Podcast Host: Hasti Rabiei
Guest: Hamzeh Arabzadeh

Hasti: Over the past decade, we've seen growing resistance to economic globalisation—whether through Brexit, the resurgence of protectionist policies in the US, or the rise of far-right parties advocating economic nationalism. This shift raises fundamental questions: Has globalisation reached its peak? What have been its real economic consequences? To set the stage, let’s begin with the broader picture—what do we mean by globalisation, and how has it reshaped the global economy over the past few decades?

Hamzeh: Globalisation, in its modern form, refers to the increasing interconnectedness of economies through trade, capital flows, technology, and migration. While international trade has existed for centuries, the late 20th century saw an unprecedented acceleration. The collapse of the Soviet Union and China’s gradual market liberalisation paved the way for a global economic order centred on free markets, deregulation, and trade liberalisation.

This shift gained momentum in the 1990s with the establishment of the World Trade Organization (WTO) in 1995 and China’s accession to the WTO in 2001. The figures illustrate the scale of change: between 1990 and 2008, global trade as a share of GDP rose from about 39% to over 61%. Foreign direct investment (FDI) inflows, a key indicator of economic integration, surged from around $200 billion in 1990 to nearly $2 trillion by 2007.

The economic impact has been profound. Globalisation has contributed to a sharp reduction in extreme poverty. In 1990, roughly 36% of the world’s population lived on less than $2.15 a day (adjusted for inflation). By 2019, that figure had fallen below 9%. The most striking transformation occurred in China, where over 800 million people were lifted out of extreme poverty between 1980 and 2020. In India, the proportion of people in extreme poverty fell from around 45% in 1993 to less than 10% in 2021.

However, while global inequality between nations has declined—thanks to the rapid economic growth of emerging markets—inequality within many countries has increased. In advanced economies, real wage growth for lower-income workers has lagged behind productivity gains. In the US, for instance, the income share of the top 1% rose from around 10% in the 1980s to over 20% today. In contrast, in developing countries like China, income growth among the lower and middle classes has been strong, leading to a narrowing of the global income distribution.

The overall verdict on globalisation remains complex. It has lifted millions out of poverty, driven economic growth, and spurred technological innovation. But it has also created structural imbalances—hollowing out manufacturing sectors in advanced economies and increasing financial vulnerabilities. The backlash we see today stems from these unevenly distributed gains, leading many to question whether the next phase of economic integration will look different from the past.

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Hasti: What are the key drivers behind this recent wave of deglobalisation?

Hamzeh: Several factors have contributed to the shift away from economic globalisation, but four stand out: The first is economic. The initial cracks in faith in unregulated markets and globalisation emerged during the 2007-08 financial crisis. The collapse of major financial institutions and the subsequent recession raised doubts about the efficiency of deregulated financial markets. In response, governments introduced stricter financial regulations, but the broader push for free trade and economic integration remained largely intact.

A more profound turning point came during the COVID-19 pandemic. The crisis exposed the fragility of global supply chains, as critical industries—from semiconductors to pharmaceuticals—faced severe disruptions. At its peak, global shipping costs soared by over 500%, and production bottlenecks led to shortages of essential goods. This prompted a rethink among policymakers and businesses. Many concluded that today’s sprawling supply chains, optimized for efficiency rather than resilience, were too vulnerable to external shocks. As a result, we’ve seen a growing push toward "reshoring" or "nearshoring" production—bringing manufacturing closer to home or to politically stable regions.

The pandemic also reinforced the role of the state in economic affairs. Governments intervened at an unprecedented scale—implementing stimulus packages, directly supporting businesses, and even mandating production of essential goods. This level of intervention reshaped public expectations, leading to stronger calls for protectionist policies, industrial policy, and greater economic self-sufficiency.

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Hasti: And the second major factor?

Hamzeh: Geopolitical tensions—especially the intensifying rivalry between the US and China—have played a critical role. Over the past two decades, China's economic and technological rise has transformed global trade dynamics. But with its growing influence, competition with the US has escalated. Since the Trump administration, and continuing under Biden, we’ve seen a shift from economic cooperation to strategic confrontation—characterized by trade wars, export controls, and restrictions on technology transfer. For instance, the US has imposed sweeping restrictions on semiconductor exports to China, while China has responded with its own countermeasures, such as curbing exports of rare earth materials essential for high-tech industries.

