Hello and welcome, you are listening to Patrick boil on finance a podcast, exploring ideas, from quantitative Finance examining events occurring in markets right now and financial history to see what lessons can be taken away including interviews with some of the most interesting people in the world of Finance to learn more about the podcast, visit on finance dot-org at an event in Arizona. A few months ago, marking the opening of a new Taiwan semiconductor planned.
Morris Chang, the company's founder stated that globalization is almost dead and free trade is almost dead and they're unlikely to come back. Globalization is a termed a gained popularity after the Cold War ended and it's used to describe the growing dependence of the world's economies cultures and populations on each other. What about by International Trade technology and flows of investment people and information?
It's by no means a new idea countries have come together to facilitate these movements over many centuries but the world is more globalized today than ever before the wide-ranging effects of globalization are complex and politically charged. As there are, of course, winners and losers associated with any big economic Accor social change globalization has had a significant effect on global growth, poverty reduction, and inequality, both between countries and within countries.
Not to mention its political societal and cultural consequences. It's not surprising. That a potential reversal has become a major topic of discussion. Trade tensions between the US and China had been growing for at least a decade. Cade and were accelerated by the pandemic and the global supply chain disruptions that ensued The geopolitical Fallout from Russia's war in Ukraine added to these global trade tensions, raising serious concerns about a decoupling World.
Some of the most influential investors on Wall Street Like Larry Fink of BlackRock and Howard marks of Oaktree have been saying that these issues may be permanently, altering the World Order think wrote last year that recent events, have prompted government worldwide to reevaluate their dependencies and reanalyze their manufacturing and assembly Footprints, Howard marks, iding the problems of Europe's, Reliance on Russian energy, and Western Outsourcing of computer
chip. Manufacturing wrote that the recognition of these negative aspects of globalization has now caused the pendulum to swing. Hang back to local sourcing rather than the cheapest. Easiest, and greenest sources that will probably be more of a premium, put on the safest and surest Charles K of Warburg. Pincus told the Ft, the geopolitics had been on The Fringe of the way we taught since the fall of the Berlin wall and that that had provided a certain oxygen to Global growth.
However, he said geopolitics is now front and center, Center in investment decision-making. Talk of D, globalization nearshoring on Shoring friend Shoring. And reassuring has been growing on corporate earnings calls to according to sin t 0, financial data firm based on their analysis. So is the global economy. Actually D globalizing. And if, so, what's next?
Historically, limitations on Transportation meant that goods were Close to their point of consumption as Transportation infrastructure, grew it became possible to separate production from consumption by at first hundreds and eventually thousands of miles. Eventually Goods could be produced where labor was either most available most affordable, or most skilled at producing a particular good allowing the benefits of specialization to be maximized after World War 2 Chi.
Cheap labor, and modern manufacturing techniques, led to the rise of Japan as a manufacturing and exporting Powerhouse. I made a video on that topic, a few months ago, as shift to Manufacturing in China began to really build momentum, by around, 1995 Asia's, ability to
manufacture cheaply. LED American companies to build factories abroad and higher Asian contractors to do manufacturing for the The result was more jobs abroad economic growth for the countries, where the manufacturing was being done. Increased competitiveness for us importers and cheap goods for American consumers. Offshoring, kept inflation low in the United States over the last 40 years to the personal consumption.
Expenditures, deflator measure of inflation Rose by only one point eight percent per year from 95 when Chinese exports to the US started to, really pick up pace through to 2020 the price of durable goods. Actually fell by almost 40% over the 25 years in question. Making life easier on many Americans. The other side of the coin is the globalization allows production to occur. Wherever, the costs are lowest and this offshoring led to the elimination of millions of Americans.
All types, the hollowing out of the manufacturing regions and middle class and the weakening of private sector labor. Unions, making life harder for many Americans. For the past decade economists, have been debating the future of globalization, pointing out that since the financial crisis of 2007-2008 World Trade has been growing more slowly than GDP.
A reversal of an earlier Trend observed during The 20 years that marked the era of so-called hyperglobalisation 1989 through 2009, the slowing of globalization has become intertwined with discussions of supply chain resiliency, over the last few years Europe's Reliance on Russian energy led to a greater focus on supply chain diversification in the wake of the Russian invasion of Ukraine additionally in the United States. There's been a lot of talk about
Job losses to low-wage International competitors. A recent paper by Penelope Goldberg of Yale University and Tristan read of World Bank digs into the data that has traditionally been viewed, as a reasonable measure of globalization things like trade flows, Capital, flows, labor movement across the world, measurable items like that.
