Davos Update: Reverse Trend in Globalization Worries World Leaders

Political and business leaders of the world say their discussions at the World Economic Forum (WEF) in Davos left them with a sense of the need to redefine globalization.

The expansion of free trade and open markets that shaped the world in the last three decades have begun to look fragile as trade disagreements fuel economic nationalism, the pandemic exposes the weakness of global supply chain networks and the war in Ukraine could reshape the geopolitical landscape.

Those signs worry the world’s political and business leaders that globalization could be in a reverse trend during their meetings at the WEF.

IMF Managing Director Georgieva said she was more worried about the risk of a fragmented world with trade and currency blocs, disrupting an integrated world economy than the risk of a global recession. She added that the fragmentation is strong.

Business executives sound concerned as well, worried that the world has begun to revert to blocs defined by political alliance rather than by economic cooperation.

Siemens Chairman Snabe was one of the most vocal and candid, saying they cannot let globalization reverse. He added that he would not leave Davos with that thought but rather with the thought that the world needs more collaboration.

Volkswagen CEO Diess said he was concerned by the discussions of new bloc building as the German carmaker ramps up production in the United States.

The officials threw around new buzzwords to describe a new style of globalization, with “multilateralism” a favorite. Others include “reshoring”, “friendshoring”, “self-sufficiency” and “resilience”.

German Chancellor Scholz said multilateralism is a prerequisite for stopping the trend of de-globalization.

However, not all leaders seem unhappy with the fray of globalization. Brazil’s Economy Minister Guedes said his country was out of sync with the 30-year globalization period while everyone took advantage and integrated the value chain. He added that Brazil was “cursed” because it was out of that trend, but now it is “blessed”.

Global trade has been accelerating since the 1990s onward as governments struck free trade agreements one after the other and then China entered the picture as the dominant low cost goods producer.

Together they enabled wide-spread adoption of just-in-time supply networks that helped speed the delivery of goods and hold down costs, contributing to the low-inflation environment that prevailed in the years before the pandemic.

The period also caused a loss of manufacturing jobs in the developed economies like the U.S. and Europe. Guedes said the “global labor arbitrage” is coming to an end.

The pandemic and the war in Ukraine are not the only culprits to upend those supply networks. Even before it, the system was targeted by nationalist policies like those championed by Trump.

Still, despite all the talk about “de-globalization”, the countries do not seem to distance themselves from one another in terms of trade with the exception of Russia, which was isolated from the world economic system by sweeping Western sanctions.

The world trade volume index was down by 0.2% in March, but is down by only 1% from its record high in December. It is 2.5% higher than a year earlier and 11% higher than pre-pandemic levels.

Still, it could emerge in the near future as companies shift some production closer to target markets to guard against single-source dependency in their supply chain.

Diess said the shift to self-sufficiency because of global supply chain disruptions should be tempered in concern for keeping markets open. Diess argued that if big nations and blocs become too self-sufficient, it could increase the risk of an ever closing world and less competitiveness, so he said they were hoping for open markets, which are much better for the world.

Snabe, meanwhile raised the issue of future geopolitical and economic issues with China, saying it was easy for many to exit Russia because of a relatively small exposure but if it was China, the situation would be completely different.

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