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Globalization – the beginning of the end, or the end of the beginning?

February 13, 2020

reading time: 7 minutes

by Thomas Wille, Head Research and Strategy, LGT Private Banking

Deglobalization

"America first" and trade wars: since President Trump has taken office, the signs have increasingly been pointing to deglobalization.

A lot of water has passed under the bridge since Donald Trump was elected President of the United States more than three years ago. For the media, the election was a Christmas present par excellence. And even now, with the next US presidential election, there is no shortage of things to report about when it comes to Trump – the flood of news coverage seems unstoppable.

Much reporting is being done on issues relating to his office and his person: from abuse of office and direct attacks on his political opponents through to the “hire and fire” principle he uses with his cabinet and staff. It’s difficult to think of an issue that hasn’t cropped up in this presidential term.

However, if the white noise is tuned out, there is only one issue that is of key importance for both the capital markets and geopolitics: the trade conflict between the two superpowers, the US and China. Thanks to the White House’s constant about-faces, there is always something new to report about, making it great fodder for the media. Although this news is not always relevant for the markets, we still dedicate a lot of attention to the matter.

Can a trade war be won?

Students attending their first economics lecture on international relations and trade quickly realize one thing: nobody comes out a winner when it comes to tariffs. It is therefore all the more astonishing that in this conflict, one party remains firmly convinced that it can win the trade war. This begs the question: is this altercation between the two great powers just a simple tariff dispute? Or is there something larger at play?

There is, of course, something larger at play: the tariff dispute is at best a skirmish between two juveniles and is only one part of a bigger picture. The cause thereof runs much deeper and can be compared with the bipolar environment that existed during the Cold War in the 1970s and 1980s between the USSR and the US. Back then, like now, the matter at hand was global hegemony – or in other words – who is number one. This relates not only to military leadership, but also to wanting to be number one in terms of GDP, technology and intellectual property – to name just a few. When such shifts in leadership have taken place in the past, the process has never been voluntary or gone off without a hitch. So what are the possible consequences of such a changeover of power today?

Has deglobalization already begun?

Trade as % of global GDP 1960 - 2016. Source: LGT, Bloomberg.
Chart on Trade as % of global GDP 1960 - 2016. Source: LGT, Bloomberg.

Trump was elected 45th President of the US in November 2016 under the banner of “America First”.  Since then, almost all alliances have been called into question at least once, and the continuously harsh rhetoric brought the global economy to the brink of recession in 2018. The manufacturing sector in particular has suffered from the trade war over the last several  quarters.

It didn’t take market participants long to form an opinion: the election of Donald Trump and the consequences thereof have resulted in the beginning of the end of globalization. And in fact, tendencies towards deglobalization have been observable for some time now. As this chart clearly illustrates, the global economy reached its highest level of trading activity in the last 50 years in 2015.

Are we at the end of the beginning of the first stage of the technology /  information society?

From today’s vantage point, this is only a tendency, and not yet a final verdict as to whether we have reached the beginning of deglobalization. Conversely, it can also be argued that this possible trend reversal actually began more than a year before Trump was elected. This would mean that Trump was not the trigger, but at best the accelerator. So, are we now at the beginning of the end or at the end of the beginning?

The answer, as always, depends on which perspective is taken. Are we at the beginning of the end of the ultimate stage of globalization that began with the integration of the entire Chinese labor market into the global labor market over 30 years ago? The current challenges being faced with regard to global warming would point to a clear yes. Or are we at the end of the beginning of the first stage of the technology/ information society? Following the introduction of the first smartphone in 2007, a rapid change has taken place not only in terms of technology, but also in our society. How we inform ourselves and communicate today is completely different to the way we did these things only a decade before. Here, too, it can be argued that we have reached the end of this decade and that we have left the early stages of the information society behind us.

Investors must be aware that the beginning of the new decade has clearly heralded an era of bipolarity. Whether this also means the end of globalization cannot yet be determined and, for the time being, should be seriously questioned. One thing, however, is highly probable: the changes will not only have a major impact on the two great powers, they are also already influencing capital markets. This means that the winners of the last decade could quickly become the losers of the coming decade. Having said that, many companies will also be able to benefit from the new set-up. When investing, the focus should therefore increasingly be on active selection.

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Every week since 2013, our experts have been blogging about economic, financial and broader societal topics on the LGT Finanzblog. Going beyond everyday reporting, they share their personal assessments and experiences with readers.

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