We must resist de-globalization

A little over a year later, somewhere in the United States subprime mortgage market, the tide began to turn. Thanks to the credit crunch and the crippling dread it engendered, cross-border flows - in many ways the very lifeblood of globalization - all but seized up.

This was especially notable in the US, which suffered a $109 billion exodus of foreign capital in the final three quarters of 2008. In the previous nine months there was a $774 billion inflow.

For its own part, seemingly prompted by the rescue of Bear Stearns, the US repatriated $750 billion in the last three quarters of 2008. With domestic lending dominant, suddenly protectionism was very much back on the agenda - and the prospect endures in 2011.

Emerging markets in Europe and the former Soviet Union can expect to suffer particularly badly from this trend, since it is foreigners who own much of their banking systems. But nobody can expect to escape.

This was not how it was meant to be. Economic instability has always been a likely obstacle to globalization, but trade wars and the failure of WTO talks - not bad mortgages - have traditionally been viewed as the likely triggers.

Of course, we have learnt to expect the unexpected. In recent years alone the world economy has endured Sept 11, wars in Afghanistan and Iraq, SARS and the Asian tsunami - and globalization survived them all.

Similarly, it came through the collapse of the Bretton Woods system, the debt crisis of the mid-1970s, the oil shocks of 1973 and 1980, hyper-inflation, the fall of Communism in Europe and the Asian financial crisis. Now the Japanese earthquake, the so-called Arab Spring and widespread sovereign debt crises present new challenges.

De-globalization, like globalization, is hardly a new phenomenon. The economic chaos of the 1930s and the Soviet bloc in the aftermath of World War II are just two obvious instances of de-globalizing - and, indeed, the painful consequences it can bring.

It is almost impossible to imagine we will plumb such depths again. Even amid the current turmoil, globalization is very probably too far advanced, too entrenched, to allow that to happen.

It may well be, as many commentators have already pointed out, that the best we can expect pro tempore is to "muddle through"; and this, by common consent, is precisely what we have been doing. We can only hope it is the very least we manage - otherwise the repercussions will be felt far and wide and for years to come.

David Greenaway is a professor of economics and the founding director of the Leverhulme Centre for Research on Globalization and Economic Policy (GEP). GEP is based within the Nottingham School of Economics at the University of Nottingham, where Greenaway is vice-chancellor. On May 18, Zhejiang University's College of Economics hosted a GEP delegation for a joint workshop entitled Trade Costs, Economic Geography and Firm Heterogeneity.

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