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Has Globalization Been Reversed?

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By Guest Economist Joseph Joyce Capital Ebbs and Flows The disruption of the global economy caused by the COVID pandemic in 2020 had begun to be overcome when the Russian invasion of Ukraine in 2022 led to new fissures. Sanctions were placed by the United States and European nations on trade and capital transactions with Russia. Before the pandemic, tariffs and other trade measures had been imposed by the  United States and China on each other, and these restrictions were continued under the Biden administration. How far has the reversal of the measures designed to promote international trade and finance gone, and has globalization been set back?  Jesús Fernández-Villaverde, Tomohide Mineyama and Dongho Song in a new NBER working paper, “Are

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by Guest Economist Joseph Joyce

Capital Ebbs and Flows

The disruption of the global economy caused by the COVID pandemic in 2020 had begun to be overcome when the Russian invasion of Ukraine in 2022 led to new fissures. Sanctions were placed by the United States and European nations on trade and capital transactions with Russia. Before the pandemic, tariffs and other trade measures had been imposed by the  United States and China on each other, and these restrictions were continued under the Biden administration. How far has the reversal of the measures designed to promote international trade and finance gone, and has globalization been set back?

The authors then use their index to examine its impact on economic outcomes, including the impact on GDP per capita, industrial production and fixed investment. They find that a rise in fragmentation affects the global economy adversely, with emerging economies suffering more of an impact. They also find asymmetries in the timing of the effect of an increase in fragmentation vs. a decline, with the negative effects of a rise in fragmentation taking place more quickly than the positive impact of a decline in fragmentation.

The authors did find evidence of a drop in U.S.-China economic flows, although the two economies still have substantial linkages. Moreover, they report that allies of each country have not reduced trade with the other country. Regionalization has not succeeded globalization, and the authors claim that firms that retreat from globalization may lose a firm’s competitive position.

Measuring and analyzing fragmentation and its consequences will remain an active area of research. Compounding the challenges of obtaining relevant data is the uncertainty of the future. The pace and extent of globalization will be driven in part by political decisions. By the end of this year there will be executive changes in many of the largest economies. Consequently, the political landscape will change and new restrictive policies could impede the integration of markets. National leaders will assess the challenges they face and the responses they choose may diminish global, welfare.

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