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A short history of globalisation

The modern global economy did not emerge spontaneously. It was built deliberately, through decades of negotiation, institutional creation, and political choice. Understanding this history is essential because today's debates about trade, tariffs, and geopolitical rivalry are rooted in decisions made in boardrooms and parliaments seventy years ago.

Quick definition: Modern globalisation—the process of integrating economies through trade, investment, and technology—began after 1945 with the creation of international institutions and intentional tariff reductions, accelerated dramatically after 1980 with deregulation and supply chain fragmentation, and remains contested politically.

Most people think of globalisation as a recent, almost inevitable development, like the internet. In fact, it required continuous political effort to maintain. For decades, most countries preferred protectionism. The shift to openness happened because leaders made a deliberate choice: that trade would reduce conflict, raise living standards, and align incentives across nations. That choice is now being questioned, making history relevant to current policy debates.

Key takeaways​

  • The pre-1945 world was relatively autarkic: countries tried to be self-sufficient; trade was modest and tariffs were high
  • GATT (1947) created the first institutional framework for lowering tariffs; average tariffs fell from 40% to 5% by 2000
  • The postwar era (1950-1979) saw steady trade expansion, but many countries maintained high protections on manufactured goods and agriculture
  • The 1980s-2000s brought a revolution: deregulation, the rise of global supply chains, and the opening of China and India
  • China's entry to the WTO in 2001 marked the largest single expansion of the integrated global economy
  • Recent years (2015-present) show a reversal: tariffs rising, supply chains being reconsidered, deglobalisation pressuring the post-1945 consensus

Before 1945: the protectionist era​

For most of history, trade was local and limited. A farmer in medieval Europe traded with neighbouring villages. A merchant in Constantinople traded with the Mediterranean and beyond. But the vast majority of goods were produced and consumed locally because transport was expensive and communication was slow.

The modern interstate system, established at the Treaty of Westphalia in 1648, created a new framework: nation-states, not empires or city-states, would be the primary economic actors. These nation-states quickly learned that they could use tariffs—taxes on imports—to protect domestic producers from foreign competition and to raise revenue.

By the 19th century, tariffs were the primary source of government revenue in most countries. A factory in the US faced a 40-50% tariff on imports, making foreign goods uncompetitive domestically. British merchants faced similar barriers in continental Europe. This was not accident; it was deliberate policy meant to nurture "infant industries" and protect workers from foreign competition.

The peak of pre-1945 protectionism came with the Great Depression. In 1930, the US passed the Smoot-Hawley Tariff Act, raising tariffs on hundreds of goods to all-time highs, averaging 45%. Other countries retaliated; trade collapsed; and the global economy fell into a depression. From 1929 to 1933, world trade fell by 65% (measured in dollars). Unemployment in industrial countries reached 25-30%.

Many economists and policymakers came to see tariff wars as disastrous. If countries raise tariffs to protect their workers, other countries retaliate, and everyone is worse off. This lesson shaped thinking after World War II.

1945-1980: the GATT era and postwar expansion​

World War II killed 70-80 million people, devastated industrial capacity in Europe and Japan, and left the world economy in ruins. Allied leaders, meeting at Bretton Woods in 1944, decided that another postwar depression could not be allowed. They created three institutions: the International Monetary Fund (IMF), the International Bank for Reconstruction and Development (now the World Bank), and—in 1947—the General Agreement on Tariffs and Trade (GATT).

GATT was revolutionary. For the first time, countries committed to a multilateral rules-based system for trade. The core rules were:

  1. Most Favoured Nation (MFN): if country A lowered tariffs for country B, it had to lower them for all WTO members equally
  2. National Treatment: foreign goods couldn't be taxed more heavily than domestic goods once they entered a country
  3. Transparency: tariff rates had to be published and predictable
  4. Binding: tariff reductions were locked in through legal commitments

This doesn't sound revolutionary, but it was. It meant that a US tariff negotiation with France would automatically apply to Japan, Canada, and every other GATT member. It meant firms could plan investments knowing tariff rates wouldn't spike unexpectedly. It created incentives for countries to negotiate because helping your trading partners gain market access meant they would help you gain access too.

