What a Deglobalized Economy Will Look Like
Summary
TLDRThe global economy is shifting from globalization to fragmentation, with countries imposing tariffs, restricting trade, and subsidizing industries to gain advantages. This change could lead to recession or inflation, but also presents opportunities for strategic investments and 'connector economies.' Historical patterns of globalization and fragmentation are recurring, with current events like Brexit and trade wars signaling a new era of economic uncertainty and potential for both winners and losers.
Takeaways
- 🌐 The global economy is experiencing a shift from globalization to fragmentation, with countries imposing tariffs, restricting trade, and subsidizing industries to gain advantages.
- 📉 This change is a stark contrast to the recent past when countries like Russia and China joined the WTO, and globalization was seen as an unstoppable force.
- 🔍 The speaker has researched economic fragmentation, drawing on events like Brexit, Trump's trade war with China, and Russia's invasion of Ukraine to predict future trends.
- 📚 Historically, there's a pattern of globalization followed by damaging fragmentation, evident in the periods before and after World War I and World War II.
- 📈 The third wave of globalization, starting in 1980, saw trade as a percentage of global GDP soar, especially with the opening of China's economy and the embrace of free trade policies.
- 🛑 Early signs of the current fragmentation include Russia's annexation of Crimea and China's Made in China 2025 policy, both aimed at reducing dependence on the West.
- 🏦 The US responded to perceived threats with its own industrial policies, including tariffs under Trump and subsidy schemes under Biden.
- 🌎 We are now in a new era of fragmentation with emerging blocs and trade restrictions, impacting strategic industries like computer chips and renewable energy.
- 💸 According to the IMF, fragmentation could impact the global economy through trade, capital flows, payment systems, people movement, and increased global volatility.
- 📊 The effects of fragmentation are already visible in events like Brexit, which reduced UK economic growth and increased consumer prices.
Q & A
What is the current trend in the global economy according to the script?
-The global economy is fragmenting into blocs of countries with increasing tariffs, trade restrictions, and subsidies to gain advantages, moving away from the previously unstoppable trend of globalization.
What are the potential consequences of a fragmented global economy?
-A fragmented global economy could lead to slower economic growth, increased inflation, higher interest rates, changes in global payment methods, shifts in how people move around the world, and overall increased volatility.
How has the global economy's structure changed over time?
-The script outlines that the global economy has seen patterns of globalization followed by fragmentation, with notable periods such as the golden age from 1870 to 1914, the Bretton Woods era from 1945 to 1980, and the third wave of globalization starting in 1980.
What were the key factors that led to the most recent wave of globalization?
-The third wave of globalization was driven by China opening up its economy, and the elections of Ronald Reagan in the US and Margaret Thatcher in the UK, which led to policies embracing free trade, free movement of money, and people.
What are 'industrial policies' and how do they relate to the current economic fragmentation?
-Industrial policies involve using subsidies, trade restrictions, and tariffs to develop strategic industries. They have been adopted by countries like Russia and China, prompting the US to respond in kind, leading to increased economic fragmentation.
What is the potential impact of China invading Taiwan on the global economy?
-If China were to invade Taiwan, it could lead to significant sanctions from allies similar to those imposed on Russia, causing further fragmentation and potentially severe shocks to the global economy.
How might the election of Donald Trump in 2024 affect economic fragmentation?
-The election of Donald Trump could lead to increased fragmentation as he has threatened to raise tariffs on Chinese products to 60%, which would further restrict trade and potentially exacerbate economic divisions.
What are 'connector economies' and how do they benefit from economic fragmentation?
-Connector economies act as middlemen between countries that previously traded or invested directly. They benefit from rerouted trade and increased business as countries seek alternative trade partners during times of fragmentation.
What are the potential opportunities for individuals and companies amidst economic fragmentation?
-Opportunities in fragmentation include benefiting from increased government spending, providing goods that become scarce due to trade restrictions, and positioning as connector economies to facilitate trade between fragmented blocs.
