A brief history of globalization

( World Economic Forum )

When Chinese e-commerce giant Alibaba in 2018 announced it had chosen the ancient
city of Xi’an as the site for its new regional headquarters, the symbolic value wasn’t lost
on the company: it had brought globalization to its ancient birthplace, the start of the old
Silk Road. It named its new offices aptly: “Silk Road Headquarters”. The city where
globalization had started more than 2,000 years ago would also have a stake in
globalization’s future.

Alibaba shouldn’t be alone in looking back. As we are entering a new, digital-driven era
of globalization – we call it “Globalization 4.0” – it is worthwhile that we do the same.
When did globalization start? What were its major phases? And where is it headed
tomorrow?

This piece also caps our series on globalization. The series was written ahead of the
2019 Annual Meeting of the World Economic Forum in Davos, which focuses on
“Globalization 4.0”. In previous pieces, we looked at some winners and losers of
economic globalization, the environmental aspect of globalization, cultural globalization
and digital globalization. Now we look back at its history. So, when did international
trade start and how did it lead to globalization?
Silk roads (1st century BC-5th century AD, and
13th-14th centuries AD)

People have been trading goods for almost as long as they’ve been around. But as of
the 1st century BC, a remarkable phenomenon occurred. For the first time in history,
luxury products from China started to appear on the other edge of the Eurasian
continent – in Rome. They got there after being hauled for thousands of miles along the
Silk Road. Trade had stopped being a local or regional affair and started to become
global.

That is not to say globalization had started in earnest. Silk was mostly a luxury good,
and so were the spices that were added to the intercontinental trade between Asia and
Europe. As a percentage of the total economy, the value of these exports was tiny, and
many middlemen were involved to get the goods to their destination. But global trade
links were established, and for those involved, it was a goldmine. From purchase price
to final sales price, the multiple went in the dozens.The Silk Road could prosper in part
because two great empires dominated much of the route. If trade was interrupted, it was
most often because of blockades by local enemies of Rome or China. If the Silk Road
eventually closed, as it did after several centuries, the fall of the empires had everything
to do with it. And when it reopened in Marco Polo’s late medieval time, it was because
the rise of a new hegemonic empire: the Mongols. It is a pattern we’ll see throughout
the history of trade: it thrives when nations protect it, it falls when they don’t.
Arabic calligraphy in Asilah medina, MoroccoImage: Pierre-Yves
Babelon/Shutterstock.com/Unesco

Spice routes (7th-15th centuries)

The next chapter in trade happened thanks to Islamic merchants. As the new religion
spread in all directions from its Arabian heartland in the 7th century, so did trade. The
founder of Islam, the prophet Mohammed, was famously a merchant, as was his wife
Khadija. Trade was thus in the DNA of the new religion and its followers, and that
showed. By the early 9th century, Muslim traders already dominated Mediterranean and
Indian Ocean trade; afterwards, they could be found as far east as Indonesia, which
over time became a Muslim-majority country, and as far west as Moorish Spain.

The main focus of Islamic trade in those Middle Ages were spices. Unlike silk, spices
were traded mainly by sea since ancient times. But by the medieval era they had
become the true focus of international trade. Chief among them were the cloves,
nutmeg and mace from the fabled Spice islands – the Maluku islands in Indonesia. They
were extremely expensive and in high demand, also in Europe. But as with silk, they
remained a luxury product, and trade remained relatively low volume. Globalization still
didn’t take off, but the original Belt (sea route) and Road (Silk Road) of trade between
East and West did now exist.
Age of Discovery (15th-18th centuries)

Truly global trade kicked off in the Age of Discovery. It was in this era, from the end of
the 15th century onwards, that European explorers connected East and West – and
accidentally discovered the Americas. Aided by the discoveries of the so-called
“Scientific Revolution” in the fields of astronomy, mechanics, physics and shipping, the
Portuguese, Spanish and later the Dutch and the English first “discovered”, then
subjugated, and finally integrated new lands in their economies.

The Age of Discovery rocked the world. The most (in)famous “discovery” is that of
America by Columbus, which all but ended pre-Colombian civilizations. But the most
consequential exploration was the circumnavigation by Magellan: it opened the door to
the Spice islands, cutting out Arab and Italian middlemen. While trade once again
remained small compared to total GDP, it certainly altered people’s lives. Potatoes,
tomatoes, coffee and chocolate were introduced in Europe, and the price of spices fell
steeply.

