Ideas

The great deglobalizing

Our interconnected world is shrinking back toward its national borders—and that’s a problem

During a seemingly successful trip to Asia in November, Barack Obama announced several breakthroughs. Among them was a promise that the United States and Asian nations would proceed toward the Trans-Pacific Partnership, or TPP, a free-trade deal that, if enacted, would create a free trade area with a total gross domestic product of more than $27 trillion. Obama and Chinese President Xi Jinping also announced a new climate deal, the first between the two powers, which will commit both the United States and China to significant emissions cuts over the next two decades.

The TPP would seem to be just one of many indicators of our growing interconnectedness with Asia, and indeed of the interconnectedness of the entire world. Today, riots in Missouri are immediately broadcast on Al Jazeera in the Middle East; Facebook boasts hundreds of millions of users in India; and a plane crash in Indonesia is tweeted about around the world within minutes.

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But many deeper trends point in a different direction. Since the late 2000s, despite the superficial connectivity of Facebook and Twitter, the world has entered a period of what you might call deglobalization. Global trade growth has slowed dramatically from its normal pace. Banks’ investments and lending outside their borders have plummeted, and investors have pulled out of stock markets across the developing world. Cross-border migration is down. A comprehensive index of globalization produced by the Zurich-based research organization KOF Swiss Economic Institute, which includes such variables as investment dollars, tourism figures, and information flows over the Internet, finds that “globalization has stalled since the outbreak of the [international] financial crisis in 2008.”

Deglobalization does not mean nations are going to become totally isolated from each other, or that engines of change like the Internet and social media will not continue to grow. But history suggests that this contraction back to our national borders is a real phenomenon, one that has occurred multiple times in the past hundred years—and that it’s something to worry about.

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At times, a period of deglobalization has emerged right after major wars, as in the late 1910s; other times, deglobalization has stemmed from global economic shocks, as in the 1930s. After each period of deglobalization, the world eventually bounced back, though sometimes not until after global conflicts such as World War II. Still, the effects of the period of deglobalization can be enormous. The impact of our latest trend toward deglobalization could cause long-term damage, harming economic growth, hindering innovation, and leaving a legacy of the most toxic kinds of politics around the world.

For at least a century, the international system has alternated between cycles of globalization and deglobalization. During the periods of globalization, such as the 1990s and early 2000s, the world seems to become smaller: Trade increases, cross-border investment soars, international migration rises, and international communications networks become more closely linked. During the deglobalization periods, the reverse happens: Trade growth slows, governments enact tariffs and other protectionist measures, investment dwindles, and cultural and personal links between countries wither.

This period of deglobalization was sparked by the economic and financial crisis of 2008-09, which began in the United States and Europe and spread around the world. Although some rich world economies, like the United States, have largely recovered from the crisis, the impact of the downturn is still being felt years later.

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For one thing, after the crisis, banks in most developed countries drastically slashed their lending to companies in other nations. European nations, whose banks had been by far the biggest sources of capital for young companies in developing nations, passed legislation forcing banks to invest more within their own borders, in order to reduce risks for banks and to support European companies. Credit Suisse estimates that European banks’ return to lending in their home markets will take away $1 trillion in funding from emerging markets in the next two decades. Meanwhile, American and Japanese banks also have reduced overseas lending. McKinsey & Co. has estimated that cross-border capital flows are down 60 percent from before 2008.

After the crisis, governments of the world’s biggest economies also took many measures to protect their own industries, measures that were politically popular but that contributed to the drop in global trade. The Center for Economic Policy Research, a leading Britain-based economic think tank, recently published a comprehensive analysis of trade-related measures implemented between 2009 and 2013. It found that in 2013, the wealthiest nations passed 23 percent more protectionist measures than they had in 2009.

Cross-border flows of capital have regressed so badly that they are about as low as they were in 1983, before the end of the Cold War and the computerization of banking, said Kristin Forbes, a leading economist and member of the Bank of England’s external monetary policy committee, in a major speech in November. It is time, she said, to stop talking about globalization and to rethink the “assumption that global financial integration is an unstoppable trend....This deglobalization of banking will have widespread repercussions.”

The crisis also strengthened champions of state capitalism, or state control of many parts of the economy, in powerful countries like China, Brazil, and Indonesia. With leading rich world economies floundering—Japan and Europe still have not recovered from the 2008-09 crisis—both leaders and publics in many developing nations have seen reason to examine other models of development, such as China’s partially state-driven economy. This, too, tends to work against globalization. Although state companies do invest outside their borders, they are typically less open to foreigners taking significant stakes in them, and they often both benefit from and support protectionist measures by their home country governments—measures that further cement deglobalization.

