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.