We’ve heard about supply chain issues for months now and inflation even longer than that. But in the background, quietly driving up costs around the world, is deglobalization. Deglobalization is the contraction of international trade in favor of local production. The Wall Street Journal reports that since 2011, “the share of foreign content in global manufacturing production” has decelerated, albeit, at a slow, but discernible, pace. With the disruption of COVID-19, increased volatility with China, and the extensive supply chain issues, the pre-COVID calls for “Buy American” have grown even louder.
In the background, quietly driving up costs around the world, is deglobalization.
The graph below highlights the definitive march toward deglobalization. Leading up to and shortly following the Great Recession, we saw an increased acceptance of international trade, which not only helped Americans afford goods at lower costs, it also provided essential income for poorer countries who grew to rely on consumer demand abroad. Yet, what we’re beginning to see appears to be a bigger push toward increased domestic production of goods that were previously purchased internationally.
What does a more localized economy mean for you? What does it mean for your neighbor?
So, what does a more localized economy mean for you? What does it mean for your neighbor? Adam Smith, also known as the father of capitalism, warned in Wealth of Nations, that a country too enamored with self-sufficiency would find itself worse off than those who focused on their unique advantages and traded with others. For example, if it is less expensive to manufacture wine in France and scotch in Scotland, why would France levy tariffs on scotch and demand their own citizens make scotch domestically at 10, 20, or even 30 times the cost? What opportunities has France missed out on by focusing her attention on pricey scotch production?
Although a simple example, this is essentially what happens when a nation begins to discriminate against international trade in favor of domestic production. Certainly, there are national security reasons that might make such a decision worthwhile for certain goods and resources, and those should be factored into such a discussion. But it’s vital to remember that history has proven international trade plays a role in lowering costs and safeguarding peace. So, before we further close our doors to exports and imports, we should carefully count the cost of deglobalization and consider the broader impact it will have both at home and abroad.
