As the world retreats from globalization, rising protectionism and fractured trade relations threaten to redefine the future of economic growth. 

The story of global growth over the past seven decades is one of ambition, triumph, and, more recently, retreat. From the devastation of World War II emerged a vision of an interconnected world where national economies would merge into a unified system, driving unprecedented expansion. Between 1945 and the 2008 Global Financial Crisis (GFC), cross-border trade flourished, propelled by lower tariffs, advances in transportation, and the rise of global institutions like the International Monetary Fund (IMF) and the World Trade Organization (WTO).

This integration spurred remarkable economic growth, lifting millions out of poverty and creating complex global supply chains that enhanced efficiency and consumer choice. However, this trajectory has shifted lately. The cracks in globalisation became evident after the 2008–2009 financial crisis, as rising protectionism and trade barriers slowed its momentum. Today, with populist governments on the rise, the world stands at a crossroads - facing a "Fractured World" scenario, marked by heightened international tensions and a further undoing of globalization.

Globalization's Ascent (1945-2008)

The post-World War II era marked a deliberate departure from the protectionist policies that exacerbated the Great Depression and contributed to global conflict. The Bretton Woods institutions – IMF and the World Bank – were established to foster international monetary cooperation and financial stability, laying the groundwork for a more integrated global economy. The General Agreement on Tariffs and Trade (GATT), and later the WTO, provided a framework for reducing trade barriers through multilateral negotiations, leading to a dramatic decrease in average tariffs across the globe.

This reduction in trade friction, coupled with technological advancements in communication and transportation – from container shipping to the internet – dramatically lowered the costs of international trade. Global value chains emerged, allowing companies to fragment production processes across countries, optimizing for cost efficiency and specialization.

Developing economies, in particular, benefited immensely from this integration, using export-oriented industrialization to drive rapid economic growth and convergence with richer nations. The evidence is clear - globalization in this period was a powerful engine of global economic growth, trade expansion, and poverty reduction. According to the World Bank, global trade as a share of GDP nearly doubled between 1970 and 2008, a testament to the depth and breadth of this integration.

Deglobalization's Emergence (2009- Present)

The Global Financial Crisis of 2008 acted as a significant inflection point. While globalization itself was not the direct cause of the crisis, it exposed vulnerabilities within interconnected financial systems and amplified the global transmission of economic shocks. The subsequent slow recovery, coupled with rising income inequality in many developed economies, fuelled a backlash against globalisation. This backlash manifested in several ways:

• Rising Protectionism: The years following the GFC witnessed a gradual but persistent increase in protectionist measures. While the initial response to the crisis saw some coordinated fiscal stimulus, the long-term trend has been toward greater trade restrictions. The WTO's reports show a steady increase in trade-restrictive measures implemented by G20 economies since 2009. This includes tariffs & non-tariff barriers and discriminatory procurement policies.

• Populist Politics and Nationalist Sentiment: The rise of populist political movements in many countries, both developed and developing, has further exacerbated deglobalization. Populist leaders often tap into economic anxieties and nationalistic sentiments, blaming globalisation for job losses and social ills. This has translated into policies that prioritize domestic industries, restrict immigration, and advocate for greater economic self-reliance. Brexit in the UK and the "America First" trade policies of the Trump administration are prominent examples of this trend.

• Geopolitical Tensions and Supply Chain Security: Escalating geopolitical tensions, particularly between the US and China, and the recent disruptions caused by the COVID-19 pandemic and the war in Ukraine have further accelerated deglobalization. Concerns about supply chain resilience and national security are prompting businesses and governments to re-evaluate their reliance on geographically dispersed and potentially vulnerable supply chains. "Reshoring," "near-shoring," and "friend-shoring" are becoming buzzwords, reflecting a desire to shorten and regionalize supply chains, even at the expense of pure economic efficiency.

A Fractured World Scenario

Now, imagine a future where this retreat accelerates—a "Fractured World" where populist governments dominate, prioritizing sovereignty over cooperation. In this scenario, international tensions flare as nations wield trade policy as a weapon. Trade wars escalate, with retaliatory tariffs and sanctions becoming routine.

Global supply chains, once a marvel of efficiency, splinter as companies scramble to localize production and reduce reliance on foreign partners. The institutions that once held the global economy together—the WTO, IMF, and others—lose their clout as countries bypass multilateral agreements for unilateral action or regional pacts.

Picture a world where the U.S., China, and the European Union each lead rival economic blocs, their borders bristling with restrictions. Businesses face a maze of regulations while consumers see prices rise and choices dwindle. This isn’t mere speculation—elements of it are already visible. The U.S.-China trade war, Brexit, and the rise of populist leaders in Europe and beyond hint at a world drifting apart. If this trend intensifies, the implications for global growth could be seismic.

The Economic Fallout

In a fractured world, global growth would take a hit. Trade, a key engine of productivity, would sputter as barriers disrupt the flow of goods and services. The efficiency gains from specialization—where countries produce what they do best—would erode, dragging down economic output. Investment would falter, too, as uncertainty and protectionism deter both domestic and foreign capital.

Developing nations, which leaned on globalization to climb the economic ladder, would suffer acutely. With export markets shrinking and foreign investment drying up, their progress could stall, reversing gains in poverty reduction. Global supply chains, from electronics to automotive manufacturing, would face higher costs and inefficiencies, forcing companies to rethink decades of strategy.

Cooperation on pressing issues like climate change or pandemics would falter, amplifying economic volatility. Yet, this fragmentation might also spawn new dynamics. Regional alliances could emerge as alternatives to global integration, offering a semblance of stability within smaller spheres. But these blocs would lack the scale and diversity of the global system, limiting their potential to drive growth.

A More Complex and Uncertain Future

The era of hyper-globalisation is likely behind us. The world economy is entering a new phase characterized by deglobalization, fragmentation, and increased geopolitical uncertainty. This shift presents significant challenges for global growth, potentially leading to slower trade expansion, reduced efficiency gains, and increased inflationary pressures. However, the future is not predetermined.

By adopting proactive and nuanced policies, governments and businesses can navigate this new landscape and seek to harness the potential opportunities of a more regionally oriented and resilient global economy. The unraveling thread of globalisation does not necessarily signal economic doom, but it certainly demands a recalibration of our understanding of global growth and a renewed commitment to international cooperation in a more complex and uncertain world.

The choice is ours. Will we let populism and protectionism fracture the world, or will we find a way to preserve the best of globalization while fixing its failures? The economic, social, and geopolitical stakes are too high to ignore.

Originally published on Substack.