1980’s Academy Award winner for the best film, Kramer vs Kramer, is a story of a couple embroiled in an unhappy marriage lasting eight years. The movie starts when one fine day, Joanna Kramer (Meryl Streep) decides to leave her husband, Ted Kramer (Dustin Hoffman) as she is tired of not being understood in her own marriage, and of being “someone’s wife, mother or daughter” all her life, without knowing who she is and what she really wants. (Sounds like Brexit, doesn’t it).
But self discovery is not the cardinal theme that won this movie an Oscar. What touched the world is the conflict, chaos and eventual compromise that Kramers go through to protect what’s most important from their marriage, their six year old son, Billy.
CUT TO: Global Economy, 2023.
When I read about the global economic situation today, the most intuitive analogy that comes to mind, is that of a marriage falling apart. A world becoming more fragmented than how augmented it is today, is the first sign of a global divorce.
One can opine whether this marriage was one worth fighting for, or was it already counting its days, long due for an overhaul. I’d say it’s some of both.
But is the world even getting de-globalised?
The short answer is - no, it is not.
De-globalisation is a dumbed-down and first order answer coined by journalists and journals alike for a world which is undergoing a complete reformation vis a vis how and who it trades with.
If de-globalisation were happening de facto, the world around us would look a lot different that it does today. The fundamental outcomes of de-globalisation such as low import and export levels and depreciation of Dollar are both either not happening, or are too soft to call it a global trade retreat. Imports and exports are even higher than pre-pandemic levels for countries like USA (imports), China (imports as well as exports), Germany (exports) and India (imports). Instead of the Dollar depreciating, as it should have been if the world were to de-globalise (because of low global demand for Dollar), it has instead strengthened and is sitting at an all time high since 2002 (owing to increase in interest rates by FED in order to curb inflation and other countries seeking refuge in the Dollar for better yield than anywhere else).
No fire without a smoke
But when Economists ring alarm bells for a decoupling global economy, there must have enough leading indicators to say so. (Hold your horses, you still can not call it “de-globalisation”.)
The hallmark traits of an open and mobile trade economy are FDI and cross border portfolio investments both of which have tanked in the recent past. FDI fragmentation has already begun, multinationals are slowly shutting shop in unfriendly or geopolitically unstable nations and setting up base either at home or near-home. This brings us to the buzzwords of present times - friend shoring and near shoring. With supply chain ruptures, countries and companies alike find it prudent to divest from geopolitically distant economies, leading to what the International Monetary Fund calls, Geo-Economic Fragmentation (more on this shortly). On top of it, cross border investments, one proxy for which is global portfolio asset holdings (cross-border holdings by counterpart economy) have gone down by ~15% in first half of 2022 as compared to December 2021, lowest since Financial Crisis of 2008.
TLDR: things are not normal, and definitely not how they used to be. Should we still call this anti-globalisation? I would say, no.
The data that we see should be assessed in the light of the highly uncertain and unprecedented times that we are going through. We should be less surprised when we a see a wave of protectionism in the way the countries are acting today, mostly in response to a pandemic, and now war. Given the recent shocks, it is only but prudent as an economy to decide who you are in bed with, which is exactly what the situation today looks like. If quoted matter of factly, this is not the end of globalisation, but a metamorphosis, especially into a more fragmented, geopolitically localised and “like minded” globalisation that we are going to witness.
The only question remains - when, why and how did we reach here?
Part 1: INT. FOYER - NIGHT
As cliche as it gets, Joanna Kramer tells Ted right before leaving that it isn’t his fault, he just happened to marry the wrong person.
It isn’t in 2023 that the world first questioned whether it had found “the sweet spot for sustaining a global economy” or the “right fit for who can be its trade partner”. This paradigm shift towards a more conservative trade policy has not happened overnight, but has been brewing through the course of history, and if one were to walk down the memory lane, we have never fully recovered to the peak trade levels of 2008. The financial crisis brought to life the impact that an interconnected and interdependent system of giants we have created can have, the domino effect of which we could not bolster all by ourselves at that time.
