A brief history of globalization

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?
Ancient silk roads

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
(flourish) when nations protect it, it falls when they don’t.
Arabic calligraphy in Asilah medina, Morocco
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 (‫)لونگ‬, 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 (start) 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 (isolated) 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 (maximize exports and minimize
imports to reduce trade deficit) and a colonial economy (the system of production and
consumption which were introduced in the colonies by the colonialist in order to fulfill
their economic demands such as raw materials, markets, area for investment and areas for
settlement.), but not a truly globalized one.

The Industrial Revolution in Britain propelled the first wave of globalization

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 Companies 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 (kept away from other countries),
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
hundreds 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 cyber-attacks.

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 (unhappy) 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 (becoming weaker). 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 (become successful) 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.