Yet economists today still don’t truly regard this era as one of true globalization. Trade
certainly started to become global, and it had even been the main reason for starting the
Age of Discovery. But the resulting global economy was still very much siloed and
lopsided. The European empires set up global supply chains, but mostly with those
colonies they owned. Moreover, their colonial model was chiefly one of exploitation,
including the shameful legacy of the slave trade. The empires thus created both a
mercantilist and a colonial economy, but not a truly globalized one.

First wave of globalization (19th century-1914)

This started to change with the first wave of globalization, which roughly occurred over
the century ending in 1914. By the end of the 18th century, Great Britain had started to
dominate the world both geographically, through the establishment of the British Empire,
and technologically, with innovations like the steam engine, the industrial weaving
machine and more. It was the era of the First Industrial Revolution.

The “British” Industrial Revolution made for a fantastic twin engine of global trade. On
the one hand, steamships and trains could transport goods over thousands of miles,
both within countries and across countries. On the other hand, its industrialization
allowed Britain to make products that were in demand all over the world, like iron,
textiles and manufactured goods. “With its advanced industrial technologies,” the BBC
recently wrote, looking back to the era, “Britain was able to attack a huge and rapidly
expanding international market.”

The resulting globalization was obvious in the numbers. For about a century, trade grew
on average 3% per year. That growth rate propelled exports from a share of 6% of
global GDP in the early 19th century, to 14% on the eve of World War I. As John
Maynard Keynes, the economist, observed: “The inhabitant of London could order by
telephone, sipping his morning tea in bed, the various products of the whole Earth, in
such quantity as he might see fit, and reasonably expect their early delivery upon his
doorstep.”

And, Keynes also noted, a similar situation was also true in the world of investing.
Those with the means in New York, Paris, London or Berlin could also invest in
internationally active joint stock companies. One of those, the French Compagnie de
Suez, constructed the Suez Canal, connecting the Mediterranean with the Indian Ocean
and opened yet another artery of world trade. Others built railways in India, or managed
mines in African colonies. Foreign direct investment, too, was globalizing.

While Britain was the country that benefited most from this globalization, as it had the
most capital and technology, others did too, by exporting other goods. The invention of
the refrigerated cargo ship or “reefer ship” in the 1870s, for example, allowed for
countries like Argentina and Uruguay, to enter their golden age. They started to mass
export meat, from cattle grown on their vast lands. Other countries, too, started to
specialize their production in those fields in which they were most competitive.

But the first wave of globalization and industrialization also coincided with darker
events, too. By the end of the 19th century, the Khan Academy notes, “most [globalizing
and industrialized] European nations grabbed for a piece of Africa, and by 1900 the only
independent country left on the continent was Ethiopia”. In a similarly negative vein,
large countries like India, China, Mexico or Japan, which were previously powers to
reckon with, were not either not able or not allowed to adapt to the industrial and global
trends. Either the Western powers put restraints on their independent development, or
they were otherwise outcompeted because of their lack of access to capital or
technology. Finally, many workers in the industrialized nations also did not benefit from
globalization, their work commoditized by industrial machinery, or their output undercut
by foreign imports.

The world wars

It was a situation that was bound to end in a major crisis, and it did. In 1914, the
outbreak of World War I brought an end to just about everything the burgeoning high
society of the West had gotten so used to, including globalization. The ravage was
complete. Millions of soldiers died in battle, millions of civilians died as collateral
damage, war replaced trade, destruction replaced construction, and countries closed
their borders yet again.

In the years between the world wars, the financial markets, which were still connected in
a global web, caused a further breakdown of the global economy and its links. The
Great Depression in the US led to the end of the boom in South America, and a run on
the banks in many other parts of the world. Another world war followed in 1939-1945.
By the end of World War II, trade as a percentage of world GDP had fallen to 5% – a
level not seen in more than a hundred years.

Second and third wave of globalization

The story of globalization, however, was not over. The end of the World War II marked a
new beginning for the global economy. Under the leadership of a new hegemon, the
United States of America, and aided by the technologies of the Second Industrial
Revolution, like the car and the plane, global trade started to rise once again. At first,
this happened in two separate tracks, as the Iron Curtain divided the world into two
spheres of influence. But as of 1989, when the Iron Curtain fell, globalization became a
truly global phenomenon.