How has Brexit impacted the UK economy according to the script?
-Brexit has been estimated to have decreased economic growth in the UK by about 5.5% since the vote in 2016 and increased consumer prices by about 2.9% in three years.
What is the 'School of Money and Macro' mentioned in the script?
-The 'School of Money and Macro' is an educational initiative launched by the script's author to provide masterclasses and courses on economics, using real-life examples and simple language to help understand current economic trends.
Outlines
🌐 Global Economic Fragmentation and Its Implications
The paragraph discusses the shift from a globalized to a fragmented economy, characterized by increasing tariffs, trade restrictions, and subsidies aimed at gaining economic advantages. It reflects on the past when globalization seemed unstoppable with China and Russia joining the WTO. The speaker has researched the economic impacts of fragmentation, considering historical events like Brexit and trade wars. The discussion also touches on the potential for a recession or inflation spike, and the possibility of investment opportunities in strategic sectors or becoming a 'connector economy.' Historical patterns of globalization and fragmentation are reviewed, from the first golden age of globalization to the impacts of World Wars and the Great Depression, leading up to the current era marked by China's economic opening and political shifts towards protectionism.
🛡️ Industrial Policies and Responses to Economic Fragmentation
This section delves into the concept of industrial policies used by nations to develop strategic industries through subsidies and trade restrictions. It notes the success of such policies in Russia and China, prompting the US to adopt its own under Trump and Biden, leading to a new era of economic fragmentation. The paragraph outlines the formation of trading blocs centered around Germany, the US, and China, and the potential shock to the global economy if China were to isolate further. It also discusses potential scenarios for increased fragmentation, such as a recession, inflation, or protectionist measures.
Mindmap
Keywords
💡Globalization
💡Fragmentation
💡Tariffs
💡Trade Barriers
💡Subsidies
💡Strategic Industries
💡Connector Economy
💡Industrial Policies
💡Inflation
💡Recession
💡Bretton Woods
Highlights
The global economy is fragmenting into blocs with increased tariffs and trade restrictions.
Globalization seemed unstoppable a few years ago with Russia and China joining the WTO.
Economic fragmentation is not new, having occurred after periods of globalization in the past.
The first golden age of globalization was from 1870 to 1914, followed by fragmentation due to WWI.
After WWII, trade within the capitalist bloc and unaligned countries increased during the Bretton Woods era.
The third wave of globalization started in 1980 with China's economic opening and free trade policies.
Russia and China showed early signs of wanting less dependence on the West post-2008.
The US responded to Russia and China's industrial policies with its own tariffs and subsidies.
Today, we are in a new era of fragmentation with trade restrictions and strategic industry competition.
Despite fragmentation, major economies are still deeply integrated, forming three big trading blocs.
China's potential invasion of Taiwan or a Trump election could lead to further fragmentation.
Fragmentation will likely continue as major players introduce more industrial policies favoring national companies.
IMF economists identified five major channels through which the global economy will be impacted by fragmentation.
Brexit, the 2018 Trump trade war, and the 2022 rupture between Europe and Russia provide insights into fragmentation's effects.
Trade barriers lead to reduced trade, economic growth, and increased inflation.
Capital becomes more expensive with less global movement, leading to higher interest rates.
The Swift Payment network is being challenged by alternatives due to US sanctions, affecting global transactions.
Fragmentation makes it more difficult to enter countries, changing travel and migration patterns.
Global volatility is expected to increase as the world moves from globalization to fragmentation.
Fragmentation presents opportunities for individuals, companies, and countries to climb the global economic hierarchy.
The most affected by fragmentation are those in economies that isolate themselves the most.
Small export and import businesses are particularly hurt by trade barriers.
Big businesses, governments, and wealthy individuals suffer investment losses after fragmentation events.
Economies that profited from reintegration with ex-communist powers are now seeing negative impacts.
Governments spending more to adapt to economic changes can benefit certain companies.
Sectors with increased volatility from fragmentation events have seen record profits.
