The economic arguments in favor of free trade are straightforward. Through comparative advantage, economies benefit from productivity gains from the international division of labor, and consumers benefit from lower prices. Indeed, the International Monetary Fund estimates that a one-point increase in measures of globalization is associated with an increase in global economic growth of 0.3%.1
Trade helps smooth out volatility of business cycles. For example, exports as a share of Eurozone GDP more than doubled in the period from 2010 to 2014, when Europe was still contending with the lingering effects of the financial crisis. This increase helped prevent Europe from sinking deeper by accessing demand in parts of the world less impacted by the crisis like Asia.2
Following the second world war, there was an explosion in global trade, fuelled by falling communication and transportation costs.
Trade as a percentage of global economic output, however, peaked in 2008 at 61% and has been in retreat ever since. While the absolute dollar value of trade has risen, it hasn’t kept pace with the growth in economic output. In 2020, trade as a percentage of world economic output stood at just 53%.
The reasons for the pullback are clear. While the benefits of globalization are widely distributed, the costs are often quite concentrated.
Sectors of the U.S. and European economies, particularly middle- and working-class jobs, were hit hard by the movement of jobs to lower-cost centers of production in the first two decades of the century. As a result, median incomes in the advanced economies largely stagnated—leading to high levels of discontent. This in spite of the long and sustained deflationary impact on consumer prices that accompanied the trade gains in the 1990s and early 2000s, driving effective increases in standards of living for most consumers.
Since 2017 in particular, increased trade barriers and a generally less-hospitable environment for the free movement of goods, people, and ideas has prevailed—with few signs of subsiding. According to the Global Trade Alert, the number of protectionist undertakings has increased by 220% globally over the past four years3. And while the Trump administration famously took an anti-trade stance, the Biden administration has kept most of the policies intact. Similar protectionist policies have also been pursued by China, the European Union, the U.K., Brazil, and India.
WHAT DOES THIS MEAN?
While a full-scale retreat from globalization is both unworkable and improbable, continued trade confrontation and secular shifts in the economy mean ongoing supply chain tangles and transitions.
Our Disruption Index shows that 69% of CEOs are concerned with the impact of supply chain disruptions, but less than half are taking long-term action in response. Seventy-seven percent say that the actions they are taking are not enough.
Much of the current discussion on supply chain bottlenecks and transportation and raw material price increases has emphasized the transitory nature of these dislocations. However, the longer-term rebalancing of supply chains—especially when combined with wage pressures from shrinking labor forces—will rework the economic flows of the economy.
Likewise, these movements will mark the end of a long deflationary cycle. It is hard under any scenario to see how price pressure will not increase. The period of consistently low inflation and low interest rates that the global economy has enjoyed since 1990 is largely coming to an end.
Companies will need to rethink their supply chains in new ways—focusing on more local and regional supply options, increasing flexibility and resiliency with more suppliers, and likely retracting from the furthest extremes of just-in-time supply that have been the mantra over the past two decades.
But this shift marks also a huge opportunity for innovation. We should expect to see new technologies and new approaches to supply chain coming into play. Especially as companies also try to rework those supply chains to lessen their environmental footprint. If the 1990s to 2010s led to creation of the just-in-time, global supply chain, the 2020s will mark the entrance to the next era.
1. International Monetary Fund, “Globalization: A Brief Overview,” May 2008, https://imf.org/external/np/exr/ib/2008/053008.htm.
2. Christine Lagarde, “Globalisation after the pandemic: 2021 Per Jacobsson Lecture by Christine Lagarde, President of the ECB, at the IMF Annual Meetings,”
Speech at IMF Annual Meetings, 16 Oct. 2021, https://www.ecb.europa.eu/press/key/date/2021/html/ecb.sp211016~25550329d5.en.html.
3. Global Trade Alert database, https://www.globaltradealert.org.