Protectionist backlash or falling consumer demand: Is the world in danger of deglobalization?

What if unemployment in Ireland reaches 25% next year? What if GDP falls a quarter between 2007 and 2012? The spectre of the Great Depression looms over us large at the moment and there has been much commentary of late – see for example Robert Samuelson’s recent blog post – on whether and how our current global recession/depression compares with the last one of similar scale, that of the 1930s.

Is it pointless spooking of the public or is it a relevant comparison worth exploring further? Recently, Kevin O’Rourke and Barry Eichengreen make the case that the comparison is at least worthy of further investigation in an analysis of some key global indicators, including output, stock markets and interest rates, comparing ‘now’ and ‘then’. Their conclusion was that “world industrial production, trade, and stock markets are diving faster now than during 1929-30” – something that previous US-centric comparisons hadn’t concluded. One thing that worried me as a student of the history of globalization was the inclusion of trade in that set of statistics. Here is O’Rourke and Eichengreen’s Figure 3, Trade Then and Now, which worried me so much:

World trade then and now - Source O'Rourke/Eichengreen 2009

World trade then and now - Source: O'Rourke/Eichengreen 2009

Are things that bad? Is the world going to “deglobalize”? Is trade going to collapse and bring us – in a trade-dependent Ireland and a trade-dependent world – unemployment, poverty and misery along similar lines as the world saw in the 1930s?

The first thing to know is whether or not the world is more globalized in trade terms now than it was in the 1920s and 1930s. This may seem like a dumb question at first: just as the world is more urbanized and more industrialized on a totally different scale now compared to a century ago, surely it’s more globalized too, right? But those who research globalization have shown that it’s rowed back and forth over the decades and centuries, whether one looks at trade, migration or capital markets.

For example, as Kevin O’Rourke writes elsewhere with two co-authors, the globalization of international investment was greater in 1914 than it was at any point later until the early 1970s. “Deglobalization” of capital markets meant that while foreign assets accounted for nearly 20% of world GDP during 1900-14, the 1930-1960 figure was just 5-8%, similar to levels in 1870.

A table in the same paper outlines trade and the integration of goods markets in the pre-1914 period. The best estimate for Europe is that the trade-output ratio – how much of what was produced was traded – increased from 30% in 1870 to 37% in 1914. What happened next? In particular, what happened in the Great Depression and how does that compare with now? The graph below shows two lines, the orange line being the world trade-output ratio from 1991 to 2013, as estimated by the IMF’s World Economic Outlook. The blue line is my own estimate, based on Mitchell’s Historical Statistics and research I did while in Trinity, of the global trade-GDP ratio in the 1920s and 1930s, using 25 prominent economies (not dissimilar to a proto-OECD).* The shaded part shows the future, for the orange line – i.e. 2009 on.

Global trade-output ratios across the two Depressions

Global trade-output ratios across the two Depressions

Three things strike me:

  • The first thing to notice is that in 1991, one third of what was produced globally was traded. The world was about as globalized in 1991 as the OECD was in the mid-1920s and as Europe was in 1900. So we certainly not talking exponentially different levels of trade intensity now compared to a century ago – probably just greater geographical spread.
  • Protectionism, deglobalization and the destruction of trade kicked in in the early 1930s. The change was a steady four-year shift to a new lower level of trade intensity. For all intents and purposes, the Great Depression led to a halving of how integrated global trade markets were.
  • The world’s global trade intensity since 1991 has been marked – it has essentially doubled, meaning that almost two thirds of what is produced is now traded. Not only that, unlike in the 1930s when trade intensity almost halved, global integration of trade markets is likely to increase over the coming years of global recession and recovery, if the IMF’s latest statistics are to be believed.

Does this make any sense? How can trade in 2009 be falling faster than it did in 1929 – at the start of a period of dangerous protectionsim – and yet the world is still globalizing? Mathematically, the answer has to be that trade is contracting, but slower than output. Economically, the answer – I think – is that trade is much more integrated into daily life now than then. Or put another way, trade in the 1920s and 1930s was more easily substitutable than now. Globally integrated supply chains and consumer networks mean that when output falls now, trade falls – and vice-versa, as countries are trade-dependent. Just look at Japan’s exports – that to me tells a story of global consumers cutting back on buying new cars, not British or German consumers deciding to buy local rather than buy Japanese cars.

