It wasn’t going to be a good start to the work week anyway, given the horrific weekend of deadly gun violence. But an economics research note landed in e-mail that asked a question that proved impossible to shrug off.
“The end of the world as we know it?”
This came from chief economist Neil Shearing at the international firm Capital Economics, without any hint he was cleverly alluding to a favorite rock song of the Generation Xers. His answer was serious, too.
Yes, it might be, as the most recent era of greater globalization winds down. And if what he fears comes to pass, we will really miss it when it’s finally over, too.
Shearing’s note came out in the middle of a rough few days in the escalating trade war between the United States and China.
Last week the Trump administration announced additional tariffs on imports from China. The Chinese responded in a couple of easily predicted ways, including allowing its currency to drift lower. That has the effect of making its exports cheaper.
The U.S. then labeled China a currency manipulator, a largely symbolic action that in a way was comical. What the Chinese actually had done by allowing the value the Chinese yuan to fall was to stop propping it up. It’s like deciding to issue speeding tickets only after drivers dropped back to the posted speed.
Tuesday was much better in the investment markets as China moved to stabilize its currency, yet Shearing wrote that his firm had been thinking about the end of globalization well before the most recent exchange of punches with the Chinese.
Global flows of goods and services as a percentage of global GDP have been flat. Foreign direct investment, meanwhile, has even been declining.
There have been different eras of increasing globalization, and Shearing referred to one that really took off in the 1990s. Unlike previous periods of expanding global trading, this one was characterized by the inclusion of a lot of emerging economies. There was also a surge in capital flowing across borders, not just stuff.
For the youngest baby boomers and those born later, this is the only world they’ve ever known. And it has transformed American business.
My career began in 1983, when Medtronic had just one of the 16 officers listed in the annual report with an international job, one called simply the vice president, international group. About a fourth of this medical device maker’s sales went abroad.
That’s the way it was done then. You took care of business at home and then looked abroad for other profitable customers. The international business model was mostly distribution, maybe finding a local partner to sell your products in their home country.
This might seem myopic, yet in 1983 the U.S. economy was easily the world’s biggest. It generated more than 30% of global GDP. The next largest economy was Japan’s, only a third or so the size of the American economy.
Way down the list, roughly half the size of Italy’s, was China’s economy. It generated a tiny sliver of global GDP.
It was inevitable that America’s share of the global economy would decline from there, although not because our country was somehow losing its way. It’s generally understood that well-off regions or countries probably won’t keep the big leads they have on poor countries, as poor economies simply grow faster.
Why? If conditions are right, like the presence of a stable government that welcomes entrepreneurship and private investment, emerging economies generate better returns as they develop than those that can be found in mature economies.
Last year the American economy still ranked ahead of China’s as the world’s biggest, yet its percentage of global GDP had slipped to less than 24%. Meanwhile, China’s share of the global economy is now roughly eight times bigger that it was in 1983.
By one measure the Chinese economy has already become the biggest.
Of course, businesses no longer assign a single VP to keep track of everything happening outside the United States. And it simply wouldn’t occur to most entrepreneurs now that they could safely ignore most of the world’s potential customers. There’s even a term, “micro-national,” for a startup that already has staff and customers all over.
As for Medtronic, its sales outside the United States came pretty close to half of total sales last year, split between what the Fridley-based company calls its non-U.S. developed markets and emerging markets. And, of course, it’s no longer Medtronic, Inc. but Medtronic PLC, with its formal headquarters in Dublin.
Shearing from Capital Economics thought we might be watching a “relatively benign end” of the recent era of growth in the flow of stuff across borders, as artificial intelligence, robotics and other technical innovations make it easier to make products in one location. This would mean a boost in efficiency, as businesses rely less on cumbersome and long supply chains.
What he’s worried about is that there seems to be no such benign force at work. Instead, this era could be coming to an end due to all the sand tossed in the gearbox by those in charge, including here.
If it’s just the Americans and Chinese who choose to keep fighting, he wrote, then history suggests that maybe countries in Asia, Europe and the rest of the Americas could keep forging economic ties.
But if globalization is passing out of favor all over, what’s to replace it? Likely something a lot worse, as the market-oriented rule book that the United States and its allies drew up to govern the flow of goods and capital for the past seven decades comes apart.
“It’s even possible that this might lead to an eventual Balkanization of the global economy, with U.S.- and China-led spheres of influence, each with separate payment systems, regulatory standards and technological platforms,” he continued. “It goes without saying that this would have much graver economic and market consequences.”