From 'hyperglobalization' to 'thin globalism'

Finally. After years of talk about deglobalization, decoupling and derisking, there is at long last evidence of substantive change in global economic activity.

The primary driver of that evolution is geopolitics, but that isn’t the whole story. The transformation of global trade will outlive this geopolitical moment and the future is likely to be a world of “thin globalism, ” a trading system with more intense connections among like-minded countries and "thinner" with those with ideological differences.

Ever since Donald Trump launched his trade war against China, economists have looked for a change in global trade patterns; expectations increased after the COVID-19 pandemic pushed governments and businesses to rethink their dependence on global supply chains. The Biden administration’s readiness to pursue many of its predecessor’s trade policies and principles, coupled with Russia’s invasion of Ukraine, heightened pressures to reassess business activity.

One result is a general slowdown in trade. The U.N. Conference on Trade and Development’s (UNCTAD) last Global Trade Update, released in mid-December, anticipates a 5% contraction in global trade in 2023.

That might not be as bad as it sounds. A January report by Boston Consulting Group (BCG) takes a little off the edge of that downturn, predicting that gross domestic product growth over the next decade will exceed that of world trade in goods — 3.1% for the former vs. 2.8% for the latter. The report noted that while that is a reversal of a 20-year trend of “trade-led globalization,” the world economy will continue to grow.

China is at the center of much of the change. Its slowing economy is responsible for a chunk of the global deceleration but that may prove temporary. More enduring are tensions between it and the United States that are transforming their economic relationship as well as that of China and much of the developed world.

Preliminary numbers for the first 11 months of 2023 show that China lost its position as the top exporter to the United States for the first time since 2006. It was replaced by Mexico, which last held the No. 1 spot in 2000. BCG expects that trend to continue, with overall trade between the two economic giants falling over the next decade by $197 billion from its 2022 level. China’s trade with the EU will continue to grow but it will slow and will expand less than the global average.

A January report by the Hinrich Foundation and Oxford Economics provides more detail. Their analysis shows that China’s share of trade in intermediate goods (IG), stuff that is used to make final products and which many economists believe provides a more accurate portrait of how supply chains work, fell in the U.S. from 18% in 2018 to 11.4% in the first quarter of 2023, and from 26.5% to 24% in Japan. Japan’s share of IG exports to China fell a little less — 2.1% — over the same period; that of South Korea to China shrunk by 2.8%.

The South Korean story is part of a bigger geopolitical story. In 2023, South Korea’s exports to the U.S. increased by 5%, while those to China fell 20%. That decrease yielded a record South Korean trade deficit with China of $18 billion, the first time it has been in the red with the Asian giant in 31 years. Moreover, in December, South Korean exports to the U.S. surpassed those to China for the first time in two decades. This reflects efforts by the Yoon Suk-yeol administration in Seoul to strengthen ties with its ally, the U.S., and reduce vulnerability to Chinese economic coercion.

Southeast Asia is a big winner as supply chains diversify. BCG reckons that total trade with ASEAN members will grow $1.2 trillion over the next decade. A little more than half that growth — $661 billion — will be with China, but trade with the U.S. and Japan will increase by more than $200 billion as companies try to insulate production networks from geopolitical pressures. India too will be rewarded, with its external trade projected to grow $393 billion over that same period; $180 billion will go to the U.S. and the EU, and $124 billion will go to China.

Mexico is another beneficiary. It became the U.S.’s largest trade partner at the beginning of 2023, with bilateral trade exceeding $850 billion in 2022. The Dallas Fed credits “nearshoring,” or the movement of production facilities closer to final markets, for contributing to its rise. BCG estimates that Mexico’s trade with the U.S. will continue to grow, expanding $300 billion over the next decade.

Chinese companies appear to be taking a page from the Japanese playbook by investing in Mexico to get around U.S. sensitivities. China is now the fastest-growing source of investment in Mexico with total funds reaching $2.58 billion through the summer of last year. The headline is impressive but context is important: That is less than a tenth of Japan’s foreign direct investment ($33.2 billion) during the same period.

