Is Globalization Fading?

Globalisation has slowed in 2023 amid insufficient aggregate supply and persistent geopolitical tensions. 

Chad Bown tackles this question and other trade-related topics in an interview with Janet Bush of the McKinsey Global Institute (January 18, 2023, “Forward Thinking on the complicated and contentious state of global trade with Chad P. Bown“).

If globalization means trade agreements …

If deglobalization means less nondiscriminatory trade policies, most all the major economies of the world are members of the World Trade Organization. And one of the fundamental rules, pillars, of the World Trade Organization is the most-favored-nation, MFN, rule. You’re supposed to apply nondiscriminatory policy, basically the same tariffs toward everyone. Well, that is now changing.

We saw that really beginning to change in 2018, 2019, in the context of the US–China trade war, where those two countries went from having tariffs toward each other that were the nondiscriminatory types that they applied toward trading partners in the rest of the world. US toward China was about 3 percent. China toward the US was about 8 percent. Well, nowadays those countries are applying tariffs on the order of 20, 21 percent toward each other. Toward everyone else they’re still in the 3 to 8 percent range, so still relatively low. But they’re very much applying discriminatory trade policies, tariffs, toward one another.

With the conflict, Russia’s invasion of Ukraine, we have seen not only financial sanctions but a number of countries, the United States, EU, UK, Canada, the G-7, applying much higher tariffs against Russia. Discriminating, essentially breaking one of the central tenets of the WTO system—now, for good reason, obviously. But if that is what we mean by deglobalization, meaning no longer applying nondiscriminatory policies toward each other, trying to shape economic activity for noneconomic reasons, say, I do think some of that is going on. At the end of all of that, we still may have just as much trade as we had before, just as much cross-border movement of goods and services, but the patterns of that may look fundamentally different than the way it was before all this new stuff started happening over the last four or five years.

The tradeoffs between economies of scale and a wider distribution of global suppliers

Companies, their job is to reduce costs and provide goods and services to consumers for as low a price as possible. And if governments reduce trade barriers and make it seem as though trade relations with trading partners are secure, reduce uncertainty, then it makes sense for companies to make big investments and build supply chains to try to reduce those costs. What we have seen happen is you do, at the end of the day, have certain types of goods where you do have really geographically concentrated sources of supply. …

Another one that we have seen is the semiconductor story, and high-end semiconductors in particular. For the United States, globally, the main [sources] of high-end semiconductors, the fastest, fanciest chips, are essentially Taiwan and South Korea. Companies like TSMC and Samsung produce the vast majority of high-end semiconductors. For the United States, those are not countries or entities of concern. Those are places that are friends, allies.

And yet it doesn’t make a lot of sense in a new world where we have not just geopolitical shocks and concerns, but you’ve got pandemics and you’ve got climate-induced shocks. Whether that’s incredible storms, floods, droughts, it really doesn’t make sense to have incredibly geographically concentrated sources of supply, even though those may be incredibly economically efficient and may be the result of very good economic policies, which led firms to achieve economies of scale and build out really impressive supply chains. … Additional geographic diversification could ultimately be beneficial.

Now, it may end up being more costly. There are massive economies of scale of having all of that production locally sourced there in Taiwan or in South Korea. And provided nothing ever goes wrong, then great. But the concern is, we now live in a world where we’re more likely to be exposed to things that could go wrong, and we have to plan for that accordingly. And we have to convince the companies to do more for their supply chains, and some of that likely needs to come about through policy.