Globalization among G7 Nations Has Faltered since 2000

In our Globalization Report 2016 most of the G7 economies (Canada, France, Germany, Italy, Japan, the United Kingdom and the United States) belong among the countries with the highest globalization-induced GDP per capita gains since 1990. However, the globalization of these countries has been decreasing since the bursting of the dotcom bubble. As a result, G7 countries have achieved lower GDP gains from globalization, whereas emerging economies gained ground.

Burst of globalization following fall of the Iron Curtain

After the fall of the Iron Curtain, the global interconnectedness of G7 countries increased steeply, with the largest increase in global interconnectedness experienced by Germany. Between 1990 and 2000, the country’s globalization index score rose by 18.4 points (see Figure 1).

After the dotcom bubble burst, this globalization momentum slowed down. The level of global interconnectedness − as measured by the globalization index − decreased in six of the G7 countries between 2000 and 2014. This decline was particularly marked in the United Kingdom. The main reasons for this were an increase in trade barriers and deterioration in British foreign trade activities and foreign investments.

Japan was the only G7 country to improve its global interconnectedness between 2000 and 2014, with a particularly sharp increase after 2011. Reasons for this development included higher exports and imports in services and an increase in Japanese foreign direct investment abroad. This increasing level of global interconnectedness is one of the reasons why Japan leads the way in the Globalization Report 2016, in terms of globalization-induced GDP gains.

G7 countries losing global market share

Another reason for declining globalization in developed industrial countries is the fact that these countries are increasingly losing global market share – primarily to China – but also to other emerging countries such as India, Poland, South Korea and Mexico (see Figure 2). This is because these countries been steadily catching up in international production and global trade flows for about 15 years. China has become the “factory of the world”, India the “back office of the world”. This has prompted international competition to increase significantly. In fact, the G7 countries have not only lost global market share during that time period, but have also become increasingly less competitive, losing out to China in particular. The USA is particularly affected by this, being completely displaced by China in the field of broadcast and communications technology, for example.

Low increases in globalization = low globalization-induced GDP gains

While globalization decreased in the majority of the highly developed G7 countries between 2000 and 2014, a number of less developed countries have managed to increase their global interconnectedness during this period. These include the “usual suspects” in the emerging countries category, such as India, Brazil and South Africa (see Figure 3). However, our blog post on Central and Eastern Europe shows that these countries are also among those that have made the most progress when it comes to globalization.

The fact that these less developed countries managed to raise their level of global interconnectedness since 2000 resulted in globalization-induced GDP gains. The highly developed industrial countries recorded weaker GDP gains due to the slowdown in globalization they experienced.

However, it must be noted that it is precisely the highly developed industrial countries which have already achieved a relatively high degree of globalization and have therefore been able to generate high globalization-induced gains over time. However, it is now becoming increasingly difficult for them to increase their gains, as they are starting out from a high level. On the other hand, developing and emerging countries still have a great need to catch up, as they are latecomers to the globalization process and have started out from a low level.

This is also demonstrated by the fact that a majority of the emerging countries record very high relative GDP per capita gains, even though their absolute gains are low. For example, the figure for China is 406 percent – the highest among the 42 countries investigated. Some of the G7 countries, including the USA (41) and the United Kingdom (36), come towards the bottom of the pile in terms of relative gains.

Challenge for the G7: Resisting protectionist tendencies

It is to be assumed that the emerging countries will continue with their catching-up process and will rightfully claim an increasingly large piece of the globalization pie for themselves. As a result, there could be a more equal distribution of globalization-induced GDP per capita gains in the medium to long term, which would largely be seen as a positive development by the countries involved. However, for the G7 countries this also poses significant challenges. On the one hand, they need to make room for new players, meaning it will become more difficult to defend their leading global position on an economic – and therefore also political – level.

On the other hand, they need to find new strategies to preserve and expand their international competitiveness. This is because emerging countries’ catch-up process means that they will continue to rise in global value creation chains. It is likely that in the future they will not be satisfied with their position as suppliers of cheap products, but will also advance into high-end segments, which have up until now been largely occupied by industrial countries. Ongoing innovation and technological advances represent one way of tackling this predicament.

However, the biggest challenge for the G7 countries will be to refrain from reacting to emerging countries’ catch-up process with protectionism, continuing instead to focus on globalization and free markets as a fundamental prerequisite for increasing prosperity. Now more than ever before, this will raise the question of how globalization-induced gains are distributed within the countries themselves. The anti-globalization tendencies which are currently on the rise in the USA and the EU in particular can only be countered if these gains can find their way through to large sections of the general public. If protectionism triumphs, everyone will ultimately lose out.