Connector economies act as middlemen between countries that used to trade or invest directly, profiting from fragmentation.
The School of Money and Macro is launching to help build foundational knowledge of economics.
Transcripts
The global economy is
fragmenting into blocs of countries that are slapping each other with tariffs,
restricting trade of crucial goods and subsidizing their own industries
to gain an unfair advantage against other nations.
This is a remarkable change from just a couple of years ago
when Russia and China joined the World Trade Organization,
and globalization seemed unstoppable.
So is fragmentation the future of the global economy?
And if it is, does that mean that we are heading for another recession
or inflation spike in which groceries and gas prices, again get out of control?
Or could it be that there is actually some unforeseen silver lining,
especially if you invest in certain strategic sectors
or if your economy managed to become a so-called connector economy?
To answer these questions, I have immersed myself in the latest economic
research on fragmentation and how previous events like Brexit,
Trump's trade war against China and Russia's invasion of Ukraine
can inform us about what a fragmented global economy will look like.
But, before we can understand the future of fragmentation,
let's first discuss how we got here.
With a quick a recap of the previous
eras of globalization and fragmentation.
You see, if you go back in time, you will see that a pattern
of seemingly unstoppable globalization and then damaging fragmentation
is really nothing new.
It happened before specifically, the first golden age of globalization
happened from 1870 to 1914.
And as you can see here in this chart, it was characterized by relentless
increasing trade as a percentage of the global economy.
However, that era came crashing down when the First World War started, during
which the global economy segmented into an allied and a central power bloc.
Then, after trade initially seemed to recover, it once again collapsed
as countries increasingly introduced tariffs, trade barriers and subsidies
for their own industries in response to the Great Depression.
This eventually got so bad that the world economy once again
fragmented into two blocks the Allied and the Axis powers,
which, after some brief economic skirmishes, were quickly
at each other's throats for real during the Second World
War, reducing a much of the global economy to ashes.
However, then,
even though the world was once again fragmented into two rivaling blocs, trade
did increase quite a bit within the capitalist bloc
and between unaligned countries, during the Bretton Woods
era of 1945 to 1980.
And while trade never quite reached the levels of the first golden age
of globalization, the Bretton Woods era is still often referred to as the second
wave of globalization, as trade did recover some of its earlier losses.
However, this wave paled in comparison to the third wave of globalization, which
started in 1980 as a world un-fragmented
When China started opening up its economy.
At the same time, the elections of Ronald Reagan in the US and Margaret
Thatcher in the UK ushered in an era in which politicians embraced free trade,
free movement of money across borders and the free movement of people.
And so unsurprisingly, trade as a percentage of global GDP
soared much higher than ever before, especially after previously
communist economies like Eastern Europe and Russia opened up to the world as well.
And while such hyper globalization came at a price for Western workers
who saw good paying factory jobs move overseas, Western politicians
were willing to pay that price
as they came to believe that an increasingly interconnected
and equal global economy would mean that previously autocratic countries
would become increasingly democratic and unwilling to go to war as they have
too much to lose from something as senselessly destructive as a war.
However, while this strategy seemed to have worked for Eastern Europe,
which indeed became democratic as it got wealthier,
there were already some early signs that Russia and China wanted to make
their economies less dependent on the West rather than more.
The first sign was that when Russia annexed Crimea in 2014,
it combined that with a ban on many Western food products,
while its simultaneous only increased subsidies for Russian firms
which rapidly transformed Russia into an agricultural powerhouse.
The second sign came soon after from China when it introduced
its Made in China 2025 policy in 2015
that again combined a lot of subsidies with already high restrictions
of foreign firms to stimulate sectors where the Chinese wanted to depend
less on the West, like batteries, electric guards and computer chips.
In economics, using subsidies, trade restrictions and tariffs
to develop strategic industries is known as using industrial policies
and after seeing their success in Russia, but especially in China,
the United States felt that it had to respond with its own industrial policies.