Then there’s the impact of Russia’s invasion of Ukraine—the largest land war in Europe since World War II. This war has fundamentally reshaped global energy markets, fractured long-standing economic ties, and forced many countries to rethink their economic dependencies. The idea that economic interdependence fosters political stability—a key argument for globalisation—has been significantly challenged. Instead, national security concerns are increasingly driving economic decision-making, leading to what some analysts call "geo-economics"—where economic policies are used as tools of geopolitical strategy.

Together, these factors have created a shift toward a more fragmented global economy, where national security, supply chain resilience, and domestic economic interests are taking precedence over the traditional ideals of free trade and economic integration

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Hasti: But can we really say that globalisation caused these geopolitical tensions? Wouldn’t these conflicts have happened regardless, even in a world with less economic integration?

Hamzeh: That’s a fair point. Globalisation did not create these geopolitical tensions, but rather, it interacted with existing rivalries in complex ways. The core logic behind economic interdependence—known as the "peace through trade" hypothesis—suggests that when countries are deeply integrated economically, war becomes too costly to pursue. In theory, nations dependent on each other for critical goods, markets, and capital should have stronger incentives to cooperate rather than engage in conflict.

However, reality is more nuanced. While globalisation has historically helped maintain peace in certain contexts—for instance, fostering European integration after World War II—it has also fueled strategic competition in others. The US-China rivalry is a case in point. Initially, China’s integration into the global economy was expected to lead to political and economic convergence with the West. But instead of reducing tensions, economic interdependence has, in some cases, heightened them. China’s access to global supply chains accelerated its rise as a technological and military power, triggering fears in Washington about strategic dependence. The result has been a shift toward decoupling in critical sectors like semiconductors and artificial intelligence, precisely because of how interwoven their economies became.

Similarly, the idea that trade fosters political stability has been challenged by Russia’s invasion of Ukraine. Europe’s deep reliance on Russian energy—built over decades of economic integration—did not prevent war. Instead, it became a strategic vulnerability, forcing European nations to scramble for alternative energy sources once geopolitical realities took precedence over economic logic.

So, while globalisation may not have caused these conflicts, it has played a crucial role in shaping their dynamics. The modern world is too interconnected for nations to fully disentangle their economic and political interests. But rather than leading to a seamless, cooperative global order, economic interdependence has, in some cases, become a weapon—what some analysts call "weaponised interdependence." Countries are increasingly using trade, finance, and technology as tools of geopolitical leverage, rather than just instruments of mutual prosperity.

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Hasti: You mentioned four major shocks driving deglobalisation. What’s the third?

Hamzeh: The third factor is the growing emphasis on self-sufficiency in strategic industries—a shift driven by the realization that economic dependencies can be weaponized.

One of the clearest examples is Russia’s use of energy as a geopolitical tool. Before its 2022 invasion of Ukraine, Russia supplied around 40% of the EU’s natural gas and 25% of its oil imports. This deep energy dependence allowed Moscow to exert leverage over Europe, leading to an energy crisis when European nations moved to cut ties. The consequences were severe: in 2022, natural gas prices in Europe surged nearly 15-fold compared to pre-crisis levels, pushing inflation to record highs and causing some industries to shut down due to soaring energy costs.

This crisis amplified fears about China, particularly in industries where it holds a near-monopoly. China controls over 70% of the global supply of rare earth minerals, which are essential for semiconductors, electric vehicles, and military technology. It also dominates about 80% of the world's solar panel supply chain and 60% of global lithium refining, a key component for electric vehicle batteries. Policymakers in the West fear that China could use these advantages as leverage—just as Russia did with energy. In fact, Beijing has already restricted exports of gallium and germanium, two critical minerals for high-tech industries, in response to US-led semiconductor sanctions.

Because of these vulnerabilities, economic decision-making is no longer just about efficiency and cost-cutting. Governments are prioritizing national security and industrial resilience, even at a significant economic cost. The US, for example, has launched a $280 billion CHIPS and Science Act to bring semiconductor production back home, reducing reliance on Taiwan and China. Similarly, the EU has committed €43 billion to its own European Chips Act to increase domestic semiconductor production.

In short, the logic of onshoring and "friendshoring" (relocating supply chains to allied countries) is reshaping globalization. Nations are willing to absorb higher costs to secure independence in critical sectors—whether that’s energy, semiconductors, pharmaceuticals, or defense-related technologies. This marks a fundamental shift away from the previous era, where economic efficiency was the overriding priority.

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Hasti: And what’s the fourth shock?

