One of today’s dominant macro-trends is the reversal of globalization, or deglobalization. Globalization is the free flow of people, goods, services, capital, technology, and ideas across national borders. This system has faced numerous threats in 2020, most notably rising nationalism, geopolitical instability, and the COVID-19 pandemic.
In an increasingly deglobalized environment, equity investors may have a harder time finding steady profitability and value. Let’s take a look at how we got here and where we could be going if this trend continues.
How did the world first embrace trade?
We’ve understood for at least two centuries that trade stimulates worldwide economic growth. An 1817 article by British political economist David Ricardo explained that a country is better off when it focuses on producing goods where it has the greatest comparative advantage and trades for other goods where its comparative advantage is less. If every country specializes in this way, he wrote, all countries would be better off—even in scenarios where one country holds no comparative advantage in producing any goods.
The comparative advantage theory has been extended and modified over the years, but Ricardo's basic argument has stood the test of time. Specialization and trade lead to higher levels of economic growth. But while trade benefits society as a whole, the benefits may not be equally distributed. Certain groups in any country may be harmed by trade. The migration of manufacturing abroad benefits Americans who purchase goods at a relatively low cost, but it can hurt those who had worked in factories previously located in the US.
After two destructive world wars in the first half of the 20th century, the US and other countries coalesced around the simple idea that more economic integration would promote widespread growth and align national interests, thus reducing the likelihood of another world conflict. The 1948 General Agreement on Tariffs and Trade (GATT) included the US, UK, Europe, and Japan. Trade agreements were later extended to include emerging countries like China, Brazil, and India. The World Trade Organization (WTO) was formed in 1995 to oversee the GATT and provide a forum for individual countries to settle trade disputes. The result was a sharp increase in bilateral and multilateral trade agreements. There were 50 trade agreements around the world in 1990; today there are 280.
World trade as a percentage of global GDP
Sources: World Bank, OECD, 9/4/2020. For illustrative purposes only.
Global trade increased steadily for several decades before the 2008 financial crisis. The world spent nearly 10 years recovering from the GFC, but we haven’t reached the 2007 peak percentage of global GDP since. The Trump administration hardened existing trade friction in 2017 by deciding to withdraw the US from the Trans-Pacific Partnership (TPP) with 11 countries, including Canada, Japan, and Australia. At the same time, increased tension between the US and China and rising nationalism put global trade under pressure.