If we were to measure globalisation in a single proxy metric, it would be trade as a percentage of global GDP. The above graph by the World Bank illustrates that we never fully recovered after the 2008 Financial Crisis (another way to look at it, the bubble burst offset the noise and overpricing, helping us maintain the 55-57% baseline). When Economists say that there is a global slowdown, what they imply is that while we are recovering from the pandemic, followed by the ongoing war, our YoY growth potential is still not close to the pre-pandemic levels, which seems to have flattened out.
The two dips in the trade to GDP ratio post 2009 have been witnessed in 2016 and 2020, which brings us closer to the answer - what led to where we are today and why.
Key Timeline
2016-17, Brexit and Trump Administration: With the Pareto lying with a few key economies such as USA, Europe, China among others, any key developments here can have a ripple effect on the world to follow. The Brexit Referendum of 2016 where 52% of the UK voted for an out from EU echoed the sentiment that countries prefer administrative and economic sovereignty above everything else.
The Trump administration which came in effect from January 2017, was always “America First”, placed on the world what came to be known as “Trump Tariffs” (especially on Chinese imports), pulled out of Trans-Pacific Partnership which stood for 90% reduction in taxes in pacific rim countries like USA, Australia, Peru, Chile, Mexico among others, and started the US-China Trade War. Both these developments (Brexit & Trump’s brutal focus independence over interdependence) paved path for isolated & more bilateral agreements than ever.
2018, US-China Trade War: US-China Trade War has been a bittersweet development for the global economy, while the world lost approximately USD 450 Billion in import tariffs (imposed by both the countries on each other), the Rest of World (ROW - countries other than US & China) raised global trade by net 3 percent. This happens because - if two giant economies reduce imports/exports to & from each other, it creates an opportunity for other economies to redirect their buffer resources to meet such trade requirements.
February 2020, Brexit: The first vestige of whether fragmentation would look prosperous or not can be answered through the UK’s exit from EU. UK exports fell by 23% in the first 15 months post Brexit to other EU states. According to a study, UK is at least 5% poorer than what it would have been had it stayed in the European Union. Even today 56% natives believe that Brexit was a wrong decision, reasons behind such sentiment being that severing ties with EU comes with its own cost, such as resource scarcity both in terms of skilled labour as well as goods. This happens because of impeded trade and leads to price rise. Today UK is one of the worst performing G20 countries, only one that didn’t recover back to pre-covid growth levels and is expected to lose 4% of its GDP in long term.
March 2020, Pandemic: The Global Health Crisis of 2020 left the world in a state fo total and complete shut down which brought to light what a supply chain rupture could look like. What is a supply chain disruption?
Unexpected increase or decrease in demand - Unexpected increase can lead to shortages and decrease can lead to failed businesses, temporary or permanent shut-downs, job losses and more. In a world of total lockdown, consumption of services such as hospitality, travel is bound to go down with a parallel jump in consumption of goods such as consumer durables, household products, electronics etc to adapt to the new normal.
Productivity problems - The cheaper you produce, the cheaper you sell, the more sales you do, the more revenue earned, in a way, a win-win for all. However, in a pandemic world, where imports and exports are impeded, countries depend on domestic production more, which shores up the prices of inputs, as labour mobility gets hampered, per unit cost of production cost goes up.
Access problems - Industrial production is no longer a one-country job, companies with base in US, might have manufacturing hubs in China, and distribution spread across globe. Problems like warehouses and storage facilities shutting down, implies delays in logistics, procurement, and distribution thus disrupting the whole supply chain for businesses and making it less competitive.
2022, Russia-Ukraine War: Russia and Ukraine are central to the global supply chain for resources such as Oil, metals like nickel, aluminium & palladium (used in automotive and construction industries), food crops such as wheat and vegetable oils, the exports for all of which are now suffering. This means a price rise in rest of the world as raw material shortage occurs for businesses and food shortage for consumers. In 2022, energy and food inflation was felt the most in Euro-zone, besides the rest of the world.
Part 2: INT. BILLY’S ROOM - NIGHT
Ted Kramer comforts Billy, and tells him that his mommy might never come back. Billy acquiesces with the situation, asking Ted to not leave him, showing how the father and son have accepted and moved on into the new normal.
