Is Globalization Thriving or Coming to an End?
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Is Globalization Thriving or Coming to an End?

A recent Credit Suisse Research Institute study examines the future of globalization through three potential scenarios: continued globalization, the emergence of a multipolar world and the end of globalization.

Globalization can be defined as the increasing interdependence and integration of economies, markets, nations and cultures. It has turned into the most powerful economic force in the past 20 years. "It is now so pervasive in its effects and has produced so many startling outcomes – the rise of global cities, the successes of small states, growing wealth in emerging economies, the emerging consumer and fast-changing consumer tastes, etc. – that we risk taking globalization for granted," said Giles Keating, Vice Chairman of IS&R and Deputy Global Chief Investment Officer, Private Banking & Wealth Management.

Two Waves of Globalization

The first wave of globalization, which was dominated by the US and Europe, took off around 1870. Trade thrived, boosted by the construction of railroads and the opening of the Suez Canal. Multinational investment banks proliferated. "It was built on the fruits of the industrial revolution and the rise of the American economy," said Stefano Natella, Global Head Equity Research, Investment Banking. The outbreak of World War I in 1914 abruptly ended this first wave of globalization. Globalization then effectively revived in the early 1990s, accelerated by the fall of communist regimes in Central and Eastern Europe, extensive trade liberalization and the growing momentum of the Chinese economy. "This (second wave) was then driven by US multinationals, the advent of the euro, the growth of financial markets and the development of many emerging economies," he added. In recent years, the course taken by globalization has become much less clear. This creates uncertainty, as whether the direction that globalization eventually takes will have far-reaching implications on the world economy. The Credit Suisse Research Institute looks into three potential scenarios in its recently released study "The End of Globalization or a More Multipolar World?"

A Historical Perspective of Global Shares of GDP

A Historical Perspective of Global Shares of GDP

Sources: Angus Maddison database, Credit Suisse

Scenario 1: Globalization Continues

The first scenario presumes that globalization continues in the form that we have experienced over the past three decades with the US dollar continuing to dominate the foreign exchange markets, and global multinationals becoming more powerful. Trade would continue to grow, facing few interruptions from protectionism. The Internet economy would also continue to grow across borders. The world would increasingly be characterized by more "open societies," resulting in the spread of democracy and open door policies for immigrants. A greater convergence in global living standards could result.

Scenario 2: The Emergence of a Multipolar World

The second scenario assumes the emergence of a multipolar world with a world economy resting on three regions: the Americas, Europe and Asia, which will continue its ongoing rise. Trade would generally increase at a slower pace and become more region focused. This trend may result in new regional anchor currencies and regional financial centers. From a corporate point of view regional champions might develop, able to supplant existing global multinationals. This multipolar world may give rise to more entrenched "managed democracy" and more regionalized versions of the rule of law. A multipolar world may also lead to increased restrictions on immigration, with a selective skill-based movement of labor favored and domestic urban-rural migration dominating population movements rather than cross-border movements.

The World's Economic Center of Gravity Shifts East

The World's Economic Center of Gravity Shifts East

Sources: UN Department of Economic and Social affairs, IMF, Credit Suisse

Scenario 3: The End of Globalization

The third scenario is the most negative one, assuming less cooperation between nations. Barriers to trade and protectionism would increase, resulting in slowing domestic-focused economic growth and trade. The cost of capital would rise and currency wars could be a possibility. From a corporate point of view, national champions would be favored over multinationals. Anti-globalization movements are likely to grow stronger in this scenario, and transitions to democracy may be reversed in some parts of the world. Migration streams could breakdown and increased poverty and civil strife could well become a reality. All these factors may trigger open conflicts, ultimately leading to military clashes between the great powers. The main threats to globalization come from indebtedness and immigration. Wealth inequality, the imposition of non-tariff trade barriers as well as trade sanctions are other potential threats to globalization.

Globalization Timeline

Globalization Timeline

bubbles indicate hurdles to globalization in the form of localized armed conflicts, growing debt and/or marginal increases in trade barriers.
Orange bubbles indicate more intense conflicts, heavy debt burden and/or constraining trade barriers.
Red bubbles stand for a major threat to globalization from severe military expansion, unsustainable debt positions and/or trade barriers.

Source: Freedom House, Credit Suisse

Which Is The Most Likely Outcome?

So which of these three scenarios is most likely to prevail? The rise of emerging markets, financial and economic crisis in the US and Europe, the creation of new international institutions such as the Asia Infrastructure Investment Bank with the demise of existing ones point towards a more complex, multipolar world, despite exiting geopolitical risks. "Our sense is that the world is currently in a benign transition from full globalization to a multipolar world, though this is not complete," Natella said. "Companies continue to try to sell their goods across borders but are less willing to invest internationally." The world is right now most multipolar in terms of trade patterns and economic activity. But financially, the world, although highly globalized, is much less multipolar, with the US still dominating the financial markets.