GATT sponsored eight "rounds" of multilateral negotiations between 1947 and 1994. Each round reduced tariffs further:

  • The Kennedy Round (1964-1967) cut average tariffs by about 50%
  • The Tokyo Round (1973-1979) cut them by another 30%
  • The Uruguay Round (1986-1994) cut industrial tariffs by a further 40% and was the first to include agriculture and services

By the end of the Uruguay Round, average tariffs in developed countries had fallen from 40% to around 4%. This is a stunning reduction in about 50 years.

Trade volume expanded correspondingly. In 1950, exports were about 5% of world GDP. By 1980, they were 10%. Every decade, trade grew faster than GDP, indicating increasing integration. Companies began sourcing inputs from multiple countries. Firms that wanted to export had to meet international quality standards. Consumers gained access to foreign goods.

However, this era was not pure free trade. Many countries maintained high tariffs on sensitive industries: agriculture, textiles, steel, automobiles. Developed countries heavily protected farmers. A US farmer in 1970 was protected by tariffs, quotas, and subsidies. Textiles—which employed millions in developing countries wanting to export—faced strict quotas limiting how much each developing country could export to the US and Europe. This protected politically powerful unions in rich countries but prevented developing countries from moving up the value chain into manufacturing.

Japan and later South Korea and Taiwan grew rapidly by using this window strategically. They kept their domestic markets relatively closed but were given preferential access to US and European markets due to Cold War concerns (the US wanted allies against the Soviet Union). These countries invested heavily in manufacturing, built world-class firms, and eventually graduated into high-wage industries. By 1980, Japan was the world's second-largest economy.

1980-2000: deregulation and supply chain revolution​

The 1970s saw stagflation: simultaneous inflation and stagnation. Governments, facing persistent unemployment and rising prices, looked for solutions. Ronald Reagan in the US and Margaret Thatcher in the UK argued that regulation was the problem and markets the solution. This philosophy extended to trade and finance.

Financial deregulation happened first. Capital controls—rules preventing money from leaving a country—were dismantled. The Bretton Woods system of fixed exchange rates, maintained since 1944, collapsed in 1973. Currencies could now float, reflecting supply and demand. Banks were allowed to operate across borders. Stock and bond markets opened to foreign investors. Money became truly global; by the 1980s, $1 trillion per day was flowing across international currency markets.

Trade continued liberalising. The US, under both Reagan and Clinton, pushed for lower tariffs. The Uruguay Round (1986-1994), the most ambitious GATT negotiation yet, cut tariffs further and created the World Trade Organization (WTO) in 1995 to enforce rules.

But the most significant change was structural, not policy: the invention of the global supply chain. Container ships, air freight, and telecommunications made it economical to produce goods in multiple countries and coordinate the pieces globally. A US firm could design a product, have components made in Taiwan, assemble them in Mexico, and sell to the world.

Initially, this affected low-skilled manufacturing: textiles, shoes, electronics assembly. A shoe maker could design in Italy, manufacture uppers in Vietnam (low-cost labour), manufacture soles in Indonesia, and assemble in Portugal, all at lower total cost than making everything in one place. Competition intensified; prices fell; employment in manufacturing in the US fell steadily.

This era saw real growth in developing countries. China, having started market reforms in 1978, began opening to foreign investment. Export processing zones—special areas with low tariffs and light regulation—attracted multinational factories. A young woman from the Chinese countryside could move to Shenzhen (population 30,000 in 1980, 7 million by 2000) and earn 10x her village wage making electronics for export. Hundreds of millions made this transition.

2000-2010: the China shock and peak globalisation​

China's entry into the WTO on December 11, 2001, was the single most significant trade event since GATT's founding. China agreed to slash tariffs (from an average of 15-25% to 10% within a few years), open industries to foreign investment, and align with WTO rules. In exchange, it gained secure market access to the US, EU, and Japan—the three largest economies.

The impact was staggering. Between 2000 and 2010, China's share of global manufacturing exports tripled from 4% to 12%. Its share of global imports tripled as Chinese factories demanded raw materials and components. This was not just trade; it was the largest and fastest integration of a major economy into global supply chains in history.

For companies, this was revolutionary. The wage gap between a Chinese factory worker ($500 per month) and a US factory worker ($4,000 per month) created irresistible incentives to relocate. A shirt that cost $8 to make in the US cost $1 to make in China. Retailers like Walmart could source globally, driving down costs for consumers and squeezing suppliers everywhere.

