Global Trade in the Age of Deglobalization - Is the World Turning Inward?

Forty years ago, in the 1980s, there was a groundswell for change in the world’s leading economies. This resulted in governments changing, and their replacements implementing policies following Milton Friedman's teachings over John Milton Keynes's previously favored theories. By the 1990s, globalization was the focus, and trade in goods, services, and financial capital freed up considerably. Many popular politicians of 2025 see things differently, however. They prefer a micro-view over a macro one, focusing on globalization's effects on their local populations (“voters”) rather than on the world as a whole. As we move into the second quarter of the 21st Century, we appear to be entering a new era of deglobalization. 

What is Deglobalization?

Chatham House describes deglobalization as “a movement towards a less connected world, characterized by powerful nation-states, local solutions, and border controls rather than global institutions, treaties, and free movement.” Recent events, such as the success of Trump in the recent US presidential election (and in particular his MAGA (“Make America Great Again” following), the Ukraine and Middle Eastern wars, and Brexit, have given a strong indication that we are now in a new age of deglobalization.

Why the Theory of Comparative Advantage Promotes Trade

Macroeconomics, of course, looks at the economy from the big picture; what can economies do to increase income, growth, production, and other variables overall? 

A trade model economists often use is the Theory of Comparative Advantage. 

In this model, you compare the production of goods and services by an entity. If one entity can produce an item more cheaply than another it has an absolute advantage in that item. However, absolute advantage can be a simplistic measure - bigger countries are likely to have an absolute advantage in virtually everything compared to smaller ones. 

The Theory of Comparative Advantage, however, demonstrates that trade can be beneficial for all nations involved, even if one is clearly more efficient in production and has lower costs than others. Comparative advantage describes an economy's ability to produce a particular good or service at a lower opportunity cost than its trading partners.

For the best overall results, countries should focus on producing those goods and services in which they have a comparative advantage over their trading partners, and leave the production of less lucrative products to the other nations. 

Comparative advantage explains why trade is beneficial to all countries, even large nations that have an absolute advantage over most other nations. For example, the USA could undoubtedly produce almost everything quicker, cheaper, and in greater numbers than in a small nation like the Pacific Island of Fiji. However, in 2022 Fiji exported $511M to the United States, with the main products that Fiji exported being water ($383M), processed fish ($53.4M), and perfume plants ($11.7M). Why? Presumably, because Fiji has a comparative advantage in these products, allowing the USA to divert resources into those items it has the comparative advantage in. In turn, it exported Aircraft Parts ($11.4M), Medical Instruments ($4.97M), and Unpackaged Medicaments ($3.81M) to Fiji in 2022. 

The Heckscher-Ohlin Model Also Encourages Trade

Alongside the Theory of Comparative Advantage, economists use the Heckscher-Ohlin Model to explain the benefits of trade. 

This theory argues that countries export what they can most efficiently produce. Countries should ideally export those materials and resources that they have an excess of while proportionately importing those resources they lack.

The model doesn’t restrict itself to tradable commodities. It looks at all resources - land, labor, and capital - and nations benefit from trading resources from abundant regions to where they are scarce.

For example, the Heckscher-Ohlin Model recognizes that labor is cheaper in The Philippines than in the USA, so many US companies find it worthwhile to outsource their call centers to the Southeast Asian nation. In turn, the Philippines imports goods like electrical equipment, machinery, and aircraft from the United States, alongside crops like grain, seeds, fruit, and cereals. Presumably, the USA can produce the specialist equipment more efficiently than The Philippines and has the space and climate to grow the food products.

Why Globalization Became Unpopular Again

Throughout the 1980s and 1990s, there was a major overhaul of many countries’ economies. Impediments to trade were removed, trade blocs were formed and nations were encouraged to trade freely. People began to speak openly about the global economy.

The world economy continued to perform well after this period, notwithstanding a few shocks, such as the Global Economic Crisis of  2007-2009, and the setbacks of Covid in 2020.

Unfortunately, change creates winners and losers. For example, while the US economy benefited overall from the reduced costs of outsourcing call centers to The Philippines, the move had a significant effect on the former call center operators, who had to retrain and find new employment. Similarly, the city of Detroit was hurt considerably by the downsizing and modernization of the US automobile industry, despite the benefits generated on a macro scale.

The benefits of globalization have been felt unequally, and in many cases “ordinary citizens” have endured much pain for what they perceive as little benefit. It is unsurprising, therefore, that politicians have been able to stoke up the flames of discontent and win support for protectionist policies that they sell as being a way to move back to how things were in “happier times”.

Why is Deglobalization Bad From a Macro-Economic Perspective?

In the recent US presidential election, Donald Trump vowed to impose tariffs and trade restrictions to reduce the US’s reliance on international trade. In particular, he promised to bring in massive hikes in tariffs on goods coming from Mexico, Canada, and China starting on the first day of his administration. He declared that he would impose an across-the-board tariff of 10% or 20% on every import coming into the US, and a tariff upward of 60% on all Chinese imports. He stated that he would alter tariff rates for specific nations as retaliation for illegal immigration and drugs coming across the border.

“To me, the most beautiful word in the dictionary is tariff. And it’s my favorite word.” - Donald Trump during an interview at the Economic Club of Chicago in mid-October 2024.

Economists, however, are less positive in their views on the imposition of tariffs and other trade restrictions. Ultimately, American consumers may end up less enamored by the new tariffs, too, as they will probably end up having to pay them.

Tariffs are effectively taxes on imports. Tariffs aim to make imported goods comparatively more expensive than locally produced goods, encouraging consumers to “buy local” rather than opt for cheap imported goods. 

A side effect of imposing tariffs occurs when local producers require imported components for their products. Here, the local manufacturer has to pay the tariff on these components, increasing their costs, which they will typically have to pass on to their customers.

Wrapping Things Up

Some businesses and communities may benefit from the imposition of tariffs and other trade restrictions - they face less competition and can continue to produce goods less efficiently. Workers in these industries keep their jobs which they may have otherwise lost if a free market existed.

However, consumers end up paying more for these goods, with less choice and innovation, when there is trade protection. Overall, deglobalization reduces world production and efficiency. Businesses may see a decline in efficiency due to a lack of competition. They may even see a reduction in profits due to the emergence of substitutes for their products.