Globalization has been one of the dominant economic trends for over 100 years. Expanding free trade and increasing the flow of goods, services, and people from country to country has been a so-far invincible force since the late 19th century.
According to George Saravelos and Robin Winkler, strategists at Deutsche Bank, the era of expanded globalization is over and de-globalization is here.
While we’ve written about the implications of trade restrictions, tariffs, and the like before, Saravelos and Winkler made an interesting comparison to the last time the US attempted to stem the tide of globalization.
Saravelos and Winkler noted that there has been another time before the election of Donald Trump that a Republican came into office with both houses of Congress on his side calling for the protection of the American economy. From the note:
“In 1928, on the eve of the Great Depression, Herbert Hoover ran on a platform that promised higher tariffs on agricultural products to America’s suffering farmers. Having won the presidency and a comfortable Republican majority in Congress, Hoover proceeded to pass, with the help of Republican senators, the Smoot-Hawley Act, which was signed into effect in 1930 and raised tariffs on more than 20,000 products to levels not seen before in US trade history.”
This in turn, led some of the biggest trade partners of the US to also raise their tariffs against American goods in retaliation. Furthermore, limits on capital flows and movement of people also put a drag on economic growth. The end result contributed to the disaster of the Great Depression.
“As a result, US trade halved within years, and global trade weakened even more, even if it continued at low levels within regional trading blocs such as the Commonwealth and the remnants of the Gold Bloc,” said the note. “The rise in protectionism served as an important catalyst to the global recession.”
Many of the protectionist moves made by Hoover are echoed in the suggestions of President-elect Trump today. Several analysts have noted that the large trade partners Trump has threatened with tariffs — China and Mexico — could also retaliate with their own tariffs.
In fact, the Chinese government has threatened some measures like restricting iPhone and US car sales if Trump goes through with his policies. Additionally, Trump wants to stem the flow of immigrants into the US, which could be a negative labour supply shock.
Saravelos and Winkler also noted that this issue was exacerbated in the 1930s by developments in Europe.
“Flows in capital and people further declined in the early 1930s as a wave of populist political movements spread through Europe,” said the note.
Far-right populist parties have been aiming to restrict the flow of immigrants and pull back from the European single market. And the UK’s exit from the European Union is a concrete example of such a move.
Now Saravelos and Winkler point out that drawing a historical comparison is “not intended to argue for a repetition of history but to highlight how a sequencing of events led to the unravelling of global trade.”
There are also some caveats here. For one thing, Trump’s proposals are not as severe as the policies Hoover put in place. Further, economies and people are already far more connected than they were in the late 1920s.
While the strategists did not predict any sort of calamity from this trend and Trump’s policies, they did note that they “doubt that global growth will be helped” and noted there could be serious problems with the policies’ implementation.