Here's why globalization is here to stay

BlackRock CEO Larry Fink thinks the war in Ukraine is accelerating the end of globalization that has shaped the new world order for the last 30 years.

Oaktree Capital Management founder Howard Marks said the war is forcing the pendulum of international affairs to swing away from globalization as companies and governments rethink their interdependence.

Wharton management professor Exequiel (Zeke) Hernandez disagrees. He said it will take much more than a conflict between two countries to destroy the economic fundamentals of international trade.

“I believe that there could be some short-term disruption, but I don’t believe that globalization in the medium to long run is going to be completely obliterated, which I think is the spirit of a lot of these predictions,” he said during an interview with Wharton Business Daily on SiriusXM.

Simply put, companies and countries need each other. Reaching beyond borders is how they secure their supply chains, grow their customer base, find skilled and unskilled labor, and provide the population with all the goods and services they demand.

“For most reasonably sized businesses, the home market is just not large enough of a market, so they need to serve foreign markets,” Hernandez said. “That will mean having more global or, more commonly, regional supply chains.”

The professor pointed out that doomsday predictions about the end of globalization have been made before, usually during times of crisis. At the beginning of the COVID-19 pandemic, The Economist ran a cover story about it, and similar declarations were made during the Great Recession of 2008. But he said crises create only “temporary blips” in economic activity, like the sharp drops induced by sudden pandemic lockdowns.

“It happens all the time,” Hernandez said about the negative predictions. “I think we have to distinguish between short-term disruption and structural changes in the economy.”

Hernandez has maintained his stance on globalization for years, writing in a 2020 blog post that while his position may be “boring” compared with the naysayers, it’s based on facts.

“I believe that an approach based on basic facts — even if boring — may help calm down some of the anxiety about the future of globalization,” he wrote.

Hernandez said one reason why the declarations about globalization’s demise are overblown is that the world’s economy isn’t really as entangled as people think it is. Foreign direct investment, for example, accounts for just 4% of the global economy. And South Korean multinational firms such as Samsung and Hyundai conduct only 10% to 15% of their business outside their geographic region, with the bulk of it inside Southeast Asia.

To be sure, authoritarian regimes often cut themselves off from the global market for a host of reasons — Russia’s Vladimir Putin is just one example. But firms often respond by shifting their activities elsewhere in the world. That’s why Hernandez thinks it will take world war on a larger scale to create the kind of disruption that would halt globalization.

“Unless you have authoritarianism and protectionism rise to a level where every country wants to be economically self-sufficient, you’re not going to make a big dent,” he said. “The only thing that will happen is you might shift which countries are more involved in trading and doing business with each other.”