlines forecasting a global economic recession there is another narrative about the end of globalization. This reflects political tensions over trade, the impact of the pandemic on global supply chains and the shutdown of economic ties with Russia. But dating the beginning and end of the most recent era of the integration of global markets poses challenges.

All chronological assignments for the purpose of establishing historical eras are arbitrary. Did World War II begin in 1939 when Germany and the Soviet Union invaded Poland? Or in 1937 when Japan invaded China? When was the First Industrial Revolution succeeded by the Second Revolution? Mid or late 19th century? And good luck finding agreement on when the golden age of rock and roll took place.

The dating of economic eras also involves assumptions. Did the First Era of Globalization begin in the early 1870s as usually stated, and if so, why? Germany’s adoption of the gold standard at that time is usually seen as a shift in monetary regimes that facilitated international capital flows, but trade and migration flows had expanded prior to the 1870s. Assigning a date to the end of the First Era is easier to do, as currency convertibility was suspended during World War I and borders were shut to migration.

The commencement of the Bretton Woods (BW) system marks the beginning of the Second Era of Globalization. The agreement was signed in 1944 and the IMF commenced operations in 1947, so 1945 can be seen as the beginning of the post-war era. But the system actually described in the agreement did not operate until 1958 when European currencies became fully convertible for current account transactions. Did the BW regime end in 1971, when President Richard Nixon ended the convertibility of foreign central bank holdings of dollars to gold? Or in 1973, when attempts to establish new fixed exchange rate values ended and the major currencies began to float? The IMF’s Articles of Agreement were not amended to reflect the new practices until 1976.

The Bretton Woods system ended in the 1970s, but globalization did not go into reverse. The post-World War II era can be extended to include the following decades, but that would overlook several important changes in how international economic affairs were conducted. The elections of Margaret Thatcher and Ronald Reagan in 1980 are widely seen as marking the beginning of what has been called the neoliberal era, which has been characterized as a shift to dependence on market outcomes. (Gary Gerstle of Cambridge University, however, shows that the term “neoliberal” encompasses a number of political agendas, not all of them consistent, in a compelling account in his book The Rise and Fall of the Neoliberal Order: America and the World in the Free Market Era.) The initial policy changes occurred domestically, but this was also the period when the IMF began to promote the removal of capital controls. On the other hand, the 1980s was a “lost decade” of growth for those countries, mainly in Latin America, that were embroiled in the debt crisis.

The year 1990 is another candidate for dating the start of a new era of globalization. Douglas Irwin of Dartmouth College has described the era of 1985-1995 as the period of “the greatest reduction in global trade barriers in world history.” China began to allow private enterprises to flourish at the end of the 1980s, while East European nations sought to integrate their economies with those of Western Europe and the rest of the global economy after the collapse of the Soviet Union in 1991. The North American Free Trade Agreement (NAFTA) signed in 1994 by Canada, Mexico, and the U. S. created a trilateral trade area amongst the three countries.  In 1995, the World Trade Organization was established, with a mission to facilitate international trade. The new international agency sought to promote new trade agreements while administering a mechanism to resolve trade disputes amongst its members. Economic inequality among nations narrowed during this period as many emerging markets enjoyed rapid growth, although inequality within nations rose as the benefits of global trade and financial flows were not equally shared.

But if the Third Era of Globalization is no longer operating, when did it cease? The global financial collapse of 2008-09 demonstrated the fragility of extended financial sectors even in the advanced economies, and lacerated confidence in the ability of regulators to anticipate sudden collapses of financial flows. The response of domestic governments and international agencies to the crisis led to a revival of economic activity but the recovery was slow, particularly for those who did not benefit from the rise in asset prices that low interest rates fostered. Foreign expansion by multinational firms continued but the pace of foreign direct investment slackened, while the IMF issued a reappraisal of its policy recommendations regarding capital flows to include capital controls as an acceptable macro policy tool.

The year 2016 has a strong claim for marking the end of this era of globalization. Donald Trump campaigned advocating the use of tariffs to end trade deficits and the erection of a wall along the border with Mexico to halt illegal immigration. He sought to implement those policies after his election, including the imposition of tariffs on Chinese goods. The votes in favor of Britain leaving the European Union (“Brexit”) in the same year demonstrated the distrust of many British citizens of multilateral governance as well as a fear of immigration. The result in that country has been a reduction in trade and migrant flows, with no evidence of a positive economic payoff.

Whatever momentum was left in international economic expansion was throttled by the pandemic and then the Russian-Ukraine war. The pandemic exposed the vulnerability of global supply chains to national shutdowns, and the dangers of dependence on single suppliers of strategic goods, such as medical equipment. In response to the invasion of Ukraine, the U.S. and European allies have sought to cut off trade and financial flows with Russia, which in turn seeks to use higher oil and gas prices to lower Western morale. The U.S. hopes to slow down Chinese technological advances by scrutinizing Chinese acquisition of U.S. firms while supporting U.S. firms in areas where they may fallen behind.

Whether or not the third era of globalization expired in 2016, 2020 or 2022, there is a strong sense that a new era has begun. But is it the end of globalization? Richard Baldwin of the Geneva Institute in his NBER paper, “Globotics and Macroeconomics: Globalisation and Automation of the Service Sector” and in a series of blog posts argues that changes in global economic activity have been misunderstood and misinterpreted. The drop of world trade/GDP since 2008 was largely a function of the decline in the value of commodities, particularly mining goods and fuels.

There has also been a slowdown in the transfer of manufacturing from advanced economies to a handful of emerging economies, as well as a reorganization of supply chains. But Baldwin shows that a new wave of globalization is taking place in the provision of intermediate service activities, which include accounting, financial analysis, legal analysis, and other activities. Advanced economies still account for the majority of service exports but emerging economies including China, India, Korea, Poland, the Philippines and Brazil have recorded rapid growth in these activities. The barriers to further expansion are technological, not regulatory, and those barriers are falling rapidly.

It is premature, therefore, to proclaim the end of globalization. Trade in manufactured goods may not be advancing at the same pace as it has in the past but that slowdown was inevitable. Trade in services, on the other hand, has grown continuously since 1990, although some deceleration in the current economic environment is inevitable. However, advances in artificial intelligence (AI) will alter the supply of both goods and services. Its impact on national economies and global markets is a matter of speculation, but the widespread use of AI may herald the start of the next era of globalization.