The end of two globalizations
What will future historians say that we did wrong?
It seems increasingly possible that the curtain is coming down on the great age of global economic integration which began in the decades following the second world war and then accelerated dramatically in the 1990s. It remains to be seen just how deep and long-lasting a retreat is on the cards. Whether we’re in for more of a gentle retrenchment or a dramatic fracturing of the global economy depends on the choices that our political leaders make in the months and years (but perhaps also in the days and weeks) that lie ahead. But the direction of travel is obvious enough.
Trade as a share of global GDP peaked in 2008 and has drifted downward in the years since. Global capital flows likewise peaked in the years immediately prior to the global financial crisis, after which they fell by much more than trade, to a level about 70% of that of the pre-crisis peak; they have since drifted downward as well. While migration data are not as good as figures on trade or financial flows, it seems that migration into rich countries also peaked in the latter half of the 2000s and then dropped—though there has been an uptick in recent years. On the whole, it does look as though peak globalization came and went long before the arrival of trade wars and Covid and supply-chain hell.
Even so, product and financial markets remain fairly well integrated—in the sense that you can buy more or less the same goods, at more or less similar prices, across many different countries. Yet many of the world’s most important countries are increasingly inclined to see this as a problem to be solved rather than something to be celebrated. Economic interdependence not only exposes domestic firms and workers to occasionally unwelcome foreign competition. It also creates strategic vulnerabilities which can be exploited by rival powers and which can limit a government’s room to pursue its vital national interests. On top of that, it facilitates cultural spillovers which can produce what some leaders see as an undesirable convergence in norms and attitudes.
So the rules have begun to change. They are likely to change much more. Governments increasingly realize that the failure to actively pursue self-sufficiency when other countries are engaged in such efforts leaves their economy asymmetrically vulnerable to an interruption of trade. Yes, the difficulties caused by recent trade wars and supply-chain disruptions are pushing private firms to rethink choices about where to source their inputs and produce their goods. But over and above that sort of narrow reassessment, which is oriented around questions of commercial self-interest, a more significant evolution in attitudes toward economic interdependence is unfolding. It is a change in views, across the global economy, regarding what the world is and ought to be and how powerful nations ought to conduct relations with each other.
What is behind this reconsideration? A century from now, when people look back on this era, what forces will they think pulled the world apart? What will they say brought an end to this era of globalization?
Importantly, this is not the first time the world globalized, and neither will it be the first time that an era of globalization was followed by an unraveling of global integration. In the 19th century, much of the world followed a trajectory which is remarkably similar to that of the 20th.
The first half of the 19th century was marked by widespread social upheaval and by a global war between European powers, both of which impeded trade and the integration of markets. But as the century wore on, the economies of Europe and the Americas became ever more intertwined. Integration resulted in part from removal of barriers to trade, encouraged by the global hegemon of the day, Britain, which pursued unilateral free trade from the middle of the 19th century and which worked to strike trade deals with other large economies. But globalization also received an enormous boost from technological progress, which reduced transportation and communication costs. In the end, though, the economically integrated global order fell apart, and the world sank into a period of intense insularity.
That period of insularity is where the story of 20th century globalization begins. After the second world war, the new global hegemon, the United States, sought to knit the world economy back together. Reductions in tariff barriers helped, but technology—in the form of dramatic improvements in global communications, the mass expansion of commercial flight, and the emergence of container shipping—also served to supercharge integration. In the end, though, here we are. The apparently similar way in which these two globalizations played out suggests that a comparison might yield some understanding of why they ended—and how we might prevent destructive deglobalization in the future.
Those looking for neat and tidy explanations are likely to settle on one of three narratives. The first is a story of Thucydides’s trap. It is one in which global integration helps to facilitate the rise of upstart powers whose increasing strength leaves the dominant country feeling threatened. A cycle of mutual suspicion and increased hostility unfolds, which ultimately leads to a catastrophic implosion of the global order. In the 19th century, great power rivalries led to the calamity of 1914, and inhabitants of the future might one day look back and see uncanny parallels between Britain and America, Germany and China, the first world war and whatever horrors await us. The lessons they draw are likely to be ones concerning complacency, overconfidence in the conflict-deterring properties of economic interdependence, and the risks of underestimating the likelihood and cost of war.
Others may find that this story mischaracterizes and omits too much history. They may point to the essentially economic nature of the arc of the two globalizations.
What effects did the economic integration of the 19th century have? In an impressive book on the subject, “Globalization and History”, by Kevin O’Rourke and Jeffrey Williamson, the authors ask and do their best to answer three critical questions: did markets actually become more integrated during the 19th century; if so, how did market integration affect land, labor and capital; and did the effects of integration on these productive factors lead to a political backlash? They focus their inquiry on what they call the Atlantic economy, which in practice means western and southern Europe, the Americas, and Australia (whose inclusion makes sense despite its decidedly extra-Atlantic location).