For American manufacturing workers, this was devastating. Manufacturing employment, already declining, fell sharply. The textile industry, protected for decades by quotas, collapsed when quotas were eliminated in 2005. Steel mills closed. The Rust Belt widened.

Yet consumers benefited enormously. Clothing prices fell 30-50% in real terms. Electronics became affordable for average households. The US median household could afford goods in 2010 that would have been luxury items in 1990.

India also opened significantly in the 1990s-2000s, becoming the world's back office. Software development, customer service, and business process outsourcing moved to Indian cities. Bangalore became the "Silicon Valley of India." Infosys and Tata Consultancy Services (TCS) became multinational firms.

By 2010, the world economy had achieved unprecedented integration. Global supply chains spanned continents. A product's components crossed borders multiple times. Tariffs had fallen to historic lows. Capital moved freely across borders. E-commerce was emerging, making it easy to buy goods from anywhere to anywhere. Economists spoke of "globalisation" as the defining feature of the modern economy, seemingly inevitable and permanent.

2010-2020: peak trade, then reversal​

Trade growth slowed after 2010 relative to GDP growth. This wasn't due to policy change; it was structural. Advanced economies had already accumulated capital and integrated supply chains. Growth in these countries slowed due to aging populations and rising inequality. Developing countries, growing fast, couldn't import at the same rate. China's growth, while rapid, shifted from export-led to domestic-consumption-led, meaning fewer imports of raw materials.

Politically, though, sentiment began shifting. The 2008 financial crisis, which hit the US and Europe hard, created backlash against globalisation. Manufacturing workers, hit by outsourcing, found a political voice. Labor unions, which had supported free trade in the postwar era, became protectionist. Donald Trump's 2016 election campaign was explicitly anti-trade; his main policy was raising tariffs.

In 2018, the Trump administration raised tariffs on steel and aluminium, claiming national security concerns (a thin justification under WTO rules). It then imposed large tariffs on Chinese goods, claiming intellectual property theft. China retaliated. By 2019, US-China trade was entangled in a tariff war, with average bilateral tariffs rising sharply.

The pandemic (2020-2021) disrupted supply chains severely. Factories shut down; shipping containers piled up in the wrong ports; semiconductor shortages cascaded through the economy. Firms began reconsidering their supply chain strategy: was maximum cost efficiency worth the vulnerability? Major manufacturers began "reshoring" production back to home countries or diversifying suppliers away from China.

2020-present: deglobalisation?​

The post-pandemic world has seen rising protectionism. The US has raised tariffs on Chinese goods to average 19%, the highest since the 1980s. The EU has raised tariffs on certain industries. Countries are reconsidering supply chain geography, moving some production back home or to allied nations. The consensus around free trade has fractured.

However, the degree of "deglobalisation" is often overstated. Total trade, measured by the ratio of global exports to global GDP, remains around 30%, far higher than in 1980 (around 12%). Supply chains remain deeply integrated. A US firm still sources from dozens of countries. Financial markets remain globally integrated. Multinational corporations remain the dominant form of large business.

What has changed is political will. Where there was a consensus from 1945-2010 that lower tariffs were beneficial, there is now active debate. Questions about the distributional effects—who wins and who loses—are finally being addressed seriously. The gains from globalisation continue accruing to consumers and workers in some countries, but the costs fall heavily on workers in others.

Common mistakes about the history of globalisation​

Mistake 1: Assuming globalisation was inevitable​

Globalisation required deliberate choices: to create GATT, to reduce tariffs, to allow capital flows. If governments had chosen protectionism in 1947, globalisation would not have happened. It was not technology that drove globalisation; it was policy. This matters because it means deglobalisation is also possible through policy choices.

Mistake 2: Thinking this is the first wave of globalisation​

The world economy was highly integrated in 1910. British capital flowed to Argentina, India, and South Africa. Labour migration was common. Trade ratios were as high as today. This first wave ended with World War I, the Great Depression, and World War II. Modern globalisation is partly a re-integration after a period of isolation.

Mistake 3: Attributing all manufacturing decline to offshoring​

Manufacturing employment in the US fell from 19 million in 1980 to 12 million in 2020. Not all of this is due to offshoring; some is due to automation. Factories that stayed in the US produced more output with fewer workers. However, the timing suggests globalisation was a major factor: the sharpest employment declines occurred in the 2000s, coinciding with the China shock, not the automation wave of the 1980s-90s.

