Industry Insights: The Sustainability of Globalization

The intensifying debate surrounding the trajectory of globalization has been fueled by recent shocks such as the pandemic, trade wars, and geopolitical tensions, leading to questions about its sustainability. Analysts hold contrasting viewpoints, with some claiming globalization's decline and others asserting its endurance. Supporters of the former emphasize factors like the global financial crisis, trade wars, and geopolitical tensions as evidence, predicting negative consequences such as reduced poverty alleviation, increased inflation, and lower productivity growth. However, a closer examination challenges this perspective.

A more nuanced analysis of the data reveals that globalization has not significantly weakened. While the ratio of merchandise trade to GDP has declined, primarily due to the commodity supercycle, adjusting for inflation shows that the real proportion of merchandise trade relative to economic size has remained stable. This suggests that international trade in goods has not declined in relation to the overall economy.

Furthermore, historical trade shocks have not led to deglobalization. The U.S.-China trade war, for example, resulted in a decrease in the share of imports from China but did not trigger reshoring of supply chains; instead, imports from other countries increased. Similarly, the Fukushima disaster prompted adjustments in specific supply chains rather than nearshoring. These instances demonstrate that trade shocks have not caused the demise of globalization.

Lastly, the future evolution of supply chains may have limited macroeconomic impact. Considerations of risk, associated costs, and government policies will influence the restructuring of supply chains. Given the current risk factors, increasing supply chain redundancy may be the optimal approach to mitigate risks. Furthermore, upfront costs can be offset by lower variable costs, including labor, taxes, and regulatory environments. Consequently, future changes to supply chains may involve gradual adjustments rather than complete deglobalization.

In conclusion, despite differing viewpoints, the available evidence suggests that globalization will persist. While adjustments and redundancies in supply chains may occur, the interdependence of the global economy, culture, and population will endure, and international trade in goods will continue to play a significant role. Recent shocks have not caused irreversible damage to globalization, and it is likely to adapt and evolve rather than fade away completely.

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