Brexit is just the latest blow to globalization

It's too early to know if Britain's vote to leave the European Union is the beginning of a broader trend, but one thing is clear: Globalization is getting buffeted by increasing headwinds.

It's not just the heightened rhetoric of EU-skeptics in Britain – or other European capitals, who are now pushing for Nexit (the Netherlands), Frexit (France), and Czexit (the Czech Republic).

Nor is the rhetoric on this side of the Atlantic limited to a pair of insurgent presidential candidates, Donald Trump and Bernie Sanders. American enthusiasm has also cooled for the 12-nation Trans-Pacific Partnership trade deal that would open US markets to Asia and South America and vice versa.

Now, trade officials are talking about "peak trade" – suggesting that the cross-border flow of goods and services may be headed downward indefinitely. 

Indeed, international flows of trade and capital have still not fully recovered from the Great Recession of 2007-09, says Pankaj Ghemawat, an economist and co-creator of the DHL Global Connectedness Index. Brexit compounded the trend.

In the first two days of trading since the historic referendum, major stock markets in Europe and the United States were down 5 to 10 percent. The British pound had fallen nearly 12 percent against the dollar.

"Globalization is not inevitable," Geoffrey Jones, a history professor at Harvard Business School, writes in an e-mail. "My own take is that globalization waves reward the successful (countries, cities, or people) and leave a lot of others behind.... At some point, the losers take note of what is going on and revolt."

Britain's historic referendum June 23 to leave the EU underscores not only the growing pushback against globalization, but also the difficulty – and economic cost – of trying to disengage from it. 

Britain on its own

To be sure, not all forms of globalization are under attack. The cross-border flow of data remains strong, thanks in part to the Internet. 

And the Brexit campaign was always about more than just globalization. EU bureaucratic meddling fueled a lot of anger.

Nevertheless, anti-EU politicians seized on two forms of globalization, trade and immigration, to hammer home their point that Britain would be better off going it alone.

For reasons of culture, geography, and history, Britain is likely to weather an EU exit better than other EU countries might.

Of all 140 countries in the DHL index, Britain has the second broadest pattern of trade. Less than half of Britain's exports, and just over half its imports come from the EU, points out Mr. Ghemawat, professor at New York University Stern School of Business. Switzerland, a non-EU member, is the largest destination for its exports.

Economically, Brexit "is probably very bad," says Mr. Ghemawat, who is also a professor at the IESE Business School in Barcelona. "But if any EU member could overcome the withdrawal symptoms, this might be the one."

His biggest worry is what his figures don't pick up: the gateway effect.  Many US and other corporations use Britain as their base of European operations. Once Britain leaves the EU, it won't have a free pass into its huge market. That could cause many companies to move their European headquarters from Britain to the mainland.

For example: Of the world's 50 largest non-British companies, at least eight use Britain as their base to reach the rest of the Europe. At least two of those companies – Samsung and LG Electronics – are reportedly looking at pulling up stakes to find another European base. Big global banks – there are at least 14 in London alone – will also have to move to the Continent if they expect to continue operating in the EU.

Another British upset, in 1931

This is not the first time Britain has upset the existing economic order. In 1931, pressured by the outflow of its gold reserves, the government declared it would no longer redeem its currency in gold. The gold standard was considered sacrosanct – more inviolate in that era than the EU is today. One US bank president at the time said it was "like the end of the world."

Yet, Britain's economy didn't crumble. It rebounded because it could print more money and exit the world's deflationary spiral. Within two years, most of the major powers also abandoned the gold standard, in practice if not always in name.

Britain's economic situation has changed dramatically since 1931, of course. It no longer has an empire to sell to. Even some economists who support Brexit say the country will go through at least a shallow recession before rebounding.

The bigger question is whether other nations will once again follow Britain's lead.

"The real risks of deglobalization are political," Professor Jones says. "The EU has a social crisis and a refugee crisis. It has a security crisis from Islamic terrorism. It has an aggressive Russian neighbor. It is highly fragile due to the EU crisis.... The risks of a disorderly meltdown of Europe are high."