Has Globalization Passed Its Peak?

Rawi Abdelal and Adam Segal

From Foreign Affairs, January/February 2007

Summary:  Not long ago, the expansion of free trade worldwide seemed inevitable. Over the last few years, however, economic barriers have started to rise once more. The forecast for the future looks mixed: some integration will probably continue even as a new economic nationalism takes hold. Managing this new, muddled world will take deft handling, in Washington, Brussels, and Beijing.

Rawi Abdelal is an Associate Professor at Harvard Business School and the author of the forthcoming Capital Rules: The Construction of Global finance. Adam Segal is Maurice R. Greenberg Senior Fellow for China Studies at the Council on Foreign Relations and the author of Digital Dragon: High Technology Enterprises in China.

THE END OF THE WORLD AS WE KNOW IT

Once upon a time, not very long ago, economic globalization -- the free worldwide flow of capital, goods, and labor -- looked both inevitable and inexorable. Most governments seemed to embrace the very real benefits being offered by rapid technological change and international markets and sought to liberalize their economies in order to maximize these gains. Policymakers worked to prepare their societies for a world of ever-increasing interconnectedness and relentless competition, and the debate -- at least within the United States -- started to revolve around how to cope with the effects of this new "flat" earth.

Then came the financial crises of the 1990s and the early years of this century in Asia, Russia, and Latin America. The U.S. current account deficit -- the difference, broadly speaking, between what U.S. residents spend abroad and what they sell abroad -- shot upward. The U.S. dollar fell in value and seemed headed for an even more precipitous drop. As outsourcing accelerated, the American middle class came to feel increasingly insecure. Historians such as Niall Ferguson and Harold James pointed out that the previous era of globalization (which ran from about 1870 to 1914) had once seemed as unstoppable as the current one but had ended disastrously; so, too, they warned, could today's.

But will it? Has the current age of globalization already started to come to a close? Will the process of integration continue, or will it grind to a halt?

The paradoxical answer is neither of these scenarios. The technological revolution that has driven the current wave of globalization will continue. Communication will become still cheaper and easier, allowing corporations to spread their operations -- research and development, design, and manufacturing -- around the planet. Companies will exploit scientific talent in other countries to spark a new wave of technological innovation.

At the same time, certain barriers will start to rise. The institutional foundations of globalization -- such as the rules that oblige governments to keep their markets open and the domestic and international politics that allow policymakers to liberalize their economies -- have weakened considerably in the past few years. Politicians and their constituents in the United States, Europe, and China have grown increasingly nervous about letting capital, goods, and people move freely across their borders. And energy -- the most globalized of products -- has once more become the object of intense resource nationalism, as governments in resource-rich countries assert greater control and ownership over those assets.

Taken together, these contradictory trends indicate the shape of things to come. The picture is muddled. Although globalization as a process will continue to sputter along, the idea of unrestrained globalization will wane in force. As Cornell's Peter Katzenstein has argued, globalization and internationalization are not the same. The more prosaic process of internationalization -- that is, exchanges across borders -- can and will continue, even as the transformative ideological process of breaking down barriers slows considerably.

Much now depends on how national governments respond to these changing circumstances; they could still make conditions better or worse. As the integration of national economies stalls, maintaining the high degree of openness already established will require deft management. U.S. policymakers, in particular, need to do a better job of countering their constituents' wariness of global markets and managing the political backlash against openness that has already begun. The challenge is to sell the benefits of ongoing globalization to a wary public, to make sure those benefits materialize, and then to ensure they are distributed more equitably.

DOUBLE VISION

In retrospect, signs of the current slowdown in globalization have been obvious for some time. Major participants in the process have always had very different ideas about how the integration should occur. As a result, what often looked like a single, steady process turns out to have been conducted along two, sometimes contradictory tracks.