Globalization isn't finished – it can unlock new growth and beat the climate crisis

Despite talk of deglobalization, and the rise of armed conflict and hostilities in the Ukraine and in the Middle East, the world economy remains deeply interconnected. The world is not deglobalizing. Instead, the economic interconnections among nations are being reconfigured along geopolitical and regional lines.

Geopolitical affinity is becoming more important than geography for trade and foreign direct investment flows. Security concerns and strategic rivalries are increasingly steering national economic policies, including barriers to trade and foreign direct investment. The IMF reports that new trade restrictions have tripled since 2019. Such fragmentation of the global economy threatens innovation and could reduce global GDP by 7%. At the same time, shared interests among nations to address climate change offer opportunities for global cooperation.

The era of growing globalization between 1960 and the beginnings of the Global Financial Crisis in 2006-2007 reflected a positive-sum belief that globalization – including open markets, trade and cross-border flows of physical, intangible and financial capital – would produce net benefits. All nations could be winners. The embrace of globalization by the US and other OECD nations was also based on the belief/hope that welcoming China, the ascendant economic power, into international norms and institutions would drive its evolution from a socialist marketizing economy under authoritarian rule to a democratic capitalist market economy.

This era yielded many benefits: poverty reduction and the development of the middle class in China and other emerging markets; the convergence in growth rates among countries and regions; low inflation and falling interest rates; and a reduction in inequality among nations. But inequality within nations increased, and not everyone benefited. In the US and other advanced industrial economies, many middle-income, middle-skill workers in manufacturing faced competition from low-wage workers in China and other parts of the world. This fueled the rise of right- and left-wing populism in democratic capitalist nations, and protectionist trade and investment restrictions.

At the same time, many nations including the United States and Europe have introduced industrial policies in key sectors, including semiconductors and green technologies. These policies are motivated by several economic and strategic goals, including: strengthening competition and resilience in global supply chains; developing, accelerating and scaling investments required to achieve net zero commitments; fostering research and development in key foundational and dual-use technologies like advanced semiconductors and AI; and responding to both the competitive and national security threats posed by China’s rise as a major economic and military power.

Semiconductors, critical minerals and batteries – all sectors targeted for market dominance by China – provide essential inputs for digital and green industries in the US and other advanced industrial economies. Their industrial policies aim to keep global markets competitive, resilient and secure for these key products and technologies, and to counter China’s efforts to achieve both market and geopolitical power in them.

Industrial policies are often criticized as a costly form of protectionism that distorts markets. Yet during the globalization era, strategic deployment of industrial policy by the East Asian economies of Japan, South Korea and Taiwan accelerated national technological innovation and deployment, contributing to the expansion of global competition and markets. Today, in the presence of complex externalities – climate change, concentrated market power in key inputs, and rapid technological change – could industrial policy have a positive impact as well? Yes, potentially, if industrial policy measures are outward-looking and market-creating, not inward-looking and protectionist, and if they are coordinated among nations to address climate change and other shared global objectives, like fighting future pandemics.

Russia’s invasion of the Ukraine and violation of the rule of international law has strengthened cooperation among the US and Europe. Cooperation and coordination are also emerging to address another shared challenge: economic and technological vulnerability to China. The resulting panoply of policies to decouple from China has created opportunities for countries in the Global South, such as Vietnam and Mexico, to enter labour-intensive segments of global supply chains; this could stimulate the growth of the manufacturing sector in these economies.

When it comes to technological innovation, however, decoupling efforts are undermining academic exchanges and research collaborations among universities and businesses in China and other nations that flourished during the era of globalization. As China’s engineers and scientists are being scrutinized on national security grounds in the US and other nations, and as foreign experts are similarly targeted in China, global progress in innovation and productivity is threatened by mutual suspicions.

Amid these tensions, shared global imperatives remain. Climate change continues to be an urgent area for market-creating coordination among developed economies and between them, China and the Global South. While carbon emissions continue to grow, the collective commitment to reducing them in the United Nations COP process offers collaborative pathways to progress in developing and adopting sustainable technologies. Achieving shared carbon-neutrality goals will require a fine-tuned strategic approach to industrial policy in green sectors. While national subsidies and public investment can support progress towards net zero, protectionist measures can inhibit market competition and access to sustainable technologies and products.

Fragmentation of the world economy into geopolitical alignments driven by national security concerns should not come at the expense of global environmental security. A successful green transition for the globe requires targeted re-globalization.

The authors are members of the World Economic Forum’s Global Future Council on the Future of Growth. Learn more here.