Economic Development

State-of-play: new globalisation or fragmentation?

July 27, 2022


State-of-play: new globalisation or fragmentation?

July 27, 2022

Oliver Sawbridge

Manager, Policy and Insights

Oliver Sawbridge is a policy and insights manager at Economist Impact in its new globalisation practice, and is particularly responsible for research and analysis on international trade. As the global economy is being transformed by multiple forces including geopolitics, technological progress and climate change, the new globalisation practice works with clients to navigate these structural shifts.

His insights provide context and meaning in an accessible way. They are informed by numerous years of policy experience, most recently at the Department for International Trade, where he delivered aspects of Britain’s free-trade agreement programme. Before this he was a policy and legislative researcher at the House of Commons.

Mr Sawbridge holds a master’s degree in international relations from the University of Auckland. His areas of expertise include geopolitics, trade and supply chains.

We are still contending with the consequences of the covid-19 pandemic. Continued restrictions and lockdowns, high levels of debt, changing consumer patterns, increased travel costs and disrupted supply chains still characterise the global economy. However, in the first quarter of 2022 there were signs of recovery.

In all major economies, trade in goods was above the pre-pandemic levels of 2019 for . While trade in services was still lagging in the fourth quarter of 2021 compared with 2019, services trade continued to display an upward recovery for most major economies.

As the global trading system rebounded from the impacts of covid-19, the outbreak of the war in Ukraine pushed trade back into crisis. The combined effect of these events could be felt for months or years to come. Both are global problems that require global solutions. 

Pre-pandemic, the cost of goods and services such as grains, fertiliser and shipping had already been on the rise, but the pandemic and the war in Ukraine boosted prices further. These major issues have caused commentators, politicians and business leaders to suggest globalisation will be replaced by regionalisation or domestication, where shorter supply chains are better protected from global shocks. 


Globalisation versus fragmentation modelling

Economist Impact recently modelled two scenarios: one where the world increased globalisation through adoption and strengthening of trade ties, another where the world fragmented and regionalised. Both scenarios are possible in the current climate and each results in dramatically different outcomes for economies around the world. 

The results show a significant increase in gross domestic product (GDP) for the scenario based on increased globalisation and a significant decrease in GDP for the regionalised alternative. 


Increased globalisation is linked to economic growth

In the ‘optimistic scenario’, GDP for countries across the globe increased except for India, which we put down to trade diversion. These results show that the world needs to continue the path to greater cooperation and integration. Nations would be wise to look to trade agreements—multilateral, plurilateral, regional or bilateral—to increase growth. They help ensure stability of trading relationships, enhance liberalisation and reduce the regulatory burden to trade—a win for governments, businesses and consumers. To go the other way, decoupling trade links and interconnected supply chains would lead to additional business disruption at an already volatile time.


Cooperation is critical to address the increased uncertainty

The future state of the world is uncertain. The Economist Intelligence Unit (EIU) has outlined potential future risks, including Russia severely limiting gas supplies to Europe; the entrance of a new highly aggressive covid-19 variant; conflict erupting between China and Taiwan; further extreme weather patterns; and an inter-state cyber war.

The effects of all the risks outlined by the EIU will be felt globally, so increasing worldwide cooperation and resilience is essential to thwarting them. We witnessed the strength of the global system with the response to the covid-19 pandemic. Companies and countries worked together to curb the spread of the disease while protecting against it through vaccinations. Such resilience in the face of uncertainty would not have been possible without the cooperation and reliance on the global trading system. Businesses and citizens will suffer if there is not a worldwide effort to confront and overcome disasters.

The world recently witnessed what a global effort can achieve at the Twelfth WTO Ministerial Conference. Nations with differing ideologies can still come together to agree on outcomes that benefit all. As progress at the multilateral level is incremental, nations often look for faster rewards for their efforts and so turn to plurilateral, regional or bilateral trade agreements. All of which are beneficial. However, there is a risk attached to these as rules and regulations diverge between regions, nations and agreements. We should be cautious that regulation included in these agreements does not happen in isolation as it increases the complexity of the global trading system. 

It is imperative that countries who negotiate or adopt plurilateral, multilateral or bilateral agreements ensure transparency so rules are available to all. To enhance transparency as well as accountability, trust and inclusiveness, governments need to have an on-going dialogue. This will further build the necessary precedence, consistency and harmony for the rules-based global trading system. All of which will ensure the world continues to operate as an open and free market, allowing businesses to thrive and consumers to take advantage of the associated prosperity.

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