In truth, hyper-globalization had been in retreat since the global financial crisis of 2007-08. The share of trade in world GDP began to decline after 2007, as China’s export-to-GDP ratio plummeted by a remarkable 16 percentage points. Global value chains stopped spreading. International capital flows never recovered to their pre-2007 heights. And populist politicians openly hostile to globalization became much more influential in many advanced economies.
Hyper-globalization crumbled under its many contradictions. First, there was a tension between the gains from specialization and the gains from productive diversification. The trade principle of comparative advantage held that countries should specialize in what they were currently good at producing. A long line of developmental thinking, however, suggested that governments should instead push their economies to produce what the rich world did. The result was a conflict between the interventionist policies of the most successful economies, notably China, and the ‘liberal’ principles enshrined in the world trading system.
Second, hyper-globalization exacerbated distributional problems in many economies. The inevitable flip-side of gains from trade was a redistribution of income from its losers to winners. And, as globalization deepened, redistribution from losers to winners grew ever larger, relative to the net gains. Economists and others who pooh-poohed the central logic of their discipline ended up undermining public confidence in it.
Third, hyper-globalization undermined the accountability of public officials to electorates. Calls to rewrite globalization’s rules were met with the retort that it was immutable and irresistible— “the economic equivalent of a force of nature, like wind or water," as former US President Bill Clinton put it. To those who questioned the prevailing system, the UK’s former Prime Minister Tony Blair responded that, “You might as well debate whether autumn should follow summer."
Fourth, the zero-sum logic of national security and geopolitical competition was antithetical to the positive-sum logic of international economic cooperation. With China’s rise as a rival to the US and Russia’s invasion of Ukraine, strategic competition has reasserted itself over economics.
With hyper-globalization now having collapsed, scenarios for the world economy run the gamut. The worst outcome, recalling the 1930s, would be withdrawal by countries (or groups of countries) into autarky. A less bad but still ugly possibility is that the supremacy of geopolitics means that trade wars and economic sanctions become a permanent feature of international trade and finance. The first scenario seems unlikely—as the world economy is more interdependent than ever and the economic costs would be huge—but we certainly cannot rule out the second.
Yet, it is also possible to envisage a good scenario whereby we achieve a better balance between the prerogatives of the nation-state and the requirements of an open economy. Such a rebalancing might enable inclusive prosperity at home and peace and security abroad.
The first step would be for policymakers to mend the damage done to economies and societies by hyper-globalization, along with other market-first policies. This will require reviving the spirit of the Bretton Woods era, when the global economy served domestic economic and social goals—full employment, prosperity and equity—rather than the other way around. Under hyper-globalization, policymakers inverted this logic, with the global economy becoming the end and domestic society the means. International integration then led to domestic disintegration.
Some might worry that emphasizing domestic economic and social objectives would undermine economic openness. In reality, shared prosperity makes societies more secure and more likely to countenance openness to the world. A key lesson of economic theory is that trade benefits a country as a whole, but only as long as distributive concerns are addressed. It is in the self-interest of all well-managed and well-ordered countries to be open. This is also the lesson of actual experience under the Bretton Woods system, when trade and long-term investment increased significantly.
A second important prerequisite for the good scenario is that countries do not turn a legitimate quest for national security into aggression against others. Russia may have had reasonable concerns about Nato enlargement in Europe, but its war in Ukraine is a completely disproportionate response that will likely leave Russia less secure and less prosperous in the long run.
For great powers, and the US in particular, this would mean acknowledging multipolarity and abandoning any quest for global supremacy. The US tends to regard American predominance in global affairs as the natural state of world affairs. In this view, China’s economic and technological advances are inherently and self-evidently a threat, and the Washington-Beijing bilateral relationship is thus reduced to a zero-sum game.
Leaving aside the question of whether the US can actually prevent China’s relative rise, this mindset is both dangerous and unproductive. For one thing, it worsens the security dilemma: American policies designed to undermine Chinese firms such as Huawei are likely to make China feel threatened and respond in ways that validate US fears of Chinese expansionism. A zero-sum outlook also makes it more difficult to reap the mutual gains from cooperation in areas such as climate change and global public health, while acknowledging that there will necessarily be competition in many other domains.
In short, our future world need not be one where geopolitics trumps everything else and countries (or regional blocs) minimize their economic interactions with one another. If that dystopian scenario does materialize, it will not be due to systemic forces beyond our control. As with hyper-globalization, it will be because we made the wrong choices. ©2022/Project Syndicate
Dani Rodrik is professor of International Political Economy at Harvard University’s John F. Kennedy School of Government and the author of ‘Straight Talk on Trade: Ideas for a Sane World Economy’