Firstly, under Trump, who introduced a lot of new tariffs
on Chinese goods in 2018 and secondly, under Biden, who introduced
massive subsidy schemes for strategic sectors.
With his Inflation Reduction Act and Chips Act in 2022.
Of course, these actions were met with responses from both rivals and allies
in the form of increased tariffs from China, for example, in 2018
and subsidy programs from Europe in 2023,
which means that today we are no longer living in the era of globalization,
but rather in a new era of fragmentation in which two new emerging blocks
of allied and axis countries have in place a lot of trade restrictions
and tariffs against each other, while they all try to dominate
strategic industries such as computer chips and renewable energy
by subsidizing their own companies while restricting those of others.
And yet, despite all of these changes, the most important
allied and axis economies are still deeply integrated.
For example, if we look at this graph from the World Trade Organization,
we can see that there are basically three big trading blocs in the world right now.
One is in Europe, centered around Germany.
One is in North America, centered around the United States
and one is in Asia, centered around China.
So if fragmentation was to get much worse with China joining Russia in its
isolation, that would be an extremely,
extremely big shock to the global economy.
So will that happen?
Well, the scenario that experts have been worrying about the most
is that China decides to invade Taiwan, which it has repeatedly threatened to do,
and that the allies
will respond with a similar sanctions that they used against Russia.
Alternatively, if Donald Trump is elected this year,
we would likely also see more fragmentation as he has
threatened to raise tariffs on Chinese products to 60%.
But even if these scenarios don't come to pass, fragmentation is likely to continue
as all major players are introducing more, not fewer, industrial policies
that favor national companies rather than a free global market.
But does that mean that we are heading for a catastrophe
in the form of a long recession and another big inflation spike?
Or could it be that this will be the biggest economic opportunity
of a lifetime?
In other words, what will fragmentation do to the global economy?
Well, according to economists at the IMF, there could be at least five
major channels through which the global economy will be impacted.
But of course, as the future is uncertain, we cannot know
for sure how important each of these channels will be.
However, given that we have already seen some fragmentation events like Brexit,
the 2018 Trump trade war and the 2022 rupture between Europe and Russia,
the experience from these events might give us some clues
about what might happen if global fragmentation continues.
The first channel that the IMF economists have identified is trade.
Simply put, if blocs of countries try to depend
less on each other for trade, eventually they will likely succeed
and trade less, or at least trade less than what they otherwise would have.
Then, if trade is more difficult, companies
that depend on that trade will suffer reducing economic growth.
What's more, as imports of goods are now less available,
their price will increase, leading to increased inflation.
Indeed, this is precisely what happened when the British
tried their own little mini fragmentation experiment in the form of Brexit,
which some economists have estimated has decreased economic growth in the UK
by about 5.5% since the vote in 2016.
While it increased consumer prices by about 2.9% in three years.
Luckily, the 2018 Trump trade war seems to have been less damaging,
with the best estimates that I could find indicating that it could have cost both
the US and China around half a percentage point of GDP, while
the effect on inflation was almost nonexistent on the other end,
the 2020 rupture between Russia and Europe was so damaging for both parties
that they could not find any good estimates for economic damage
because governments on all sides interfered so heavily.
Still, most economists that studied this event seem to agree
that it led to greatly reduced trade, which increased inflation and inflicted
heavy economic damage on both sides, which would have been worse
had governments not acted by taking on more debt.
The second fragmentation channel that IMF economists have
identified is capital, meaning that as money becomes
less able to move around the world, it will become a more expensive.
And that means in the case of money, that there will be higher interest rates.
So far, this has especially impacted smaller economies that have decided
to break away from the global economy,
where both Russia and Britain have really had to raise interest rates
quite a bit, or in the case of Russia, even restrict money flows
to prevent that their currencies would collapse.
Speaking about currencies, the third fragmentation
channel is about payments where, while you might not realize it, when you do it,
most global transactions are handled through the Belgian Swift Payment network.