It’s not just economic ties that are loosening; personal and cultural links between countries also have dwindled since the late 2000s. With growth slowing and unemployment rising, many countries have seen a spike in nationalist and anti-migrant sentiment. In Greece, that sentiment has coalesced into public support for Golden Dawn, a neo-fascist political party whose members have become infamous for brutally beating migrants. Golden Dawn won 21 seats in Greece’s parliament in 2012 elections, though they did slip to 17 in the election held last week. Even in wealthier and seemingly more secure European nations like France and Denmark, extreme nationalist and anti-migrant parties, like France’s National Front, have made huge inroads in the past six years. The National Front likely will be a serious contender in France’s next presidential elections in 2017.

This anti-migrant sentiment has occurred even though cross-border migration, a key sign of globalization, has dropped significantly from its levels in the 2000s. A study by The Financial Times of data on migration accumulated by the United Nations shows that there are “a million fewer people a year moving to another country on average [every year] after 2010.”

Other types of social and cultural integration have dropped as well. The Internet is in some ways becoming less free, with many governments putting up walls around their domestic Internets. In a 2014 report, Freedom House, a nonprofit that studies economic, social, and political freedom worldwide, found that freedom on the Internet had declined for the fourth year in a row. “The portion of Internet traffic that crosses international borders is about 17 percent...far below the level one would expect in a flat [i.e, globalized] world,” notes the 2014 DHL Global Connectedness Index, another study of globalization that uses multiple variables to measure international integration.

History suggests that a contraction back to our national borders is a real phenomenon, one that has occurred multiple times in the past hundred years—and that it’s something to worry about.

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In many respects, of course, the Internet and social media have knit the world more closely together. But that virtual closeness doesn’t necessarily mean closeness in practical terms; in fact, it can conceal the realities of slowing or falling migration, trade, investment, and other types of international integration. “Overall, the depth of global connectedness remains quite limited—lower than many people think,” concluded the 2014 DHL Global Connectedness Index.

History suggests that periods of deglobalization like the one we’re now in can have effects that last for decades. One that we’re already seeing is rising isolationism in rich countries. A recent Pew poll of Americans found a higher percentage of people convinced the United States should play less of a role abroad than at any time in the past 50 years. Yet without other major powers able to assume leading global roles, a withdrawal by countries like the United States or Germany leaves a dangerous power vacuum, allowing powerful and illiberal states like Russia to lash out, and major crises, like the looming genocides in Central Africa or western Myanmar, to emerge with no one to organize a response.

Deglobalization also could do long-term harm to the world economy. Reduced bank lending across national lines will undermine entrepreneurship, since it will become increasingly difficult for small companies around the world to find anyone to help them grow. In addition, state companies often use links to government, and the power that comes with it, to crush smaller private sector competitors, a trend that has happened repeatedly in Russia.

In the long run, deglobalization could foster an overall decline in trade, which would make the entire international economy less dynamic. Indeed, numerous studies have shown that free trade boosts international growth, and the growth rates of countries that embrace trade. National Bureau of Economic Research economists Dan Ben-David and Michael Loewy have demonstrated that, even if other countries adopt protectionist measures, “a unilateral reduction of tariffs by one country is enough to raise the...growth rates of all countries.”

Deglobalization in our era can be halted. For one, American and European leaders could help demonstrate the benefits of continuing interest in the world. President Obama, for instance, has praised the TPP trade deal but has spent little time trying to convince members of Congress, even those from his own party, to support the agreement. Partly as a result, many Democrats already have come out against the TPP.

Leaders could also demonstrate a commitment to global communications, and to the power of intercultural exchange. Obama could make a free and interconnected Internet a higher priority; thus far, he has avoided criticizing countries, such as China and Thailand, that control their people’s access to the global Web. In 2015, nations like Russia and Turkey likely will enact new legislation making it even easier for their governments to censor social media sites and cut off their citizens from access to some information from other countries.

World leaders also could push back against the most extreme, and often racist, anti-migration organizations. In Europe, many politicians have instead tried to copy elements of far right, anti-immigration parties; in Britain, for instance, the Conservative government has refused to directly take on the right-wing United Kingdom Independence Party. A similar dynamic has taken hold in America’s Republican Party, in which senior leaders have adopted the rhetoric of anti-immigrant groups rather than rebutting them and pointing to the economic benefits of migration.

By contrast, in her annual New Year’s address, German Chancellor Angela Merkel took a different tack. She pointedly criticized the growing anti-immigrant—and seemingly anti-Muslim—movement in Germany known as Patriotic Europeans Against the Islamicization of the Occident, or Pegida for short. Pegida has held rallies that have attracted tens of thousands of Germans.

“Do not follow those who have called the rallies, because all too often they have prejudice, coldness, even hatred in their hearts,” Merkel said. Germany, she went on, stood for a different policy toward migrants: “We help them and take in people who seek refuge with us.”

Joshua Kurlantzick is Senior Fellow for Southeast Asia at the Council on Foreign Relations and author of “Democracy in Retreat: The Revolt of the Middle Class and the Worldwide Decline in Representative Government.”

Related:

What the GDP doesn’t show about America

The Internationalist: Why it’s time to stop fearing OPEC

2012: Are the new democracies pro-democracy?

2012: Global domination? Whoa, Canada!

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