Could the forces of globalization be receding?
Over the last six decades, countries around the world have increasingly relied on international trade to obtain the goods and services they consume. The trend toward increased globalization was particularly pronounced from the mid-1980s to the mid-2000s, becoming the source of much anxiety for workers in industries threatened by offshoring. But that trend may be coming to an end.
What factors can account for this growth in trade between countries? According to a summary of research presented by the Center for Economic Policy Research, the growth in international trade "was driven by a mix of technological change, business innovation, and policy reforms around the globe -- to say nothing of the re-integration of China into the world economy."
However the growth in global trade, "27-fold between 1950 and 2008, three times more than the growth in global GDP," has stalled since 2009, leading to the question: Is the era of growing international trade coming to an end? Have we reached "peak trade"?
The answer, as with most things in economics, is neither simple nor definitive. It depends on how much of the slowdown in the growth of trade can be attributed to temporary factors associated with the Great Recession and how much can be attributed to longer-term factors.
Without doubt, the last economic downturn caused a large part of the fall in trade. The recession led to a decline in the demand for goods and services, and that in turn led to a drop-off in the volume of trade between countries. But while the Great Recession is a large part of the reason for stalling growth of international trade, longer-term structural factors must be considered as well.
First, the slowdown can be traced in part to the end of the integration of China -- and to some degree Central and Eastern Europe -- into the world economy. During this transitional period, international trade grew robustly. But as this era ends, the volume of international trade relative to GDP will stabilize. It's possible that other developing countries will emerge to fill the void, but even if they do it's unlikely they'll have an impact as large as China.
The second reason the slowdown in trade may be a permanent phenomenon associated with the Great Recession is diminishing returns to offshoring production. If the limits have "been reached on the ability of (incentives for) firms to engage in the international fragmentation of production," then we should expect growth in trade due to production moving to other countries to be limited as well.
Finally, it could be that protectionism -- rules and regulations that insulate domestic industries from international trade -- is behind the slowdown in trade growth. However, most analysts don't view this as a major factor, although "it may have significant impacts on specific (groups of) countries and on specific sectors."
So, what's the bottom line? Has the growth in trade stalled permanently, or should we expect a return to the six-decade trend toward increased globalization once we've fully recovered from the Great Recession?
The argument that globalization's growth is will resume generally asserts that technological change -- the "Internet, digitization, more efficient logistics, e-payment systems, translation software, and so on" -- will reduce the costs of trade, particularly for smaller businesses, and lead to future growth. The other is that technological change may also allow for significant growth in the trade of services. The government-enforced barriers to the trade of services are often large, and if these are removed such trade could increase substantially.
So, although it's not certain that the growth in international trade will resume, there's a strong possibility that the globalization that has occurred over the last several decades -- and all of the effects that come with it -- hasn't yet come to an end.