So, having looked at the stats, I’m a little less worried than before. Firstly, politicians seem much more acutely aware of the dangers of protectionism now (… although perhaps a historian can correct me on the political economy of the early 1930s). Secondly, while 1920 and 1990 were not dissimilar starting points, in terms of the level of trade intensity, we have entered our recession at a different level of trade intensity than our forebears 80 years ago. While the 1920s were a stuttering decade for global trade, the nineties and naughties have seen solid expansion of trade networks. The 20-year build-up before recession set in, coupled with the technologically-enabled disaggregation of value chains, has created global trade networks of a much more integrated nature than those of the 1930s. It would be much harder now – even if we all wanted to – to destroy our trading networks, as we’d be trimming our own consumption possibilities far more than consumers had to back in the 1930s. Hopefully, my optimism is not misplaced.

* For those interested in the details, the 25 counties were weighted by their non-agricultural labour force, to strike a balance between GDP and population weightings.

(PS. I still think a comparison of the real economy effects of the financial crisis of the early 1870s is worth a go… Here’s hoping I’ll find the time!)

A brand new scare graph – Japan’s collapsing exports

I have just discovered a set of global trade statistics updated monthly by the Dutch Bureau for Economic Policy Analysis (CPB). (Incidentally, this is not the first time I’ve come across excellent work by the CPB – their work on administrative burdens imposed by regulation is essentially the international pioneer on the topic and has informed EU thinking on how to cut red tape.)

Rather than hundreds of words of rapier-sharp analysis, I thought I would just post one graph that I thought was the single most shocking thing I’ve seen this recession yet: Japan’s trade figures.

Japan's exports and imports, Jan 2000-Jan 2009

Japan's exports and imports, Jan 2000-Jan 2009

While Japan may have been ‘over-exporting’ – or at least ‘under-importing’ if domestic demand is moribund – the 40% year-on-year collapse in exports cannot be written off as just another statistic. Presumably driven by exports of cars, this has to make for dismal reading. China is not far behind, it seems, with exports down almost 20% year-on-year in late 2008.

As far as I know, even open countries such as Estonia (down 10%), Singapore (down 20%) and Ireland (down just 1%) have seen falls in exports but nothing like 40%. (Interestingly, imports have collapsed in Ireland, down almost 30%, while exports are static – are multinationals just clearing their output?)

For those who think this whole post is just far too optimistic, to REALLY depress yourself, have a look at this global – rather than US – comparison of the 1930s and today, A Tale of Two Depressions, by Kevin O’Rourke and Barry Eichengreen. As they note in their conclusion:

The world is currently undergoing an economic shock every bit as big as the Great Depression shock of 1929-30. Looking just at the US leads one to overlook how alarming the current situation is even in comparison with 1929-30. The good news, of course, is that the policy response is very different. The question now is whether that policy response will work.

Brother, Can You Bail-out my Bank? (1931 revisited!)

Every crisis creates its own artistic genius – take for example Picasso, or the Credit Crunch Blues. Mere mortals mightn’t move in quite the same league, but we can try. So, with sincere apologies for the butchering of Jay Gorney’s lovely music and the usurpation of Yip Harburg’s original lyrics, Weird Al, this one’s for you!

Brother, Can You Bail-out my Bank, lyrics by Ronan Lyons, music by Jay Gorney (1931)

Once I built a hedge fund, I made it fly, made it rise all the time.
Once I built a hedge fund; now it’s gone. Trichet, can you bail-out my bank?
Once I bought a bank share, at the top, lent a mortgage, sub-prime;
Once I bought a bank share, watched it tank. Paulson, can you bail-out my bank?

Once in red braces, gee we looked swell,
Full of that Ghekko Doodly Dum,
Half a trillion bills went slogging through, Hell,
And I hit the NYSE gong!

Say, don’t you remember, they called it wrong; it was to go up all the time.
Why don’t you remember, before it sank? Darling, can you bail-out my bank?

Once in red braces, gee we looked swell,
Full of that Ghekko Doodly Dum,
Half a trillion bills went slogging through by the bell,
And I was the kid with the gong!

Say, don’t you remember, they called it wrong; it was to go up all the time.
Why don’t you remember, before it sank? Sucker, can you bail-out my bank?

(Next stop a recording studio!)