The Laws of Globalization Still Stand
Written by: Pankaj Ghemawat
The shock vote in the UK to leave the European Union took place just weeks before I completed final edits on my new book The Laws of Globalization and Business Applications. And the month after it was released, Donald Trump was elected President in the US after running a strongly anti-globalization campaign. Bad timing for a book with such a bold title? Does globalization in the age of Brexit and Trump still conform to regularities strong enough to be accorded the status of scientific laws? In my view, the answer is a clear “yes,” as Brexit itself helps illustrate:
My first law, the law of semiglobalization, asserts that international interactions, while non-negligible, are significantly less intense than domestic interactions. Flows across the UK’s borders (especially people flows but also trade and capital flows) were large enough to provoke a backlash, yet they still fall far short of what one would expect if borders had ceased to matter. Thus, the UK’s (gross) exports account for about one-third of its GDP, about the same as the world as a whole and far below a zero-border effect benchmark of 96% (100% minus the UK’s share of world GDP). And first-generation immigrants comprise only 13% of the UK’s population, although Britons think—as reported across three different surveys—that 24–31% of the country’s population was born abroad.[i] The UK’s international flows are smaller than commonly presumed, but even with a “hard” Brexit, it is extremely unlikely that they would shrink so much as to become irrelevant.
My second law, the law of distance, asserts that international interactions are dampened by distance along cultural, administrative, and geographic dimensions and often affected by economic distance as well. In accordance with this law, the UK’s international ties are disproportionately centered on Europe. In 2015, 45% of the UK’s exports went to the EU and it drew slightly over one-half its imports from there. Adding in Switzerland brings the Continental share of the UK’s merchandise exports to over one-half. Given physical proximity, the EU is likely to continue to be the UK’s largest trade partner by far, unless the terms of separation are very acrimonious (like India-Pakistan, to invoke a rather different example of Brexit). And the UK’s ties to countries beyond the EU—the US is its largest single destination country for exports—illustrate the non-geographic dimensions of the law of distance. The models reported in my book indicate that sharing both a common language as well as colony/colonizer ties (as the UK and US do) boosts trade by 341% and FDI by 656%!
With globalization under attack, my laws provide a stable frame of reference for public policy and business strategy. And a wider appreciation for these laws could also affect the public debate. For an illustration, return to the example of Britons overestimating immigrant stocks: simply informing survey respondents about the actual amount of immigration reduces the proportion who think there are “too many migrants” in the UK by more than 40%! Popular myths about globalization must be confronted with hard data, and my book draws on several million data points as well as firm-, industry-, and country-level examples from around the world to establish its proposed laws and examine their business and public policy implications.
[i] See the 2014 and 2015 editions of the Ipsos MORI “Perils of Perception” surveys as well as the 2013 edition of the German Marshall Fund of the United States “Transatlantic Trends” survey.