They also look at. Government policy changes and changes in sentiment that can be found in the data to they analyze the occurrence of certain terms and phrases in news. Articles, for example, to understand how public discourse has changed over time, they break down a lot of the data by country to to show how different countries are having different experiences of globalization. The authors describe three phases of the Down in globalization that has occurred since the financial crisis.
The first phase starts around 2015 with concerns, about the impact of import competition from low-wage countries, especially China on the labor market and impact of refugee, flows primarily in Europe. This phage is marked in Europe by brexit and in the US and China by increasing tariffs on one another. They Say that the economic effects of this phase were meaningful but not sufficient. To reverse decades old globalization Trends.
The second phase, according to Goldberg and Reed played out during the pandemic. When new argument against International Trade, began to emerge. These were driven by temporary shortages of PPE like face masks and other items that could be blamed on fragile Global Supply chains. There was public outcry around the world for export bans, on certain items that were deemed critical in the fight against covid.
The authors argue that, if anything trade, increased economies, resilience during the pandemic, but they argue that the extensive coverage of some of the difficulties by the Press, contributed to the villain ization of globalization and laid, the groundwork for phase 3, the Third Phrase, according to the paper began with the Russian invasion of Ukraine last year and provided possibly the strongest argument of all for rethinking, globalization concerns about
National Security Europe's, Reliance on Russia for energy exposed, a real weak point, the new term friendship during entered, the international trade, vocabulary, the example, provided by Europe's Reliance on Russia. Fur a critical. Led to strong policy actions by the US that included sweeping export restrictions in the semiconductor sector targeting China, Goldberg, and read.
Say that these developments can be plausibly considered the markers of a new era in international trade and globalization digging into the data. A popular measure of globalization is international trade in goods and services. World Imports can be seen to have grown rapidly over the last 30 years, including after the credit crunch, as shown in the chart on screen right now, you can also see that world Imports bounced back sharply in 2021.
After the decline in 2020 driven by the pandemic, they shows the longer-term resilience of international trade now when measured as a share of GDP Imports have Likely declined since the global financial crisis. This is the trend that I mentioned earlier that has led to concerns that the world has started D globalizing. Since the credit crunch, because the decline is small and trade. As a percentage of GDP is still close to its highs.
A lot of people are describing this as more of a Slowdown in globalization it's not exactly a reversal of trend. It can also be argued that slowing traffic Trade in goods from this level is not a great indicator of any big problems in the global economy to begin with. There's little reason to believe that international trade in Goods, should have continued increasing at the previous
decades. Pays, there are practical constraints on how many goods were ever going to be shipped around the world rather than being locally produced things were bound to slow down eventually. Additionally, some Of the flattening out, likely reflects the fact that countries increasingly produce and consume services and move away from Goods as they develop and services tend to be more local in nature.
Looking at trade in intermediate Goods which are Goods that are used to make other finished goods. We can see the trade in intermediate Goods has grown since 2019 a period that incorporates the slump during the pandemic This growth can be seen as a measure of countries continued participation in global value chains, where different stages of production processes are happening in
different countries. Looking at a longer-term graph, you can see that intermediate Goods Imports are a declining share of GDP in China and India as both countries. Now, produce more inputs domestically these two economies are becoming less reliant on the Economy for inputs, though, it's much more subtle. There's also a downward Trend in intermediate, Imports in Germany and the United States to in the rest of the world. The trend is slightly upwards.
So some countries are participating more than others in Global Supply chains. Another way of looking at globalization is to examine the stock of inward foreign direct investment the chart on screen right now. Shows the globalization of capital markets in the United States and the rest of the world. The stock of inward FDI investment accounts is valued at nearly 60 percent of GDP and shows. No major downward Trend in Germany.
In word FDI, as a share of GDP grew until the global financial crisis and has not yet recovered to that Peak. China experienced a boom in FDI in the period leading. Digging up to its boom, and exports osted. India the stock of inward migrants shown on the screen right now, measures the globalization of Labor markets, Germany. And the United States have absorbed migrants as an increasing share of their
population. We Germany recently surpassing the United States in migrants as a share of the population as it absorbed a huge number of refugees in the 2010s. China and India are homes too far, fewer migrants as a share of their population. And this trend appears flat in these countries, these charts show that the growth of trade as a percentage of GDP has stalled since the financial crisis, and even declined in some cases, but Trends in capital and labor
markets. Tell us somewhat different story combined. These Trends suggest that it's probably too early to talk of Globalization, especially when the Slowdown of global trade might be reasonable to expect after its earlier period of fast growth which possibly reflects the growth of the domestic Market of two, large formerly low-income countries, China and India s d. Globalization Trends are quite different in different countries. While the United States and
China seem to be gradually. Decreasing their Reliance on On global markets. This is not at all true for the rest of the world. While the data doesn't yet show, strong signs of D, globalization already happening, the trade policy. Environment has changed dramatically over the last five years, especially in the United States. This matters as these policy changes will drive how trade goes in the future. Since the end of World War Two global trade barriers had been
gradually fall. Length and a variety of trade agreements allowed, many countries to become more integrated in World Markets, several developing countries reduce their tariffs unilaterally, and joined the World Trade Organization. The Us and other advanced economies played a leading role in the reduction of trade barriers and the design of the World Trading System.