It is history’s trademark character to over indulge during boom, and over withdraw during uncertain times. Humans as a race tend to materialise the “could be” by overreacting as a mass, to any event.
Yet again if we learnt from the mistakes made in previous versions of Globalisation, then this time, we are over-correcting by pivoting into a more protectionist and localised globalisation, influenced by a fabric of geopolitical affinity.
Key trends that demonstrate this today
Geo-economic fragmentation: Coined by the International Monetary Fund, GEF is a gradual and deliberate withdrawal from a globally integrated economy towards an economy which favours geographically economical and economically independent framework. On-shoring & near-shoring being some of the new trends underscoring this broad theme.
In the world of globalisation, producing efficiently and at low cost was the objective, hence, specialised services were off-shored. In a post pandemic world, businesses and economies have realised that efficiency can not come at the cost of reliability. Businesses want to own their supply chains end-to-end to ensure that setbacks such as production & logistics disruption, delays in fulfilment do not happen, hence, on & near-shoring provides for a faster, reliable, and resilient supply chain, one that can brave pandemics, wars and everything that the world has just been through.
Geopolitical realignment: The behemoth events such as pandemic & war in the past few years have created rifts between key countries, to name a few US-China, Ukraine-Russia, US-Russia, among others. The side effect of a rift is formation of a cluster, i.e. exclusive blocs between countries which trust each other for matters pertaining to policy support, trade, or business. America tightening ties with Mexico, Brazil & Argentina exploring common currency, formation of RCEP by Asia-Pacific countries, are all signs of regional and geo-political realignment, i.e. reconfiguring trade and economic decisions basis geo-political alignment.
Need for China + 1: “When China sneezes, the whole world catches a flu” indeed came true during the Pandemic. We have realised the cost of single points of failures, meaning, that its imperative for businesses to find a China + 1 alternative for their production and manufacturing needs. Mexico, India, South-east Asian countries like Vietnam are the biggest gainers from this trend.
Along with the above, tech-fragmentation owing to Chip war between US-China, and a wave of protectionism, i.e. countries imposing tariffs are all new themes of a fragmented global economy.
Part 3: EXT. COURTHOUSE - DAY
The first courtroom session for Kramer vs Kramer begins.
As the world tries to untangle the labyrinth and pass a verdict on whether we should take a U-turn into the 1990s or brace ourselves for the new definition of a global economy, the questions that countries need to answer in these times for themselves are:
Will they be a friend, foe or “fairly on their own”? Emerging economies like India should be as much a friend as possible (i.e. protecting the trade and bilateral relationships we have built over decades with USA, Russia, Israel inter alia), resist taking hard stances wherever unfriendly bilateral relations are involved (follow the path of multilateralism to plurilateralism) and build resilient capacities to fend for our domestic consumption and investment needs, which can be of use as as global asset to nations needing our support.
What should they prepare themselves for? A world with restricted trade, high protectionist policies, tariff and non-tariff trade wars is definitely going to be poorer than what we experience today. IMF predicts that fragmentation can lead to a loss of up to 7% of global economic output, which can go as high as 12% if technological decoupling is also involved. If geopolitical fragmentations sustain and solidify over time, the second order impact of this could even be cast on the labour market mobility and overall decline in living standard, owing to price rise, and curtailed choice in goods and service consumption. This will especially hold true for emerging economies which trade with many and are pivotal to few. What economies (advanced and developing alike) need to take back as a learning though is to diversify and not divest. The last few years are testimony to the fact that as a part of this systemic giant that we have become, we can not afford to have single points of failure.
While the Kramers separated, they preserved the best from their relationship, only for what was the most important to both of them - their son. The world whether it may be coupled, decoupled, integrated or fragmented, should endeavour to preserve the lessons and learnings its had from the history of globalisation, abundance shared is abundance doubled.
The wherewithal for this, in the context and complexities of modern time, is for the world to figure.
Ps. A stack read alone, is a stack left alone. Go share with those who can debate you on this!