As trade officials gather on the calm shores of Lake Geneva for the World Trade Organization’s long-delayed 12th ministerial conference, a perfect storm is brewing in the multilateral trading system. The cumulative effects of the COVID-19 pandemic and the war in Ukraine have led to prolonged supply chain disruptions, global food shortages, and skyrocketing energy prices. These breakdowns of international trade are causing some to proclaim the end of the era of globalization. Business and political leaders such as BlackRock CEO Larry Fink, European Central Bank President Christine Lagarde, and U.S. Treasury Secretary Janet Yellen are questioning the future of an integrated global economy. They predict that the steps that firms and governments are taking in response to the current crises will effectively “deglobalize” the world economy: for instance, the business practice of “just-in-time” value chains that move materials across borders just before they are needed could shift to a “just-in-case” model that focuses on maintaining large inventories to safeguard against supply chain disruptions. This also means that the offshoring of production to the most cost-effective location could give way to so-called re-, near-, and friend-shoring: putting production in closer or friendlier destinations that align with the home country’s political values and lower a company’s exposure to external risks.
But there are good reasons to be skeptical of the globalization doomsayers. Of course, it is still too early to evaluate the long-term effects of the recent disruptions. For now, though, evidence suggests that global economic integration continues, even if it is slowing and changing. This evolution also means that traditional measurements of global integration are becoming obsolete as value chains adapt to new realities. For instance, one historical metric of globalization is the ratio of merchandise trade to global GDP, which measures the relative importance of international trade of goods in an economy. That ratio has declined from its peak before the 2008 global financial crisis, suggesting that globalization is indeed on the retreat.
Yet the ratio of services trade to global GDP, which measures the relative importance of international trade in services such as sales, marketing, management, administration, engineering, and education, has increased during the last 15 years, fueled by the rapid growth of cross-border digital networks. At the same time, the falling ratio of merchandise trade to global GDP should also come as no surprise: the economic integration of China, whose participation in global value chains was a key driver of globalization over recent decades, is facing diminishing returns. Moreover, China’s economy is now undergoing a structural shift toward domestic consumption and services. China’s weighty role in the world economy masks the fact that many other economies, such as Bangladesh and Vietnam, are continuing to integrate ever more deeply into global value chains.
