October 31, 2019
“De-globalization may be an ugly, scary word, meaning 40 years of ever-closer integration across borders may be going in reverse. The prospect of that looming specter frightens many people. For instance—the new head of the International Monetary Fund (IMF), Kristalina Georgieva, suggested trade wars could wipe nearly $700 billion off global Gross Domestic Product (GDP) by 2020.
The argument goes like this: Globalization has delivered a lot of positives and, arguably, the entry of China into the world trading system in 2001 led to the greatest ever increase in human welfare. If such gains were driven by globalization, then wouldn’t a reversal imply a big step backwards?
While fear is certainly lingering (just look at how markets move with every twist and turn of US-China trade or Brexit negotiations), maybe Halloween is a good time to remind ourselves that specters don’t actually exist.
Maybe what has already been achieved is not as easily reversed, even if trade and capital flows end up a bit less frictionless than they were. After all, remember the 1950s and 1960s when celebrating Halloween really took off in the US? They were prosperous years, even though cross-border flows of goods and capital were a fraction of what they are now.
Getting back to Georgieva’s numbers, US-China bilateral trade amounts to around US$700 billion. Even if both sides implement 25% tariffs on each other, that would amount to around $170 billion, which is just 1% of global trade. To get from there to a $700 billion worldwide output loss, you need to assume very high trade ‘elasticities’ and ‘multipliers’, or else something else is going on. That something else might just be fear – the fear of something bad happening whether or not it actually does come to pass.”
Shamik Dhar, chief economist, BNY Mellon investment Management