COVID-19 fallout: An acceleration in de-globalization

Dave Donabedian, CFA
May 01, 2020

Time will tell if COVID-19 does indeed accelerate de-globalization and what the extent of the impact may look like. In the meantime, we are considering what the shifts in longer-term investment underpinnings may be, including potential investment opportunities and risks as well as implications on the economy and financial markets.

Background

Perhaps the most important economic and investment trend of the last generation was globalization. Sparked by the fall of the Soviet Union, the rollout of the common euro currency, the accession of China to the World Trade Organization and the creation of the North American Free Trade Agreement (NAFTA), national borders opened up to goods and services from around the globe. From our vantage point, the results were a boon to investors. Increased competition produced low inflation and interest rates, and cheaper labor and capital boosted profit margins.

In recent years, populist movements in many countries rebelled against globalization, free trade and immigration. The argument, in a nutshell, is that globalization has been good for Wall Street but bad for Main Street. Stagnant middle class wages are the primary piece of evidence offered by anti-globalists. A rollback of the free trade movement was a key part of both Donald Trump’s and Bernie Sanders’ 2016 platform, and President Trump has pursued a significant rewrite of America’s trade policy. Brexit was largely about a desire to withdraw from a free trade zone and restrict immigration. 

There is ample evidence that “peak globalization” occurred prior to COVID-19. As the chart on the document shows, global trade volumes have declined for the last two years. Volumes are likely to fall dramatically in the aftermath of the COVID-19 recession.

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This is the first in a multi-part series: "After COVID-19: Adapting to a changed landscape".

Part 2: The size and scope of government
Part 3: Debt and deficits

Dave Donabedian is chief investment officer of CIBC Private Wealth Management, serving in that capacity since 2009. His responsibilities include chairing the Asset Allocation Committee, as well as providing oversight of internal investment strategies and the external manager selection platform.