What a Deglobalized Economy Will Look Like

Summary

The 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.