Protectionism, Geopolitics, and Populist Nationalism Could Accelerate “Peak Globalization”

posted by Banning Garrett on December 20, 2016 - 1:24pm

The global economy in 2017 could be extremely uncertain and volatile, battered by political and geopolitical instability that aggravates other economic challenges.  The United States under the Trump administration may be the most uncertain global factor, even if it backs off some of the more draconian protectionist measures advocated by Donald Trump during the campaign.  The Trump victory has provided the biggest boost yet to populist nationalism sweeping the developed world with its anti-globalization and protectionist themes. The European Union, already reeling from Brexit, could begin be further destabilized by political shifts in France, the Netherlands, and Austria even if extreme right parties do not come to power. Terrorists attacks in Europe linked to ISIS or Al Qaeda - and immigration -- will likely enhance xenophobic fears and support for nativist politics and “strongman” rule.  We are not yet in the 1930s, but it could get pretty ugly over the next 2-3 years.

The US administration, if it pursues Trump’s “America First” sentiment (it is hard to call it a “strategy”) may accelerate a global trend toward zero-sum geopolitics that currently is being led by Russia and China, while undermining global cooperation, including international efforts to climate change, and the US alliance system. Moreover, the already fragile international order could face a number of geopolitical crises, especially in Eurasia and the Middle East, that may be poorly handled by the Trump administration and further unsettle global markets. At the same time, the problems of inequality and regional economic distress within the US are not likely to be effectively addressed by the policies advocated Trump’s cabinet appointments nor will they lead toward sustainable long-term growth despite Wall Street’s initial enthusiasm for his proposed tax cuts, deregulation and infrastructure investment.  Moreover, despite Presidential jawboning, it is not likely that a significant number of manufacturing jobs will be “brought back” to the United States as they have been lost not to China but to technology.  Additionally, at a time of accelerating technological change that requires forward-thinking policies, it seems so far that the Trump administration is likely to look backwards for solutions to structural economic challenges, which may produce short-term gains while jeopardizing long-term economic readjustment and growth.

Such developments in the US, which would likely significantly affect the global economy, could actually accelerate another long-term trend that is now only a “weak signal.”  That trend, which might be called “Peak Globalization,” could lead to restructuring the global economy over the coming decades. By “Peak Globalization,” I mean a point in time when the amount physical material moving around the world - in the form of liquid fuels, container ships, food, etc. - peaks and begins to decline.  New technology is making possible moving toward local economies (both at the national and urban levels) based on “just in time production at the point of consumption” of energy, food, and products.  New technology coupled with concern about economic and environmental sustainability as well as reduction of carbon emissions has already spurred interest and development of these technologies, from renewable energy to vertical farms to 3D printing and other advanced manufacturing technologies to bring production of goods to local communities.  Any shift toward greater protectionism and uncertainty about international trade could increase support for taking steps, however limited initially, to further develop and deploy technologies that reduce economic and political risk by beginning to decouple from the global economy. 

The Trump administration’s belligerence and transactional approach to asserting “America First” and its hostility to climate change agreements and environmental regulations while doubling down on fossil fuels, may, ironically, accelerate moves toward a more economically and environmental global economy.  We may look back on 2017 as an historic turning point in a direction quite unanticipated by both Donald Trump and Wall Street.