The answer to the first question is, for the most part, yes. Iberia scarcely managed to participate in global trade, and protectionism muted the effects of global integration on some continental economies like Germany, but on the whole reductions in barriers to the movement of goods and people led to substantial integration of markets across the Atlantic economy. And the effect of this integration was an incomplete but nonetheless dramatic convergence in the prices of goods and, critically, in the returns to factors of production.
What that meant in practice was a relative decline in wages in the Americas (where labor had been scarce relative to land and resources) and a relative decline in land rents in Europe (where land had been the scarce factor). The integration of the two provided a shock to the economies and the societies of the old world, which suddenly found itself inundated with cheap grain and other resources from abroad. The new world, in contrast, found itself absorbing lots of labor-intensive manufactures—and lots of labor. The upshot of this was a profound convergence in land rents and wages. In America, from 1870 to 1910, the ratio of wages to land rents fell at an average annual rate of 1.7%. It rose by 0.9% in Germany, in contrast, by 2.5% in Britain, and by a staggering 4.4% in Ireland.
The story the authors tell is a nuanced one, in which capital flows and policy and technological change worked in some ways to mitigate the effects of factor-price convergence. But it is also a pointed one: globalization reduced some people’s welfare relative to what they might otherwise have expected, those people noticed and for the most part correctly diagnosed the source of their troubles, and this growing unhappiness eventually led to a political backlash which began unraveling the integrated global economy well before the unfortunate Archduke Ferdinand met his end. From the 1870s, protectionist policies spread across the Atlantic economy. Tariff barriers rose, though their effects were offset to some degree by continued declines in transport costs. Immigration policy became much more restrictive over time, as well. The war, of course, added a dramatic concluding punctuation mark to the globalization of the 19th century, but the world it tore asunder had already begun to fray.
How similar has our recent globalization been to the last one in these respects? There are crucial differences. Trade in manufactures and services has been far more important this time around. Reductions in tariff barriers have been comparatively more important relative to declines in transport costs. Rich-world labor forces are far more differentiated and better educated, such that “unskilled” workers account for a far smaller share of employment. With a few exceptions—like Europe in the immediate postwar period and America over the past few decades—immigration was not a very important component of recent globalization. And so on.
And yet, you don’t have to squint to see the parallels. The initial postwar globalization, which reestablished freer trade among relatively rich, industrialized countries, was associated with dramatic convergence between America and western Europe, but had relatively muted effects on the “losers” of the era—for a number of reasons, like massive investment in underexploited new technologies, and massive increases in educational attainment. But as globalization came to include deeper ties with poorer countries, the picture changed. Labor-intensive manufacturing in the rich world was hurt badly by competition from abroad. Workers without much education or specialized skills found themselves in competition with vast numbers of other workers on far lower wages—directly, in parts of America which experienced high levels of immigration, and indirectly, via trade links with labor-abundant emerging economies. Wages at the bottom of the earnings distribution stagnated, and inequality soared.
There were winners too, of course. In the rich world, factors which had not been particularly scarce—like well-educated workers, land in the metropolitan areas where such workers crowded, and innovative firms—did very well as a consequence of integration, as did many of the low-wage workers which were abundant in the emerging world. But those who lost out as a consequence of globalization, in relative if not in absolute terms, did not fail to notice, and were in many cases more aware of the reasons behind their relative misfortune than were economists and elite opinion-makers.
And, furthermore, the masses have been pretty successful in generating political action which pushes the world in a less integrated direction: through Brexit and the election of Donald Trump, yes, but also in countries all over the world, where policies have shifted toward harsher treatment of migrants, more industrial policy, and greater skepticism of dependence on other economies. Of course the world is a very complicated place and many factors other than globalization have affected wage growth, and the distribution of income, and political debates, and resultant policy actions—in recent decades as in the 19th century.
And yet there is no mistaking an underlying sequence in which the world globalized, many people did worse economically than they believed they had right to expect, and policy shifted in a more insular direction. For the future historians who embrace this story, the end of our globalization will have had its roots in an insufficient concern for the people and places hurt by integration. If only there had been a greater commitment to strengthening safety nets, to supporting investment in infrastructure and human and physical capital, to pursuing high-standard trade agreements, to maintaining skepticism in the face of claims about the benefits of free capital flows—then, maybe, things would have turned out differently.
There may be others, though, for whom the narratives above are too materialist, too focused on matters of self-interest and too neglectful of ideas and values. To tell the story of our deglobalizations, they will say, one also has to take account of racial and cultural grievance, political ideology, and recurring slides toward decadence. The end of the 19th century globalization is incomprehensible, in this view, without reference to nationalism, cultural and ethnic chauvinism, brewing tension between individualism and self-indulgence on the one hand and the collective good on the other, and other social fault lines.
