Are we in the fourth wave of globalisation?

(taken from Wix's library)

Hello everyone! Today I have a topic that is not obviously linked to current political turmoils but is indeed indirectly linked to the current international policies (and posturing) of the USA government.

As the title of this article suggests, Economists have identified three general waves of globalisation to describe changes in international trade that occurred in the past few centuries.

This being said, I would like to preface those by mentioning that the “waves” of globalisation can be interpreted differently depending on the field. Population models talk about waves of globalisation (movement of people) in a very different way than biologists would talk about waves of spreading of species around the globe, which would again be very different from how political systems (and ideologies) spread around the world in waves.

The current analysis refers to waves of international trade of goods and services (stuff), people (workers and consumers), infrastructures (Foreign Direct Investments), ideas (research and development), and the like.

For such concerns, Economists have identified three waves of globalisation in which those ‘things and people’ have moved around the globe, sometimes inside limited geographical locations, with increasing intensity.

The first wave of globalisation occurred between 1870 and 1914 (or so) and mostly refers to the North America and Europe trade of post-colonisation of that new territory. Steamships and railways lowered transportation costs substantially and allowed for profitable trade between continents.

The second wave is seen between 1945 and 1980 (or so) and mostly refers to relatively rich countries, outside of those already mentioned above, entering global trade. That wave of globalisation was pushed by the Marshall Plan (after the second world war), new technologies (early intercontinental planes), and what we call external economies of scale (Porter’s diamond).

The third wave of globalisation started around 1980 and is officially still going on. This wave has seen the inclusion of less developed countries in international trade and has been possible thanks to even more technological innovation, particularly regarding transportation costs (the intercontinental planes of today), and thanks to the rapid growth of many low-income countries, becoming producers and consumers of importance.

Now… these waves describe substantial growth in international exchanges but it doesn’t mean that trade between countries was not important before. The old Silk Road (not the newest initiative of the CCP) was in fact substantial at the time. There was also significant trade between most European countries (for example) thousands of years before that.

However, all these ‘other’ periods of trade between countries pale in comparison with what we now call the “waves of globalisation”. The volume (and diversity) of trade we are describing in these modern waves is orders of magnitudes higher than the trade we had before that.

All right… so what’s that fourth wave I’m babbling about?

Well... as mentioned in the third wave of globalisation, Economists generally agree that we are still in that same wave. However, I have seen a fourth wave develop and I think we may have just seen its beginning. I have first mentioned that idea to my University students around 2012 or so (I’ve been teaching International Economics since 2005) as a fun possible change in our views of international trade. I was foreseeing that, soon-ish enough, trade may change substantially and we may need to rethink the end of the third wave and start thinking of how trade is now.

I didn’t really think much about it since that time, revisiting the idea from time to time when teaching the waves of globalisation in my courses. However, it would seem that the time has come for me to share this new wave with you all.

Just to be clear, Economists (perhaps myself included) in decades to come will review our current history and collectively decide if 2020-2025 was indeed around the beginning of that fourth wave of globalisation, if it ever becomes a thing Economists agree on. I am sharing my own professional opinion on the matter here and I am not presenting something that standard economic theory currently agrees on. Economics is a very consistent field and we all follow mostly the same definitions and models when arguing with each others’ points of views. Again, this is something I foresee and not something that permeates the Economic field at the moment.

I call the (possible) fourth wave of globalisation ‘Preferential Globalisation’. In the three waves of globalisation we have discussed, international trade was mainly influenced by the costs of transportation and the ease of trade between (mostly) allies at first, and then with anyone able to provide (at a competitive cost) or acquire (at a profitable price) products or people. International trade has become somewhat open to every country, with some flagrant exceptions based on political concerns (think North Korea).

Don’t get me wrong, not all countries (and definitely not all industries) engaged in global trade have benefited from said trade. However, the great majority of direct participants have indeed seen increases in productivity and profitability for producers, as well as access and affordability for consumers. This lack of discrimination (to a certain extend) of international trade has made the whole system more and more efficient and better and better for almost all, although some win a lot more than others.

The fourth wave, if we ever identify such a thing, has a very different underlined mechanism. Political affiliation may now become the main justification for trade. Political considerations are indeed important in all waves of globalisation but they take a back seat when compared to profitability and variety of products. The choice of trade partners in the past (the first three waves) was mainly based on the ease of transport (technology), size of market (demand), and access to market (laws, language, political considerations).

Now, we may have entered a new order in which political preferences are considered first, which would block trade that would otherwise be easy to reach and profitable. We had many periods in the past in which a country or group of countries would reduce or block trade from another or others. These types of economic pressures have existed for as long as trade itself. However, they were mostly the exception rather than the rule. That idea of putting profits and accessibility first may now be changing to putting perceived political friends first. That perception of ‘friendship’ is also not necessarily spread throughout the population of the country, it may be held by just a few political elites to do its work.

I foresee that if that continues, international trade of tomorrow will be separated in blocks of countries that mostly refuse to trade with each other. We will have a few giant groups, for example the USA, Canada, the EU and the like in one block and China, Russia, frankly the new BRICS in another one, and perhaps some other smaller economic blocks.

Each block will most likely use their own currency of choice, which also means that the USD will probably lose its title as the reserve currency of the world (that will have its own negative impact on the USA). There will probably be a Venn diagram of sorts for those blocks, in which members of each block mostly trade with each other while blocks trade a small amount of other resources between themselves (for resources they cannot make themselves for example). At first, there will probably be two or three major economic blocks of somewhat equivalent strength but that may change after a few decades. We may move to many more small-ish blocks or go to a duopoly of international trade (just two major blocks)… it’s difficult to estimate where the long-run equilibrium will be.

Technology still plays an important role in this fourth wave of globalisation. However, this time is it not to make products cheaper to produce or to transport, but to disseminate information on which country is ‘friendly’ and which one is not. Information innovation will now replace transportation innovation as a catalyst to trade. Transportation technologies will continue to improve, but they will not be the main factor in identifying potential trade partners.

Advances in technology related to currencies (and market exchanges generally) is also why that fourth wave can take off much earlier than I thought. Cryptocurrencies may play a role in that transition to a new accepted currency (for a given block) but new ‘standard’ currencies can also be built and distributed much more rapidly (and cheaply) these days thanks to such technologies.

There we are! That’s my analysis of where international trade might go. I hope you guys enjoyed the long read.

Don’t forget to have fun!!!!