In the early decades after World War II, institutions like the European Union, and other
free trade vehicles championed by the US were responsible for much of the increase in
international trade. In the Soviet Union, there was a similar increase in trade, albeit
through centralized planning rather than the free market. The effect was profound.
Worldwide, trade once again rose to 1914 levels: in 1989, export once again counted for
14% of global GDP. It was paired with a steep rise in middle-class incomes in the West.
Then, when the wall dividing East and West fell in Germany, and the Soviet Union
collapsed, globalization became an all-conquering force. The newly created World
Trade Organization (WTO) encouraged nations all over the world to enter into free-trade
agreements, and most of them did, including many newly independent ones. In 2001,
even China, which for the better part of the 20th century had been a secluded, agrarian
economy, became a member of the WTO, and started to manufacture for the world. In
this “new” world, the US set the tone and led the way, but many others benefited in their
slipstream.

At the same time, a new technology from the Third Industrial Revolution, the internet,
connected people all over the world in an even more direct way. The orders Keynes
could place by phone in 1914 could now be placed over the internet. Instead of having
them delivered in a few weeks, they would arrive at one’s doorstep in a few days. What
was more, the internet also allowed for a further global integration of value chains. You
could do R&D in one country, sourcing in others, production in yet another, and
distribution all over the world.

The result has been a globalization on steroids. In the 2000s, global exports reached a
milestone, as they rose to about a quarter of global GDP. Trade, the sum of imports and
exports, consequentially grew to about half of world GDP. In some countries, like
Singapore, Belgium, or others, trade is worth much more than 100% of GDP. A majority
of global population has benefited from this: more people than ever before belong to the
global middle class, and hundred of millions achieved that status by participating in the
global economy.

Globalization 4.0
That brings us to today, when a new wave of globalization is once again upon us. In a
world increasingly dominated by two global powers, the US and China, the new frontier
of globalization is the cyber world. The digital economy, in its infancy during the third
wave of globalization, is now becoming a force to reckon with through e-commerce,
digital services, 3D printing. It is further enabled by artificial intelligence, but threatened
by cross-border hacking and cyberattacks.

At the same time, a negative globalization is expanding too, through the global effect of
climate change. Pollution in one part of the world leads to extreme weather events in
another. And the cutting of forests in the few “green lungs” the world has left, like the
Amazon rainforest, has a further devastating effect on not just the world’s biodiversity,
but its capacity to cope with hazardous greenhouse gas emissions.

But as this new wave of globalization is reaching our shores, many of the world’s people
are turning their backs on it. In the West particularly, many middle-class workers are fed
up with a political and economic system that resulted in economic inequality, social
instability, and – in some countries – mass immigration, even if it also led to economic
growth and cheaper products. Protectionism, trade wars and immigration stops are
once again the order of the day in many countries.

As a percentage of GDP, global exports have stalled and even started to go in reverse
slightly. As a political ideology, “globalism”, or the idea that one should take a global
perspective, is on the wane. And internationally, the power that propelled the world to its
highest level of globalization ever, the United States, is backing away from its role as
policeman and trade champion of the world.
It was in this world that Chinese president Xi Jinping addressed the topic globalization in
a speech in Davos in January 2017. “Some blame economic globalization for the chaos
in the world,” he said. “It has now become the Pandora’s box in the eyes of many.” But,
he continued, “we came to the conclusion that integration into the global economy is a
historical trend. [It] is the big ocean that you cannot escape from.” He went on the
propose a more inclusive globalization, and to rally nations to join in China’s new project
for international trade, “Belt and Road”.

It was in this world, too, that Alibaba a few months later opened its Silk Road
headquarters in Xi’an. It was meant as the logistical backbone for the e-commerce giant
along the new “Belt and Road”, the Paper reported. But if the old Silk Road thrived on
the exports of luxurious silk by camel and donkey, the new Alibaba Xi’an facility would
be enabling a globalization of an entirely different kind. It would double up as a big data
college for its Alibaba Cloud services.

Technological progress, like globalization, is something you can’t run away from, it
seems. But it is ever changing. So how will Globalization 4.0 evolve? We will have to
answer that question in the coming years.