But as this network has increasingly been used by the United States to sanction
countries, many alternatives are now being developed,
ranging from private alternatives in Russia to central
bank digital currency initiatives in Asia, a development
that could lead to increased payment costs if you transfer money around the world.
Although increased competition could also make international payments
cheaper, we'll just have to see.
Moving on from money.
The fourth channel of fragmentation involves the movement of people,
which so far has typically meant that it has become more difficult
to enter countries, which has led to big changes in where people travel.
However, this does not necessarily mean that there are now less people
moving about.
For example, while after Brexit
we saw a big decrease in emigration from the EU to Britain.
Overall migration has increased to Britain as migration from places
like India made up for lost EU immigration.
Another example is that when Russia got isolated in 2022, it initially led
to a big wave of migration from Russians to Europe and other countries.
After that initial wave though, the movement of people from
for both business and tourism purposes between the two blocks did decrease a lot.
However, as a consequence, a lot of tourism
and international business activity from Russia got diverted,
for example, from London to Dubai and from southern Europe to Turkey.
The fifth and final big channel that I thought was important
from the IMF research paper was that these economists expect
that there will be higher global volatility as the world moves
from this globalization phase to this fragmentation phase.
Indeed, after Brexit, the pound already certainly got more volatile.
And similarly after Russia's isolation, we saw huge volatility in global energy
and food prices, which made living conditions and economies that dependent
on food and fuel imports like Egypt, Sri Lanka and Pakistan, almost unbearable.
That being said, as the character of Littlefinger from
Game of Thrones once said, chaos is a ladder.
Many who try to climb it fail,
never get to try again.
The fall breaks them.
Only the ladder is real.
The climb is all there is.
In other words, for any of you who did not watch game of Thrones, well on average,
fragmentation will probably be bad for the global economy.
The changing global order will present some opportunities for some individuals,
companies and countries who can use the chaos as a letter
to climb up to a better place in the new global economic order.
So who stands to win or lose from fragmentation?
Well, while again, we cannot be completely sure yet,
I did find some really interesting winners and losers emerge
as a consequence of the fragmentation events that we have looked into so far.
Brexit, the US-China trade war and Russia's 2022 isolation.
So who lost during these events?
Well, basically increased inflation and reduced economic growth
meant that on average in countries that were directly involved,
consumers lost purchasing power while businesses lost business
and the governments had to spend more to cushion the blow for their citizens.
What's more, since markets are global, prices increase everywhere,
and thus even citizens in countries that were not directly involved
often lost purchasing power.
That being said, I have found four groups
that have been hurt particularly badly.
The first are the inhabitants of the economies
that isolated themselves the most.
So both are Russians.
And Brits, for example, got hurt more than their respective
counterparts in Europe from these fragmentation events
simply because they lost access to a bigger market.
The second category of losers have been small export and import businesses.
You see, trade barriers make trade more difficult.
But if you are a big company, you are more likely to have the resources
to hire some good lawyers that can help you find a way around these barriers.
Similarly, because government subsidies are difficult to get, they are more likely
to benefit big companies who can hire people to figure out
how to fill out all of the paperwork that is inevitably involved.
On the other hand, when it comes to investment losses,
big businesses and governments and wealthy individuals
that had previously felt like global citizens
have seen their money evaporate after big fragmentation events.
For example, after Russia's invasion of Ukraine, a lot of big
Western businesses had to take big losses on their investments in Russia.
On the Russian side,
a lot of wealthy Russians, as well as the Russian government,
saw a big share of their assets in Europe seized or frozen.
The third and final set of losers have been
those economies that have previously really profited
from their reintegration with ex-communist powers.
For example, Germany's economy first took a big hit after it lost access
to cheap Russian energy and is now seeing itself being outcompeted
by state sponsored Chinese car and solar companies.
On the other hand, countries that had been more self-sufficient
like France have so far been more resilient.
This shows us a key reason, I think, why fragmentation is likely here
to stay for a while as countries
now have a really strong incentive to be more self reliant,
which will obviously increase fragmentation, which will then
prompt countries to become, again, more self-reliant, which will then again
increase fragmentation.
