Preventing deglobalisation

Sea change: globalisation has brought far deeper integration of the world economy than previous waves of trade internationalisation. Photograph: Reuters

Economic history teaches us many lessons. One in particular, rehearsed many times over the past year, is that the internationalisation of economies should not be taken for granted. It is not a perpetuum mobile – a force of nature it is impossible prevent.

The current crisis and the responses to it have triggered fears of a replay of the 1930s. Then, tit-for-tat protectionism and economic nationalism followed hard on the heels of a Wall Street crash, the collapse of overleveraged banks, and the end of the Goldilocks economy of the late 1920s. The world experienced a giant leap of protectionism. A similar shock occurred in 1914, when the guns of August destroyed what has been termed the "liberal international economic order" – the rapidly integrating world of 1870-1913. It was not until the 1980s that leading economies returned to pre-1914 levels of cross-border integration.

Historical references can be misleading, however. The current crisis has been far less severe than the Great Depression. Nor have the past year's anti-crisis decisions been overtly protectionist. True, many protectionist measures have been introduced and more are in the pipeline – but they have been far less drastic than the tariff wars of the 1930s. Another dog that has not barked during this crisis is the competitive devaluation of currencies.

This is comforting knowledge. It testifies to the disciplining effects that membership of bodies like the World Trade Organisation has on countries' protectionist sentiments. Yet we should perhaps feel less reassured than most accounts of the crisis and of globalisation would have us believe. To understand what is currently happening in the global economy, we must move beyond traditional concepts of market integration.

Over the past few centuries, markets have been integrated through trade and cross-border movement of capital. For most of that time, it has been a continuing process of internationalisation: country after country has linked up with the global economy, oriented its production towards foreign markets, and imported an increasing share of its inputs for downstream industrial use. Companies have expanded their presence to several markets. In such an internationalised economy, trade barriers damage economic flows across borders and impose costs on producers and consumers.

This is still true. And new trade barriers erected during the crisis have damaged flows across borders. They have also lowered welfare. But we should not end the analysis with this observation. Nor should we treat the current crisis (and associated measures) as simply another example of a cyclical contraction in trade with associated effects of recently erected, low-intensity trade barriers.

The dangers posed by the current crisis are, arguably, of a different nature. They start not at national borders, but with the structure of regulation at home. At the heart of the current challenge to the global economy is a simple, but not simplistic, observation: globalisation is qualitatively different from internationalisation. Assuming that governments will not suddenly raise border barriers, the current threat to the global economy is not good old protectionism: it is an excessive drive for new and heightened regulation.

Globalisation is a higher form of internationalisation – in the same fashion as Lenin considered capitalism the highest form of imperialism. More than the mere integration of economies through trade, globalisation means densely integrated product, capital and labour markets where a cross-border flow is almost a redundant concept – because one simply cannot distinguish between markets or geographical regions. In its purest form, borders become alien concepts. Globalisation implies forms of production so integrated that cross-border flows represent just one of several signs of integration between different economic regions.

The world is not flat. And the pre-crisis economy was not fully globalised; sizable pockets of economies remained unintegrated. But what distinguished the past decade from previous centuries of internationalisation was the distinct movement towards globalisation. Geographically, horizontally and vertically, the world economy evolved towards a global economy. The main benefit of this did not come through increasing volumes of trade (although that was important) but through heightened competition in domestic markets. Hence, globalisation was not about recorded flows across borders, but the level and texture of competition.

It is this form of competition that the reviving trend towards excessive regulation is damaging.