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?

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.

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 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 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 concluded 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”.

https://youtu.be/Ys6skqxQKMk

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.