A pretty depressing message, given that this will likely
hurt global economic growth and increase inflation.
So let's quickly move on to discuss the three
categories of winners from fragmentation so far.
First, when governments spend more to adapt to economic changes, companies
that can provide needed services or products can benefit greatly from this.
For example, to deal with the Brexit chaos, the UK government
infamously hired a whole bunch of Brexit consultants to help it navigate the storm.
Similarly, a company like China's BYD
could not have become the world's biggest electric vehicle manufacturer
had it not been supported by China's industrial policies
that are now the standard in the era of fragmentation.
A second category of winners so far has been those who operated in sectors
which saw increased volatility from big fragmentation events.
For example, as energy prices shot up in Europe in 2022
many alternative energy providers recorded record
profits as they could now also sell at higher prices.
Similarly, countries that offered alternatives
to Russian energy like Qatar and the United States
profited greatly from Europe's drive to replace Russian gas.
Another example of effective sectors were alternative business
and tourist destinations for Russians, where, for example, Dubai properties
greatly from the exodus of wealthy Russians from London
and Turkey, profited greatly from Russian tourists that were no longer
welcome in southern Europe or in the Austrian Alps.
The final category of winners that has emerged
are the so-called connector economies, which are basically like
middlemen between countries that used to trade or invest directly.
For example, in 2022, profits from trade
shut up in countries like Armenia and Kazakhstan, as trade
between Europe and Russia was rerouted through these countries.
Similarly, recent research has shown that as trade between China and the US
plummeted, exports from China to connect to economies
like Mexico, Taiwan and Vietnam increased, while American imports
from these countries greatly increased as well, from which,
of course the connector economies have benefited greatly.
So in conclusion, the world has seemingly already moved from a phase
of globalization to one of fragmentation, where trade slows down.
This will likely lead to slower economic growth, increased inflation,
higher interest rates, changing global payment methods and big changes in
how people move around the world and increased volatility overall,
something from which most of us will suffer.
But at the same time,
for those countries and individuals who can position themselves to receive
increased government spending, provide goods that have suddenly become scars
or can position themselves as connected economies, the chaos of fragmentation
can be a letter to climb up the global economic hierarchy.
Of course, since we are at the start of this trend,
a lot of the consequences of fragmentation are still unclear.
But as always, I will keep you up to date
about the latest developments here on the money & macro channel.
But about those updates, I've noticed from some of your comments
that they can be a bit dense from time to time,
especially for those of you who have not studied economics.
And given that I used to teach economics at university.
I've often been asked to make more of my old teaching materials available
so that you can develop a deeper understanding of the subject,
which will in turn help
you make more sense of what is happening in the global economy today.
That is why I'm launching the School of Money and Macro,
where I will be sharing masterclasses and courses
to help you build foundational knowledge of economics using the real life examples,
simple language and visuals that you know from the money in macro channel.
To expand on this video about fragmentation,
the first masterclass will be an in-depth
summary of the latest research and insights about industrial policy
and how it will reshape the global economy for decades to come.
In this masterclass, I will cover its advantages and disadvantages.
Which countries are doing it?
What sectors are benefiting the scientific evidence
about whether or not it has worked in the past?
How to potentially make industrial policy work today.
And finally, I will discuss how it will impact the global economy.
With those of you attending the Masterclass live.
Yes, you heard that right.
The Masterclass will be a small scale live online event,
which will include extensive time for questions and discussions with me.
Of course, for those unable to attend, I will also post a version
of the Masterclass with slides and sources,
but without Q&A, on the website of this school of Money and macro and a
special note for the patrons and members as a thank you for your continued support,
you'll get a significant discount to attend the live event.
Be sure to check out the members post on YouTube or Patreon.
So if you want the latest insights into
how industrial policy will reshape the global economy,
then make sure to reserve your spot to attend the live event or buy a ticket.
For the record at Masterclass using the link in the description or top
comment below. I hope to see you there.
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