Globalization Isn’t Dying, It’s Just Evolving

Is globalization really slowing? Maybe, if you only look at the trade in physical goods. But that doesn’t take into account an explosion of the digital economy. That’s important. Increasingly, the digital realm is where the 21st-century economy lives.

Trade wars and the tit-for-tat tariffs between the U.S. and China have contributed to a slowdown in global trade. The uncertainty caused by Trump’s assault on the global trading system is likely to exact a price for years to come thanks to the stall in business investment it caused. Less investment today equals less growth (and trade) tomorrow.

But the slowdown was also afoot before Trump. Since the 2008 financial crisis we’ve seen a decline in the ratio between the growth in trade flows and that of global output. Until the crisis trade regularly grew at twice the rate of the global economy. Now it grows roughly in line, or even slightly more slowly than global GDP.

The even bigger story, though, is the longer-term structural change in the global economy, whereby we’re increasingly trading services such as music streaming or banking.

As economies mature, we’re selling the rights to produce something to someone in another country rather than shipping it to that country. Those changes also mean less physical trade in goods—no CD crosses a border if you’re streaming the latest Ariana Grande song. Yet that doesn’t mean globalization is slowing. It means it is maturing and evolving.

There is no economic relationship bigger than the U.S. and China’s. But how you quantify the flows matters. Traditionally, trade data measures shifts in goods by recording products’ value when they leave a port. But the parts in products often come from other countries these days. Even those parts can be made up of parts from elsewhere. That means a more accurate measure of trade and economic relationships involves recording where value is added. And when you do that, relationships start to look different.

The result means traditional economic policy tools are not as effective as they once were. Trump may believe a weaker dollar would boost U.S. exports by making them cheaper for the rest of the world to buy. But products like smartphones now include parts from all over the world and can effectively embody four or five different currencies, making any impact more diffuse and complicated.

There are also caveats. Calculating the value-added relationships of economies takes time. The most recent data available from the OECD only gets to 2015, which makes it less useful in making real-time policy decisions.

In today’s world even that forensic data isn’t good enough, however. Whole classes of products are missing from trade data. Like the software that makes your smartphone work. A few years ago, Hal Varian, Google’s chief economist, did a back-of-the-envelope calculation on what would happen if trade flows recorded the true value of U.S.-made operating systems installed on smartphones assembled in Asia. His answer: It would reduce the U.S.’s $500 billion trade deficit with the world by more than $120 billion in one fell swoop.

We still think of companies as national champions even though we long ago entered the age of the multinational.

Since the 2008 crisis, there has been a slowdown in long-term, cross-border investment, or what we call foreign direct investment. That, too, has provoked fears of a slowdown in globalization.

Yet the share of revenue companies derive from countries outside their home market is far greater than it once was. Companies and their shareholders rely more on foreign economies than they have ever before. And that’s before you even start thinking about how international shareholder registers have become around the world.

That matters. As supply chains adapt to new tariffs and the growing geopolitical rivalry between the U.S. and China sparks talk of a new technology cold war, prominent thinkers believe we are heading for a retreat in globalization. Or a cleaving of the world into rival economic spheres of influence.

China hawks in Washington may want to see a “decoupling” of the U.S. and Chinese economies. But few in business see that as a realistic prospect. American companies still want to sell to China, which in many cases is becoming a more meaningful source of revenue and profits than the U.S. As long as American corporate champions like Apple and Tesla still see China as a market vital to their long-term success any decoupling may be academic.

By imposing tariffs on $250 billion in products from China and threatening another $300 billion, Trump has committed what may be the greatest act of protectionism since the 1930s.

Yet that doesn’t tell the whole story. The European Union and other major economies have been securing trade agreements that lower tariffs and other barriers. A European pact with Japan went into effect earlier this year. One with Canada took force last year. Japan and 10 other Pacific economies have gone ahead with the Trans-Pacific Partnership negotiated by the Obama administration despite Trump pulling out of that on his first full working day in office. In Africa, countries are going ahead with a continental free trade agreement.

In other words, even as Trump is putting up new U.S. trade barriers, the rest of the world is responding by lowering theirs with each other.

China has a long history of erecting trade barriers. It is by no means the champion of free trade it often presents itself as these days. But one of its responses to Trump’s tariffs has been to lower its own tariffs for other countries on products such as cars. That has put U.S. companies at another disadvantage versus competitors in Asia and Europe.

According to researchers at the Peterson Institute for International Economics, as recently as early 2018 China applied an average tariff of 8% on imports. For U.S. companies the average rate is now over 20%. For all other exporters to China it has fallen to under 7%.

At the center of U.S. complaints about China is intellectual property and what the U.S. argues is a long and systematic pattern of IP theft encouraged by the Chinese state. But increasingly experts say the incentives are changing for China. In recent years it has become a genuine contributor to global innovation as seen in patent data.

There are still people who question China’s capacity to innovate. But the data also points to a broader trend. Innovation has become more global than it once was. Which is one reason why tech companies and universities worry about the prospects of the U.S.-China trade battles turning into a broader technology Cold War. The risk is such a war would leave the U.S. isolated and unable to take advantage of innovation that is increasingly cross-border.

America is a country of immigrants. But that makes it relatively rare in the world. The reality is that more than 90% of people in the world live where they were born. Whether it’s for work or family reasons or to flee persecution, we cross borders to live in another country relatively rarely.

But that doesn’t mean humans don’t like to cross borders. Even as migration figures have remained relatively stable worldwide, short-term international travel for work or fun has soared.

Much of that is a product of the jet age. It’s easier and cheaper to fly today than it was even 20 years ago. However, a large portion of the increase, particularly in the past two decades is the result of globalization and the fact a lot more people in developing countries like China and India can afford to travel. Or need to travel, in the increasingly rare case when an international Skype call or a data file uploaded to the cloud can’t do the job for them.