Globalization has raised global growth, lowered inflation, lifted hundreds of millions out of poverty, and increased equity returns. This is an impressive hit list. However, it is now facing a backlash, particularly in parts of the developed world that have borne the brunt of shifting global production patterns.

This dynamic was famously captured in the so-called “Elephant Chart”, which breaks down income growth across the global income distribution during the peak globalization decade between 1998 and 2008 (Chart 1).

Globally, low- and middle-income households (typically living in emerging markets) enjoyed strong income gains, as unbundling supply chains and rapid technology transfers enabled strong catch-up growth. Similarly, the top end of the global income distribution benefited, reflecting rapid growth in corporate profitability. By contrast, the 80th-90th percentiles of the global income distribution, which includes lower- and middle-income households in developed markets, saw their earnings stagnate over this decade.

This in part reflects a shift in production patterns and jobs away from these economies.

Globalization has also exacerbated geopolitical tensions. The US fears this process has enabled China to stand on a more even economic, technological, and military footing while engaging in unfair trade and competition practices. Recent tariff spats, restrictions on inward and outward investment from the US to China, and technology transfer restrictions have reversed aspects of global integration.

Quantifying globalization

That said, while it is common to hear that globalization has stalled or is in retreat, these claims tend to be based on anecdotes rather than hard data. Our narrow and broad globalization indices use a clear and comprehensive definition of globalization to quantify and track its development.

The ‘narrow’ globalization index focuses on the traditional engine of globalization: trade. It incorporates global trade flows as a share of GDP, global tariff rates, World Trade Organization (WTO) membership, and regional free trade agreements.

Global trade is stalling

This narrow index identifies three phases of globalization in the post-war era (Chart 2).

The first phase occurred between 1960 and 1980 and was led by WTO expansion, falling tariffs, and rising global trade.

The second one, “hyper globalization”, started in the early 1980s and lasted until the financial crisis of 2008. It saw a proliferation of new trade agreements as many emerging markets were integrated into the global economy.

From the global financial crisis to the present, the third phase has been characterized by the traditional engines of globalization slowing to a crawl, and some even going into reverse. For example, global trade intensity as a share of global GDP, which had risen from 20% in 1960 to 60% before the financial crisis, has since fallen to 57% (Chart 3).

The efforts to make further progress on trade liberalization and the enforcement of global trading rules have also failed. WTO membership has not increased, and, in practice, the role of the institution has been diminished by a breakdown in its dispute settlement mechanism.

Meanwhile, there has been little progress in lowering global tariffs and, in some high-profile cases, they have increased. The US tariffs on imports from China and broader steel imports, which were met with reciprocal action, are a notable example.

However, regional trade agreements have continued to increase, helping the narrow globalization index to creep higher. Countries are increasingly focused on smaller trade networks, aligned with political and strategic priorities, as part of a balkanization in global trade.

A more nuanced picture

But this narrow, trade-based definition leaves out important aspects of globalization. A more holistic definition of “eroding national boundaries, integrating national economies, cultures, technology, and producing complex relations of mutual interdependence” (Norris, 2000) requires a more comprehensive way to measure globalization.

Our ‘broad’ globalization index incorporates not just trade indicators, but also the stock and flow of capital, people, technology, and information across borders, as well as the proliferation of institutions that regulate and facilitate this integration.

Admittedly, this breadth comes at a data cost, with the index covering a shorter history back to the 1990s. However, it has the benefit of providing a more nuanced picture of globalization, particularly as its nature and drivers change.

Our broad index shows a bumpier path for globalization over the past 15 years, with clear impacts from the financial crisis and the pandemic (Chart 4).

However, two important messages emerge: 2020 While globalization (as the broader definition intends it) has stalled, the process has assumed a different nature and composition; It has moved away from its traditional trade engine, towards a more information-, capital- and people-centric model that might benefit new sectors of the economy.

Information is breaking down borders

The globalization of information continues apace. Technological advances are playing a key role, and the share of populations with access to mobile telephony and the internet continues to rise. But, with a third of the global population still without access to the latter, there is further scope for growth. Rising internet and mobile phone usage will enable the delivery of labor and services across borders, participating in the internet of things, and harnessing artificial intelligence. These are all trends that might benefit new economy sectors and companies, in contrast to previous rounds of globalization, which supported traditional manufacturers.