Hamzeh: The rise of artificial intelligence (AI)—a technological revolution that is set to reshape economies, labor markets, and even global power dynamics in ways we are only beginning to understand. AI is disruptive in two key ways. First, it is becoming a strategic technology, much like nuclear weapons or space exploration did in the past. The nations that lead in AI development—particularly in military applications, cybersecurity, and economic competitiveness—will have a significant advantage. That’s why we’re already seeing an AI arms race between the US and China, with both countries investing billions in AI research, computing power, and semiconductor technology. In 2023 alone, the US government restricted the export of advanced AI chips to China, fearing that Beijing could use them to enhance military capabilities.

Second, AI is intensifying economic inequality within advanced economies. While global inequality between nations has narrowed over the past few decades, inequality within high-income countries has steadily risen. There are two main reasons for this: (i) First, globalisation hollowed out middle-class jobs in Western economies. Over the past 40 years, many manufacturing and routine service jobs were outsourced to developing countries where labor is cheaper. This disproportionately affected lower-skilled workers, pushing them into low-wage service jobs. (ii) Second, automation and technological change have replaced many routine jobs, particularly in sectors like manufacturing, logistics, and retail. For instance, between 2000 and 2010, nearly 6 million US manufacturing jobs were lost, largely due to automation rather than trade. In the UK and US, another factor played a role: the decline of labor unions, which historically helped protect wage growth for lower-income workers.

Now, AI is adding a new layer of disruption. Unlike previous waves of automation, which mainly replaced routine, manual labor, AI threatens white-collar jobs in industries such as law, finance, journalism, and even medicine. A 2023 Goldman Sachs report estimated that AI could replace or significantly affect 300 million jobs worldwide, with sectors reliant on knowledge work particularly at risk.

Governments can’t stop AI from advancing, but they are facing increasing pressure to mitigate its economic and political fallout. One response has been to restrict outsourcing—pushing firms to retain jobs domestically rather than shifting AI-enhanced operations overseas. Another has been to increase public investment in worker retraining and education, ensuring that labor markets adapt to the AI revolution rather than being displaced by it.

In essence, AI is accelerating the shift toward economic nationalism, as policymakers realize that technological dominance is no longer just a commercial advantage—it’s a geopolitical necessity.

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Hasti: And all these forces—geopolitical tensions, supply chain disruptions, rising inequality, and AI—have hit almost simultaneously.

Hamzeh: Exactly. The convergence of these shocks has accelerated the shift away from globalisation. US-China tensions intensified just as the pandemic exposed the fragility of global supply chains. The economic fallout from lockdowns widened inequality, while Russia’s invasion of Ukraine triggered an energy crisis that forced governments to rethink their economic dependencies. Now, the rapid rise of AI is introducing a new set of uncertainties, particularly for labour markets.

Each of these shocks has reinforced the others. Supply chain disruptions encouraged protectionist policies. Rising inequality heightened political pressures for economic intervention. Geopolitical conflicts made national security concerns a central factor in trade and industrial policy. The result is a shift in economic priorities—where resilience, strategic autonomy, and security are taking precedence over cost efficiency and free trade. This is why deglobalisation is not just a temporary reaction but a structural transformation in how governments and businesses approach economic policy.

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Hasti: Do we see changes in how governments intervene in economies and implement anti-globalisation measures?

Hamzeh: Yes. The traditional approach, exemplified by Trump's tariff policies, aimed to make domestic production more competitive by raising costs for foreign imports. However, since 2020, we have seen a more proactive strategy. Western governments are now actively investing in industries they consider strategic, such as semiconductors, electric vehicles, and AI technologies. They are offering subsidies, imposing trade restrictions, and redesigning supply chains with national security in mind rather than purely economic efficiency. This shift toward industrial policy is what The Economist has described as “homeland economics.”

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Hasti: Can you give concrete examples of these policies?

Hamzeh: We’ve discussed several in previous episodes. A major example is the CHIPS Act, which provides large-scale subsidies to boost semiconductor manufacturing in the US. Another is the Inflation Reduction Act, which is less about controlling inflation and more about reshaping industrial production by incentivising companies in battery production and electric vehicles to manufacture domestically. Europe has followed suit, with the EU setting ambitious targets to ensure that 40% of key environmental technologies and 20% of global semiconductor production take place within Europe. Similar strategies have been implemented in countries like South Korea and India, which are expanding industrial policies to secure a competitive edge in strategic industries.

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Hasti: Do we have figures on the scale of these government subsidies?

Hamzeh: Absolutely. According to The Economist, government subsidies in advanced economies have increased by 40% compared to pre-pandemic levels. In the second quarter of 2023 alone, the US provided $25 billion in subsidies. A UBS report estimates that the seven largest economies will collectively spend more than $400 billion over the next decade on semiconductor subsidies alone. Since 2020, global spending on clean energy support has reached $1.3 trillion. These figures illustrate the sheer scale of government intervention in markets today, marking a decisive shift from the previous era of laissez-faire economics.

