Globalization in Reverse

by Rana Foroohar,

What the world’s trade slowdown means for growth in the U.S.—and abroad.

Globalization is often defined as the free movement of goods, people and money across borders. Lately, all of those have come under threat–and not just because of sanctions limiting travel and the flow of money among Russia, the U.S. and Europe. Over the past two years, global trade growth has been lower than global GDP growth. It’s the first time that has happened since World War II, and it marks a turning point in the global economy, with sweeping implications for countries, companies and consumers.
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There are many reasons global trade is growing more slowly than it has in the past. Europe is still struggling to end its debt crisis, and emerging markets are expanding more slowly than they were. But one of the biggest factors is that the American economy is going through a profound shift: the U.S. is no longer the global consumer of last resort. As HSBC’s chief economist, Stephen King, pointed out in a recent research note, during postwar recoveries past, “the U.S. economy acted as a giant sponge,” absorbing excess goods and services produced by the rest of the world. Booms would bust; markets would crash and recover. And whenever they did, you could be sure that Americans would start spending again, and eventually our trade deficit–the level by which imports exceed exports–would grow. That’s now changing. After nearly five years of recovery, the U.S. trade deficit isn’t growing but shrinking. In fact, it was down by about 12% from 2012 to 2013.

That’s not necessarily a bad thing for us. Part of the reason the deficit is shrinking is that our shale-oil and gas boom means we are buying less foreign fossil fuel, and our manufacturing sector is growing. But part of it is that wages haven’t come up since the crisis, and consumer spending is still sluggish. In order for the U.S. and the world economy to keep growing, somebody has to shell out for the electronics, cars and other goods we used to buy more of.

Unfortunately, no one is doing that.

With global economic integration seemingly in reverse, at least for the moment, many economists and trade experts are beginning to talk about a new era of deglobalization, during which countries turn inward. Some of the implications are worrisome.

Trade talks themselves are no longer global but regional and local, threatening to create a destructive so-called spaghetti bowl of competing economic alliances.

Yet deglobalization isn’t necessarily all bad.

A study by the Boston Consulting Group found that 21% of all manufacturing firms in the U.S. with $1 billion or more in sales are actively reshoring, and 54% say they are considering it.

Whether or not those jobs will help boost wages is something the Federal Reserve will be watching carefully. One of the hallmarks of the past 30 years of globalization was an easy-money environment.

Get ready for a bumpy ride.

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