Meanwhile, there continues to be progress in the internationalization of intellectual property protection. Nonresident trademark applications and patent filings across the three major global patent offices (the US, EU, and Japan) continue to grow robustly, as products and technologies move across borders.

However, geopolitical tensions around technology transfers are increasing, and these restrictions are hard to capture in this empirical work. For example, the US has taken steps to ban Chinese investment in US firms, the use of US semiconductors by Chinese companies, and the ability of Americans to invest in Chinese technology companies. These trends could support a balkanization in information over the next decade.

Capital is still flowing

The capital component of globalization bears the scars of the financial crisis and still sits below its pre-2007 peak. However, the breakdown tells a more nuanced story (Chart 5).

There has been a huge drag from the reduction in cross-border banking claims after the surge seen ahead of the financial crisis. This is probably a good thing as it reflects more prudent regulation and fewer banking sector imbalances.

And there has been an increase in capital controls in emerging market economies, measured by so-called ‘Chinn-Ito indices’. This reflects an attempt to limit disruptions from large destabilizing capital flows and these policies have been increasingly endorsed by the IMF. However, a failure to liberalize raises the longer-term risk that inefficient capital allocations across the global economy hold back the growth potential of emerging markets.

Alongside these controls, we have seen formal steps to limit cross-border investment in strategic sectors. Indeed, the Committee on Foreign Investment in the US has taken a much more active role in vetoing inward investment from countries like China in sectors deemed critical to national security.

However, despite some tightening in capital restrictions and sensitivity around cross-border investment in strategic sectors, we have signs that capital continues to seek out the best return. Indeed, portfolio flows of equity and debt investment across borders and sticky foreign direct investment have both risen notably since the financial crisis. These trends suggest that this aspect of globalization might be persisting, even amid some distortions.

COVID looms large on the movement of people

The movement of people across borders took a significant step backward during the pandemic but seems to have recovered more recently. For example, the recent strength of the US macroeconomy may reflect much larger inward migration than the Census Bureau currently estimates.

And, despite these distortions, the amount of people moving is still on the rise. Global tourist arrivals have increased by around 40% since 2007, and the stock of international migrants is up by a similar magnitude, driven by a wide range of push and pull factors.

However, a backlash to these trends is becoming increasingly clear. The World Bank Freedom of Movement Index has deteriorated over recent years, reflecting a tightening in restrictions on migration across a wide range of countries (Chart 6). If sustained, this trend has the potential to stymie the movement of people across borders.

Globalization at risk from a worsening policy backdrop

Even as the nature of globalization has shifted away from trade and towards information, capital, and people, the policy backdrop against which this is occurring has become increasingly hostile. More tariff-based trade policies, capital controls, rules around technology transfers and reciprocal investment, and restrictions on freedom of movement are evidence of this.

We can get some sense of the magnitude of this policy shift by looking at a ‘de jure’ version of our index, which aggregates variables tracking the legal and institutional environment that facilitates globalization. This measure has been deteriorating since the global financial crisis but has taken a sharper leg down in recent years (Chart 7).

Final thoughts

Several headline conclusions come from this work:

• First, the era of hyper globalization is behind us. Fifteen years on from the financial crisis, it is clear the slowing pace of globalization is not a blip, but a new era of structurally weaker integration. This implies that the tailwinds to GDP and profit growth enjoyed in past decades as the world integrated more deeply are also behind us. Worse, fracturing globalization could raise inflation volatility, via tariffs and less responsive supply dynamics in the global economy.
• The traditional engine of globalization – trade – has stalled against the backdrop of an increasingly hostile, fragmented, and uncertain policy environment. This change opens a host of important questions for investors. In upcoming research, we will investigate the extent to which supply chains have rerouted and how much evidence there is of friendshoring.
• There are aspects of globalization that persist, particularly around the flow of capital and information. The latter could tilt the winners of globalization away from manufacturing and trading economies and multinationals, towards more domestically oriented, service-based economies and firms.
• The hostile policy environment poses a major threat. There are already signs this is weighing on global integration, and there are few indicators that the political climate will become more supportive.

Important information

Projections are offered as opinion and are not reflective of potential performance. Projections are not guaranteed, and actual events or results may differ materially.

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