Latest data show US-China decoupling but no signs of deglobalisation


A series of global shocks over the past decade—from Brexit and the US-China trade war to the Covid-19 pandemic and Russia’s invasion of Ukraine—have prompted many to speculate about the end of globalisation. But sound decision-making must distinguish between predictions and actual shifts in international activity. The latest data on the size and geography of international flows strongly rebut the notion that a major retreat from globalisation is underway.

The DHL Global Connectedness Index measures globalisation based on international flows in four domains: trade, capital, information, and people. The index declined slightly in 2020, when the Covid-19 pandemic and efforts to contain its spread caused sharp drops in trade, foreign direct investment (FDI), and international travel. But by 2021 it had rebounded to above its pre-pandemic level, reaching a point just shy of the all-time high recorded in 2017. Preliminary data and projections suggest that the index rose again in 2022.

The report also examines three fundamental questions that lie at the center of current debates about globalisation: Are global flows still growing? Is geopolitical rivalry fracturing the global economy into rival blocs? And are international flows becoming more regional?

On the growth of global flows, the evidence strongly rebuts the notion that globalisation has gone into reverse. International trade, capital, and information flows have all surpassed pre-pandemic levels, and the recovery of people flows accelerated in 2022. International trade in goods reached 10% above its pre-pandemic level in mid-2022, while trade in services surpassed pre-pandemic levels in early 2022 and foreign direct investment did so in 2021. International travel, in contrast, remained 37% below its 2019 level in 2022, but it more than doubled from 2021.

Most types of international flows are likely to continue growing in 2023, albeit at a slower pace. This is due mainly to weaker global economic growth following large interest rate increases aimed at curbing inflation.

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On the effects of geopolitical tensions, there is clear evidence of the U.S. and China reducing their focus on flows with each other. Considering a sample of 11 types of trade, capital, information, and people flows, the share of U.S. flows taking place to or from China fell from 9.3% in 2016 to 7.3% in 2022 (or the most recent year with data available). Meanwhile, the share of China’s flows that were to or from the U.S. fell from 17.8% to 14.3%. Those are noteworthy declines relative to 2016 levels, but small changes relative to the U.S. and China’s total flows with the world. And even after these declines, the U.S. and China are still connected by far larger flows than any other pair of countries that do not share a border.

Decoupling between the U.S. and China has not—at least yet—led to a wider fracturing of the world economy into rival blocs.  Close allies of the U.S. and China, as classified in research by Capital Economics, have not substantially reduced the shares of their flows with the rival bloc. The share of U.S. allies’ flows involving China and its close allies fell only from 8.8% in 2016 to 8.2% in 2022 (or the most recent year with data available). And the share of China’s allies’ flows involving the U.S. and its close allies only fell from 40% to 38%. The declines for allied countries were also less widespread across types of flows than those for the U.S. and China themselves.

On the possibility of rising regionalisation, there is no robust evidence of a rising trend in the share of international flows taking place within major world regions through 2021. If international flows were becoming more regionalised, they would take place over shorter distances, on average. In fact, trade and many other types of flows have tended to take place over longer distances. The main exception to this pattern involves people flows, due to a higher proportion of travel during the Covid-19 pandemic taking place between nearby countries.

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 International flows, nonetheless, are already highly regionalised. Roughly half of international trade, capital, information, and people flows take place inside major world regions, about three times more than one would expect if flows were not constrained by the distance and differences between countries.

It remains an open question whether international flows will become more regionalised in the future. Many companies are focused on nearshoring to produce goods closer to their customers, and major supply chain reconfigurations can take several years to execute. Governments in many countries are supporting these regionalisation efforts. On the other hand, the fact that international flows are already highly regionalised limits the scope for large increases in regionalisation. In addition, many companies, rather than nearshoring, have adopted other strategies to boost resilience, such as digitisation and dual sourcing. And many of the attractions of long-distance flows are not going away.

The resilience of globalisation in the face of successive shocks is a positive development, since there is strong evidence that trade and other flows support economic growth. It is also clear that international connections dramatically expand the world’s capacity to solve problems. The public policy environment has, nonetheless, become less conducive to the growth of global flows. Trade protectionism has increased, international investments face heightened scrutiny, and data flow restrictions are proliferating. Meanwhile, geopolitical tensions challenge international cooperation and key institutions, such as the World Trade Organisation.

These and other challenges to globalisation must not be ignored. Instead, they should motivate a renewed focus on making globalisation work better, expanding its pool of beneficiaries and better managing its challenges— what some have started to refer to as reglobalisation.

History shows that globalisation can go into reverse, but it has proven remarkably resilient through recent shocks. This resilience provides a strong platform for policy efforts aimed at making globalisation work better. Reglobalisation does not have to start with rebuilding from the ground up. And the strength of global flows provides strong incentives for companies and countries to stay engaged.