Globalisation reached its zenith in the late 20th century and the early years of the 21st. This rise of international trade and free movement of capital facilitated a period of unprecedented growth and prosperity.
But as English statesman Lord Palmerston noted: “Nations have no permanent friends or allies, they only have permanent interests.”
In the aftermath of the global financial crisis, these interests dictate the reversal of the trend to greater global integration and a return to economic nationalism.
The post World War II period saw a remarkable expansion in global trade and capital flows. The collapse of the Berlin Wall and the reintegration of China, Russia and Eastern European countries into the world economy provided impetus for globalisation.
Consumption and production were unbundled, expanding over time into the division of manufacture itself. As each stage of production was undertaken in the most efficient location, businesses and nations rapidly embraced a transnational system of production. Deregulation allowed the globalisation of capital.
In a virtuous cycle, globalisation both created and relied on strong economic growth. Enlightened self-interest underpinned the system, as long as it delivered prosperity for most nations. For many nations, following the global financial crisis, the advantages of greater economic and monetary integration are now less obvious.
Less Gain, More Pain
Economic growth overall has slowed and is likely to be tepid for an extended period. For many nations, the reduced direct benefits of global trade and capital dictate a withdrawal to more closed economies. By closing their economies and focusing domestically, nations believe that they can capture a greater share of available growth and deliver greater prosperity for their citizens.
The crisis also highlighted the composition of income and wealth which underlay globalisation. In manufacturing, profits in the value chain require control of essential intellectual property rather than production. The majority of profits from Apple’s iPhones, made in and recorded as part of China’s exports, comes from high-tech components, intellectual property and branding which are captured by non-Chinese firms.
Developed nations and businesses control vital logistics and supply chains for vital trade. They dominate international financial activities, generating substantial earnings from financing trade and managing investments.
When growth rates were high, the unbalanced distribution of the benefits of globalisation was tolerated, albeit grudgingly. But lower growth rates and decreased benefits may lead nations to seek to maximise their own position at the expense of others, reducing the degree of engagement in a global economic system.
In an economically integrated world, supply chains for goods and vital commodities are international rather than national. This makes them sensitive to changes in cost structures, currency values and transportation costs.
International supply chains are also vulnerable to disruption from climatic or environmental factors. The Japanese tsunami and Thai floods of 2011 highlighted the vulnerability of supply chains, when shortages of minor but essential components halted production elsewhere. These disasters also highlighted the threat to secure access to essential resources such as oil, water and food.
There is now increased recognition that specialisation leaves national and regional economies vulnerable to competitive pressure from other nations or localities or dislocations in supply chains.
These factors may also drive a reversal of globalisation and a shift to more closed economies.
Economic and political sovereignty is undermined by globalisation. The financial crisis revealed that integration reduces the effectiveness of a nation’s economic policies, unless other nations take co-ordinated action. Governments reacted to the global financial crisis by initiating large government spending programmes to support the economy.
In many cases, there was significant financial leakage, with spending boosting imports rather than promoting domestic demand, employment, income and investment.
Changes in tax policy can be rendered ineffective if other countries do not follow suit. The problems are greater for global issues requiring international co-ordination, such as climate change and better management of scarce non-renewable resources. International agreements on global issues which require self-sacrifice on the part of nations become difficult.
Having closed economies is a natural way to deal with these pressures, reasserting sovereign control. As one nation adopts such policies, it compels other countries to pursue similar strategies to protect their own interests.
Various breakdowns—restrictions on trade, currency manipulation, capital controls and predatory regulations—now signal the retrenchment of globalisation and return to autarky.
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(This story appears in the 06 September, 2013 issue of Forbes India. To visit our Archives, click here.)