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Hasti: Have these policies actually influenced corporate behaviour? Have they successfully encouraged companies to bring production back within national borders?

Hamzeh: The evidence suggests they have. For decades, firms in advanced economies pursued offshoring, shifting production to developing countries. Now, the trend has reversed, with reshoring—bringing production back home—becoming a key theme in corporate strategy.

In the US stock market, we see a clear impact. Since 2022, the share prices of companies perceived to benefit from government subsidies and infrastructure investments have risen by 13%, while the overall value of the US stock market has fallen by 9%. This divergence suggests that firms benefiting from these policies are being rewarded by investors.

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Hasti: It seems like much of this shift was inevitable or, at the very least, justifiable. What are the criticisms of this new economic model? Why are some economists so sceptical about its expansion?

Hamzeh: Policymaking is always about trade-offs—weighing costs against benefits. If a policymaker or commentator only talks about the advantages or only about the downsides, it means they haven’t fully grasped the trade-offs involved.

A lot of these new policies seem defensible and logical. Take offshoring, for example. In Western countries, offshoring led to the decline of manufacturing industries and job losses, contributing to rising inequality. This created a political backlash from those who lost out, which in turn fuelled the rise of populist politicians. So, it’s understandable that governments want to address these concerns.

The same applies to green subsidies. There’s a compelling argument for using government policy to accelerate the transition to cleaner energy. And when it comes to securing independence in strategic industries, there are real national security concerns—especially with China—so it’s not surprising that Western governments are willing to accept some economic inefficiencies to achieve these goals.

These policies create winners—factory workers in resurgent industries, companies receiving subsidies, and investors in those firms. But the reality is that they also create billions of losers and could impose significant costs on the global economy.

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Hasti: Let’s break that down. Who are the biggest losers from this trend?

Hamzeh: Perhaps the most obvious losers are developing countries that benefited from the outsourcing boom. When Western firms move production back home, countries that relied on foreign investment and trade—especially in Asia and Latin America—will suffer. This could reverse the progress made in reducing global inequality and push many low-income nations into deeper economic struggles. But even within the advanced economies themselves, these policies come with significant risks.

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Hasti: What are the main costs associated with this shift for western countries?

Hamzeh: In some ways, this is like a larger-scale version of Brexit—an attempt to prioritise national control over economic efficiency. The IMF conducted a study where they modelled a world divided into two major economic blocs: one led by the US and its allies, and the other by China and its partners. In this scenario, a fragmented global economy would reduce global GDP by 1% in the short run and by up to 2% in the long run. The theoretical concerns are clear. These policies could be damaging in several ways: First, industrial policy is a form of central planning. Governments, rather than markets, are deciding which industries to promote. When politicians override market signals, inefficient industries may be propped up while more competitive sectors are neglected. For example, if a government imposes tariffs to make domestic industries more competitive, the result is often higher prices for consumers. If it relies on subsidies, the question becomes: who is paying for them? These interventions put additional strain on government budgets. Western economies are already heavily indebted, and rising interest rates make servicing that debt even more costly. Meanwhile, demographic shifts—ageing populations and rising healthcare costs—are putting additional pressure on public finances. In such a fiscal environment, long-term industrial subsidies may not be sustainable.

Second, these policies reduce productivity. We’ve seen this play out in countries that rely on heavy-handed industrial policies. By shielding industries from competition, governments reduce firms' incentives to innovate and improve efficiency. Worse still, companies often become dependent on government handouts, leading to waste and inefficiency rather than long-term competitiveness. In other words, you can’t just throw money at industries, restrict trade, and expect long-term growth and job creation. If policies aren’t carefully designed, they can end up wasting resources and distorting markets rather than fostering sustainable economic development.

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Hasti: That’s a sobering perspective. It sounds like deglobalisation comes with serious risks.

Hamzeh: Exactly. There’s a fundamental tension at play here. On one hand, governments want to reduce inequality, secure strategic industries, and respond to geopolitical risks. On the other hand, heavy-handed intervention can weaken market efficiency, reduce global economic output, and ultimately backfire.

The challenge is finding a balanced approach—one that addresses legitimate concerns about security and inequality while avoiding excessive protectionism and economic inefficiency. The coming years will be a real test of whether governments can walk that tightrope—or if their interventions will lead to greater economic fragmentation and stagnation.