Posted: 19 Sep. 2016 12 min. read

A short history of globalisation

Globalisation has been a conspicuous casualty of the global financial crisis and its aftermath. In recent years the two engines of globalisation, growth in international trade and capital flows, have lost momentum. In the West globalisation is routinely blamed for job insecurity, inequality, low incomes and over mighty multinationals. Politicians of left and right increasingly represent trade as a threat.

In the US the post-war consensus in favour of free trade seems to crumbling. Globalisation and free trade are out of favour. Donald Trump talks of putting America first, has roundly criticised the North American Free Trade Agreement (NAFTA) which liberalised trade between Canada, the US and Mexico and has pledged "never sign any trade agreement that hurts our workers."

Hilary Clinton's rival for the Democratic nomination, Bernie Sanders, decried the free trade deals of recent years, including NAFTA, as "a disaster for the American worker". In his analysis corporate profits and multinationals have benefited at the expense of working people.

Mr Sanders' success seems to have encouraged Hillary Clinton to soften her longstanding support for free trade. She has attacked NAFTA and the proposed Trans Pacific Trade and Investment Partnership which would bolster trade with Asia. Last month she told an audience of manufacturing workers in Detroit, "I will stop any trade deal that kills jobs or holds down wages – including the TTIP" deal between the US and the EU.

In Germany tens of thousands of demonstrators took to the streets on Saturday to protest against TTIP (the Transatlantic Trade and Investment Partnership). European critics fear it will lower standards on food and environmental protection, will lead to job-losses and will strengthen the powers of multinational corporations.

According to Marine le Pen, head of France's Front Nationale, globalisation is "a barbarity" and the world is in hands of multinational corporations and large international finance. Ms Le Pen is strongly opposed to TTIP and is a serious candidate for the second round of next year's French Presidential election.

Scepticism about globalisation is not universal. President Obama is an enthusiastic champion of TTIP. Opinion polls show that more Americans support free trade the oppose it. Most Western governments remain publicly committed to free trade.

Yet the combination of popular and political scepticism in the West about globalisation is a new and powerful phenomenon. The mood increasingly challenges a consensus about the benefits of free trade that took root in the nineteenth century.

The UK has been a leading force for global trade for much of the last century and a half. It was not always so. Between the sixteenth and eighteenth centuries mercantilism dominated thinking about trade in Britain and the rest of Europe. Merchanistism held that the government should intervene in the economy to promote exports and hinder imports. The aim was to undermine rival nations and promote the accumulation of foreign reserves and gold. It was a nationalistic, protectionist doctrine which saw trade as a zero sum game.

The trend to freer trade began in England in the nineteenth century. The turning point in the battle between mercantilism and free trade was over the Corn Laws. These imposed tariffs and restrictions on gain imports, inflating the price of bread to the benefit of aristocratic landowners. The Anti-Corn Law League, founded by Richard Cobden and John Bright, set the emerging industrial class and their workers against the politically dominant landowning classes. Despite opposition from his own party the Conservative Prime Minister, Sir Robert Peel repealed the Corn Laws in 1846.

One legacy of the battle against the Corn Laws was the creation of the Economist magazine, founded by politician James Wilson in September 1843 with help from the Anti-Corn Law League. The Economist has remained staunchly in favour of free trade ever since. An everyday reminder of the struggle against the Corn Laws for many Londoners is the statute of Richard Cobden, paid for by public subscription, near Mornington Crescent tube in Camden.

Britain's move towards free trade reflected a growing consensus that cheaper imports raised consumer incomes, reduced business costs and increased national prosperity.

Cobden saw pressure from consumers, anxious to reap the benefits of free trade, forcing European nations to follow Britain and embrace free trade. And they did. Free trade flourished in Europe between the middle of the nineteenth century and the eve of the First World War. It was the first phase of modern globalisation.

By 1900, German steel companies had invested heavily in French iron ore production sites in Normandy and 3.4 million foreign workers were labouring in Germany's agricultural sector and coalfields. Rail and telegraph networks expanded across Europe fostering trade. By the early 1900s many commentators believed that international trade and capital flows had created such a mutual dependence that war between the nations of Europe was virtually unimaginable.

The First World War dealt a hammer blow to this wave of globalisation. Trade, investment and migration collapsed. Post-war protectionism meant that attempts to resuscitate the world economy after the War's end failed. With the onset of the Great Depression and then World War II any hopes of a resurgence of globalisation were lost. Trade's share of global GDP declined and did not return to its 1914 levels until the 1960s.

Globalisation revived after the Second World War. Its twin pillars were the Bretton Woods system for managed exchange rates and the General Agreement on Trade and Tariffs (GATT). GATT started a multi-decade process of tariff reduction and the lowering of barriers to trade.

The result was an explosion in global trade and capital flows. The collapse of Communist regimes, the rise of emerging economies and the global spread of finance from the 1980s gave globalisation a new and stronger impetus. During the fast-growth period before the financial crisis globalisation enjoyed broad support. In the West cheaper imports boosted consumption. In emerging markets roaring export led-growth transformed living standards and lives.

Yet today globalisation is in retreat. Given the tide of scepticism about globalisation it is worth recalling why it became so powerful and popular.

The most powerful and elegant case for free trade was made, in the early nineteenth century, by the English political economist David Ricardo. Ricardo made the simple observation that trade freed nations from having to produce all that they consumed. Instead they could specialise in goods where production was most efficient - where they had a comparative advantage. For Ricardo this combination of specialisation and trade raised productivity and lower costs. All would gain. Much of modern economic theory supports this view.

The financial crisis has not upended the theory. But it has fuelled the notion that globalisation has squeezed incomes for middle and lower earners in the West.

Recent research by the UK's Resolution Foundation drawing on an influential research paper by the economist Branko Milanovic challenges this view. It finds that across the world people at all levels of the income distribution saw increases in the real value of their incomes between 1988 and 2008. The worst performing group, whose incomes nonetheless rose 20% in real terms, were not at the bottom or the middle of the income distribution, but near the top, at the 90% percentile. The big gainers in terms of incomes were the richest 1% and the Chinese middle classes. The lower to middle income groups in the West may have seen smaller gains, but their incomes nonetheless did rise during this period.

The benefits of globalisation are not uniformly distributed. But the same holds for the effects of monetary and fiscal policy changes and most government policies such as education, welfare and regional policy.

Ricardo was right - trade is mutually beneficial. The fact that it does so unevenly within individual countries and that it creates casualties are not reasons to turn to protectionism. They may well, however, be reason for governments to use other levers at their disposal, such as the tax and welfare systems, to ensure that the benefits are more evenly distributed.

Key contact

Ian Stewart

Ian Stewart

Partner and Chief UK Economist

Ian Stewart is a Partner and Chief Economist at Deloitte where he advises Boards and companies on macroeconomics. Ian devised the Deloitte Survey of Chief Financial Officers and writes a popular weekly economics blog, the Monday Briefing. His previous roles include Chief Economist for Europe at Merrill Lynch, Head of Economics in the Conservative Research Department and Special Adviser to the Secretary of State for Work and Pensions. Ian was educated at the London School of Economics.