The picture changed dramatically in 2018, when the u.s. announced Our first set of tariff increases targeting several countries but especially China. Eventually these tariff increases led to a tariff war between the US and China. The world's two largest economies the u.s. also imposed tariff increases on steel and aluminium imports from nearly
all countries. There was no real change in any of these policies when the US Administration changed with the US are During the these terrorists were necessary for national security purposes. Over the last year, there's been
a clear shift in the u.s. approach to international trade, in the name of supply chain, resilience and National Security. There were sweeping export restrictions placed on the semiconductor industry justified in the name of National Security, the chips act provided multibillion-dollar support for the development of the semiconductor industry in the United States.
A number of Provisions, in the inflation reduction act have led to EU complaint that subsidies, and tax credits, discriminate against products, imported into the u.s. to the detriment of European companies. There is, of course, a risk that the EU might respond to this with legislation of its own, as right now, us companies are not similarly disadvantaged in The EU there is some evidence that while the trade war between the United States and China reduced trade.
In the targeted product categories between these two countries. It boosted trade between other countries and the rest of the world. In the same products, the countries that showed the largest export growth to the rest of the world were countries with expansive trade agreements. So the trade conflict between the world's two largest Largest economies did not simply cause reallocation of global trade flows. It also generated, new trade opportunities for other
countries. The professor's argued. That just as economic variables, respond with a like to policy. Policy responds with a lag to public sentiment and attitudes. So they tried to quantify the change in public sentiment with regard to International Trade sentiment is, of course difficult. Measure. But they used text analysis to get some sense of how frequently
people talk about. Things like reassuring or friend Shoring or China. Plus one, these days the paper points out that the use of the phrase National Security shows up in a higher percentage of news articles today than it did immediately. After the September 11th attacks, this is maybe a little bit, surprising. The authors found And that the public still views trade as
being beneficial to the economy. But that there's an increasing skepticism about the benefits of participating in the global economy. The paper argues, that governments are not actually responding to private sector demand our voter Demand with these new trade restrictions, but are instead driving this trend, the data shows that right after covid firms were looking to add new suppliers to Find
their supply chains. But crucially, they were also trying to maintain their relationships with their existing suppliers. Well, companies might be aiming to reduce their Reliance on a single country for supplies. Especially after the lessons learned from over-reliance on Russia by Europe. It's worth noting how difficult it would be to significantly reduce American trade with China, in the near term Apple has Diversified Fide, their
supply change by manufacturing. All of their main product lines in more than one country, but, because of the lack of trade infrastructure, things like high quality roads and ports in places like India and Vietnam, where they've moved some of their manufacturing, it would be almost impossible to manufacture in these countries on the same scale that they're currently Manufacturing in China at present.
China has an experienced Workforce, Horse and a huge manufacturing base and skills pool that. No other country can compete with.
If D, globalization began to materialize and a meaningful part of the productivity gains that have been driven by globalization were to disappear, over a short period of time, this would likely be inflationary and result in major trade disruptions and a protracted recession, major economic Powers. Most likely Recognize this reality a name to avoid such a devastating outcome, in complex areas, like economics and geopolitics.
There are no easy answers. There are too many moving Parts, too many unknowns and too many pros and cons, whose merits can't be easily Wade. They'll never be a perfect answer and for that reason there's always a swing back and forth as different ideas are expressed so far. There's no evidence of Deep. Mobilization having already started, but there is some evidence of a political will within some of the largest economies in the world to make changes to the way things are being done.
Thanks for tuning in to today's podcast. If you enjoyed it, send a link to a friend, a special thanks to my patreon supporters, who make this all possible, have a great day and talk to you again soon. Bye. If you enjoyed this episode, be sure to subscribe so you're notified when A new episode is posted. Thank you to everyone who is supporting this content on
patreon. If you enjoyed this content you can find more like it on YouTube on the Patrick Boyle on finance Channel or follow us on Twitter at Patrick e boil. Thanks for listening. Bye.