Neither can deglobalization today be explained without taking adequate account of cultural conflict. One has to reckon with the rise of “great replacement” hysteria, and the ease with which nationalist politicians have weaponized fear-mongering about immigrants. Then there is the cultural chasm which has grown between well-educated elites in global cities and their countryfolk in the hinterlands. There is something more at work there than a simple divergence in economic fortunes. In an interesting new book by Peter Goodman, of the New York Times (which I reviewed here), the author recounts a conversation with a cabbie in Sunderland, on the subject of Brexit:
“No one here really understood what Brexit was, or what would happen if we voted for it,” he told me. “We just knew that people in London had been fucking us for as long as we could remember. Thatcher fucked us. Then Cameron and Osborne fucked us. And then Cameron and Osborne came up here and asked us to help them by voting against Brexit. We weren’t voting with that lot. It was our chance to fuck them back.”
Perhaps this is just bitterness and resentment. It is certainly hard to see it as in any way constructive. But one might just about tell a story in which well-heeled elites grew comfortable and complacent, in which the outward-looking nature of the elite undermined national cohesion and weakened the responsiveness of national governments to domestic problems, and in which the backlash which has resulted, while often quite ugly, in some sense represents an effort to rebuild functional national polities around shared national identities and values.
But strong national identities might themselves prove dangerous in the context of clashes of values between nations. In the aftermath of the Cold War, America felt sure that it had won the battle of ideas. There was simply no plausible route to sustained growth in incomes that didn’t run through democracy and free-market capitalism, and thus there was little reason to think any non-democratic country could pose a long-run strategic challenge to the United States, China very much included. Elsewhere in his book, Goodman finds Bill Clinton campaigning for China’s accession to the WTO, saying that, “China is not simply agreeing to import more of our products, it is agreeing to import one of democracy’s most cherished values, economic freedom. It is likely to have a profound impact on human rights and political liberty.”
China’s rise has indeed had a profound impact on human rights and political liberty, just not the one Clinton anticipated. Its failure to democratize, even as its economy grew from accounting for roughly a fiftieth of world GDP to nearly a fifth, both destroyed the American vision of the world’s future, and contributed to a loss of faith in democracy within the democratic west. One might have thought that this would leave China feeling comfortable and confident in its own political culture and system of government. Instead, the Party seems to have grown ever more frightened of the corrupting power of western culture and capitalism, and has moved to tighten control over business and society within China and to disentangle itself from the global economy. It is a curious fact that the economy which has seemingly done best out of the second great globalization has turned inward more rapidly and determinedly than the rich economies which tend to think of themselves as victims of China’s rapid rise.
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What will they say brought an end to this era of globalization? They will say it was all of the above, and they will likely be right. But they may say other things too, that none of these stories gets at the most important questions: if we failed in these ways then why did we fail, and were there missed opportunities to prevent our failure?
How could things have turned out differently? We might imagine two broad mechanisms which could have helped us to choose a different road. One is institutional. Perhaps we failed because we made critical errors when we had opportunities to design institutions which would have served us better, or opportunities to preserve institutions which could have kept us on a path less likely to end in a dangerous deglobalization. Maybe future historians will fret about the inadequacies of the Bretton Woods institutions, or will lament the fact that when America was at the pinnacle of its power it did not do more to strengthen international law and empower international institutions. Maybe they will argue that if the victories won by labor in the first half of the 20th century were just a little more complete, then things would have been different. Maybe they will experiment with radical new institutional forms, and discover new things about the value and limitations of such things in fostering global peace and prosperity.
The other is moral. Institutions matter, yes, but a given set of institutions can work one way at one time and another at another depending on the strength of social trust and the health of public ethics in the relevant society. Technologies change, governments change, the critical questions of the day change, and thus it matters whether a society struggling to respond to difficult circumstances can debate a course of action in good faith, draw upon a sense of what is right when making critical decisions, and cooperate effectively in implementing its chosen course of action.
That is not at all to say that for every policy question there is an answer which is the morally obvious one. There isn’t, as the question of how to engage economically with a Party-controlled China demonstrates. But maybe, our future historians will argue, there are ways in which a society with strong ethical commitments can more readily keep the threat posed by ethical slippage at the front of its mind. Maybe such societies can better recognize when they have gone down the wrong path and muster the will to change course, or resist the temptations of ideologies which turn powerful and prosperous places into mean and vulnerable ones.
These are difficult questions. They are also the sort to make one wish for a broad and cooperative social science: which marries history and economics and ethics and anthropology and so on, which conducts itself with humility and ambition and a seriousness of purpose, and which does its work with an appropriately long time horizon. Because we may once have thought that we’d never face such uncertainties again, but we were wrong—and next time, hopefully, we will have wisdom enough not to repeat our error.