Geopolitics is the easy explanation for these shifts. Rising tensions between China and the West have encouraged a rethinking of supply chains among Chinese and Western businesses. The average tariff on goods trade between China and the United States has increased between three and six times since 2017, and geopolitical tensions have made executives increasingly sensitive to future sanctions or trade bans.

That is prudent. Russia’s invasion of Ukraine prompted Western governments to impose sanctions on Moscow and new analysis from the McKinsey Global Institute found that “the number of new global trade restrictions each year has been steadily increasing, from about 650 new restrictions in 2017 to more than 3,000 in 2023.”

The report highlights the shrinking “geopolitical distance” — their geopolitical outlook — between trading nations. “Since 2017, China, Germany, the United Kingdom and the United States have reduced the geopolitical distance of their trade by 4% to 10% each.” In other words, geopolitically like-minded countries trade increasingly with each other.

There are other contributing factors. Growing skepticism of neoliberalism or letting markets dictate the “best” economic activity erodes the ideological foundation of current policy and practice in the developed world, facilitating a greater concentration of trade between those countries and with like-minded nations.

A third factor shaping trade is growing concern about climate change. Another UNCTAD report found 2,366 climate change-related nontariff measures that affected 3.5% of all potentially tradable goods and covered 26.4% of global trade. Growing seriousness about greenhouse gas emissions is driving policy, along with a desire to ensure that polluters don’t gain an unfair advantage when other producers are incurring billions of dollars in costs to clean up production.

One focus is the EU’s Carbon Border Adjustment Mechanism, basically the world’s first tax on emissions of carbon-intensive imports. While the CBAM doesn’t enter into force until 2026, its effects are already being felt as other countries follow suit. One analysis by IMF economists warns the EU mechanism could result in an annual welfare gain in developed countries of $141 billion while developing countries see an annual loss of $106 billion. India is expected to be hard hit.

Since this is an article about economics, it is bad form to leave out all “the other hands” that complicate any neat and tidy analysis. For example, while UNCTAD is right to note that global trade is slowing down, among the Group of 20 nations at least, this appears to be a return to levels that followed the Global Financial Crisis in 2008-09, a trajectory that was interrupted by a brief spike after the COVID-19 pandemic.

Arvind Subramanian, Martin Kessler and Emanuele Properzi argue in a November analysis from the Peterson Institute for International Economics that a slowdown makes sense since the world was experiencing “hyperglobalization” from 1992 to 2008, a period during which global exports grew nearly 10% a year while GDP expanded a mere 6% annually. Today, they claim, the world is deglobalizing in goods trade while continuing to grow, albeit slower, in services. This they call “slowbalization.”

Martin Wolf, the venerable Financial Times economics correspondent, writes that slowbalization is natural, the result of the end of easy opportunities to exploit differing labor costs, which is partly a product of the maturation of the Chinese economy. His colleague, Alan Beattie, agreed, adding that slowing globalization is good if it means a slowdown of cross-border capital flows. He calls pre-crisis capital movements a “financial bubble” that the world is better off for having deflated.

Then there is the claim that the world has had enough of neoliberalism, has recognized the need for a foreign policy that helps the middle class and is witnessing the return of industrial policy. Subramanian and his coauthors warn that this too could be a passing fancy as “the era of hyperglobalization was also the golden age of poverty reduction and income convergence for developing countries. The disenchantment with globalization and the embrace of inwardness are, in their own way, forms of intellectual neo-imperialism.”

The argument that China will lose market access is undercut by its growing role in the development of green technologies. It’s hard to imagine China being locked out of Western markets when its global share of lithium-ion battery exports rose from 48% to 61% from 2019 to June 2023, its share of solar panel exports rose from 44% to 62% over the same period and that of electric vehicles exploded from 1% to 24%.

Deglobalization? No. Business activities will continue to span the globe. But relations are evolving and trade is becoming more concentrated. Prepare then for a world of “thin globalism.”