The Macroeconomic Effects of Deglobalisation

This paper assesses the macroeconomic impact of deglobalisation scenarios using an estimated three-region global dynamic general equilibrium framework, considering the euro area, the US, and the rest of the world. We focus on two structural deglobalisation trend scenarios: first, exogenous disruptions to inter-regional trade, and second, greater inward orientation that is reflected in a higher home bias. Our simulations reveal that the trade compression caused by deglobalisation significantly reduces economic activity globally and in the individual blocs. Transition dynamics are typically stagflationary and are often characterised by substantial exchange rate fluctuations. We show that bilateral trade disruptions have both direct and indirect effects, which intensify the more regions are open and integrated into global value chains. Additionally, we find that inward orientation is generally costly when occurring universally. However, a unilateral increase in a region’s home bias that entails no other costs, might spur economic activity in the region implementing it. This benefit is at a disproportionate expense to others, as their export markets contract and their currencies devalue. However, if the preference shift entails efficiency costs, in terms of stifled competition or more rigid labour markets, a favourable unilateral outcome is less likely to materialise. Finally, we discuss the international transmission of shocks and show that in a less globalised steady state, external shocks produce less volatility for the euro area economy in terms of GDP and inflation, but there is also less external attenuation of domestic shocks. One implication is that certain structural trends observed in recent decades, such as the ‘globalisation of inflation’, may weaken as a result.