UBS: Economist Insights: Globalessation

As the twenty-first century dawned, it seemed nothing would stop the march of trade globalisation. But fast forward a decade and growth in global trade has reached a plateau. So, why has globalisation come to a standstill? Was a stronger global trade growth relative to global production really sustainable in the long-run?

13.10.2015 | 09:43 Uhr

What cannot go on forever, doesn’t. Take globalisation of trade. As countries reduced their trade restrictions, and transport and technology made supply chains more complicated, trade growth exploded. More and more goods (and services) were produced in one country and sold in another. More and more products had different stages of production in different countries. Throughout the 1990s and early 2000s it looked like nothing could stop the everincreasing path of globalisation.

But then the global financial crisis put a stop to many trends that looked un-stoppable, global trade being no exception. Global trade volume dropped by almost a fifth when the crisis hit. It bounced back, but since then trade growth has been more moderate than in the past. The pace of globalisation has stalled as well. The globalisation of goods markets could be witnessed by the consistent rise of exportvolumes relative to industrial production (chart 1). From the 1990s through to 2008 a higher proportion of the goods being produced found their way into exports. But once trade recovered, export growth has only kept pace with industrial production. In short, globalisation has reached a plateau.

What this global picture disguises though is the fact that the countries that seemed to benefit most fromglobalisation:- emerging markets (EM) - actually suffered an outright reversal in globalisation following the financial crisis. The ratio of exports to industrial production in EM stabilised well below its pre-crisis peak. Industrial production still grew in EM, and in fact grew faster than in developed markets (DM), but more of it was oriented to domestic consumption rather than foreign consumption. In DM, however, the globalisation of goods markets plateaued at a higher level than before the crisis.

This pattern reflects the difference in growth following the financial crisis. EM continued to experience strong domestic demand growth, supporting exports from DM. Conversely, weak domestic demand growth in DM made it harder for EM to export to DM. Yet although DM benefited more from the export bounce-back than EM, the story of the last few years is the same: the rate of globalisation levelled off.

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