Mistake 4: Ignoring the role of institutions​

Globalisation did not happen because of technology alone. Shipping costs were already low enough in 1970 to enable global trade, yet trade was much lower then. Institutions—GATT, the WTO, national regulations, corporate law—matter. Firms need to know tariffs won't spike; that contracts will be enforced; that they can move money across borders. Building these institutions took decades.

Mistake 5: Assuming free trade was the norm​

Even today, rich countries maintain significant protections: agricultural subsidies, local-content requirements, government procurement preferences. The US Farm Bill subsidises farmers at $20 billion per year. EU agricultural subsidies exceed €40 billion per year. These protections persist because farmers are politically concentrated and organised. Free trade was always partial, not total.

FAQ​

Why did countries accept lower tariffs if it hurt domestic workers?​

The key was trade-offs. Farmers in developed countries benefited from opening markets; they could export grain and meat to growing markets. Multinational corporations benefited from access to foreign markets and cheaper supplies. Consumers benefited from lower prices. Union workers in protected industries lost. Politically, it was a coalition of exporters (who wanted access to foreign markets) and multinational corporations (who wanted to relocate production) against import-competing workers. The first coalition generally won because their gains were large and concentrated; the second lost because their losses were concentrated but their political power was less than exporters'.

How did China grow so fast if it wasn't fully open to trade?​

China maintained tariffs and restrictions on foreign investment in many sectors. But it selectively opened: allowing foreign factories in special economic zones, keeping export-oriented sectors open, while protecting domestic industries. This "strategic openness" allowed it to learn from foreign firms while protecting domestic champions. South Korea and Taiwan did the same. Over time, as firms became competitive, tariffs were reduced. China's growth came from this combination of selective protection and targeted openness, not pure free trade.

Could tariffs protect jobs without causing retaliation?​

Theoretically, a small country could impose tariffs without provoking retaliation. But large countries can't; if the US raises tariffs, trading partners retaliate, and US exporters suffer. Retaliatory tariffs almost always follow. The Smoot-Hawley experience confirmed this: the US tariff spike led to equivalent retaliation, and trade collapsed. Any protection requires accepting some reduction in market access elsewhere.

Why did the WTO not prevent recent tariff increases?​

The WTO has enforcement mechanisms but is not a world government. If a member violates WTO rules, other members can petition the Dispute Settlement Body, which can authorise retaliatory tariffs. However, the mechanism is slow (taking years) and toothless: a country can defy a ruling; the worst outcome is authorised retaliation. Additionally, the WTO allows emergency protections under "safeguard" provisions, which governments use. The Trump administration's tariffs were partly justified under national security provisions, which are vaguely defined.

Is deglobalisation a permanent shift?​

Unknown. Tariffs are rising, but from very low levels. Trade is still growing, just slower than GDP. Supply chains are diversifying but not completely reshoring. Financial globalisation remains deep. The outcome depends on political choices: if governments embrace protectionism broadly, globalisation will decline; if they manage distributional effects through social policy, globalisation may stabilise at a lower level of integration. History suggests pendulums swing, but direction depends on choices made today.

What would full deglobalisation look like?​

Economically, very disruptive. A return to 1930s tariff levels (40%+) would raise consumer prices 30-50% for imported goods (most consumer goods). Manufacturing jobs would return to rich countries, but at much lower real wages, because firms would still compete globally. Supply chains would restructure, taking years and disrupting production. Financial markets would face capital controls and reduced efficiency. Some economists argue the costs outweigh the benefits even for workers, because cheaper imports matter more to their living standards than local job availability.

Summary​

Modern globalisation emerged deliberately after 1945, through the creation of GATT and a series of negotiated tariff reductions. From 1945-1980, integration expanded steadily but was incomplete; many countries maintained protections on sensitive sectors. The 1980s-2010 period saw explosive growth in supply chains, particularly with China's rise and WTO entry in 2001. This created enormous efficiency gains and expanded choices for consumers, but concentrated costs on workers in import-competing industries. Recent years show political reversal, with tariffs rising and governments reconsidering supply chain geography. The degree of "deglobalisation" remains limited, but the postwar consensus supporting trade openness has fractured. Understanding this history explains both the benefits of globalisation and the political backlash against it.

Next​

→ The China shock explained