A Comprehensive History Of Trade And Globalization

Alibaba should not be the only entity reflecting on the past. As we transition into a new, digitally-driven phase of globalization – referred to as “Globalization 4.0” – it is beneficial for us to do the same. When did globalization truly begin? What were its critical phases? And what does the future hold?

This article also concludes our series on globalization. The series was authored in anticipation of the 2019 Annual Meeting of the World Economic Forum in Davos, which centered around “Globalization 4.0”. In earlier installments, we explored various beneficiaries and casualties of economic globalization, the environmental implications of globalization, cultural globalization, and digital globalization. Now we will revisit its historical context. So, when did international commerce begin and how did it pave the way for globalization?

Silk Routes (1st Century BC-5th Century AD, and 13th-14th Centuries AD)

Humanity has engaged in the exchange of products for almost as long as it has existed. Nonetheless, beginning in the 1st century BC, a remarkable occurrence took place. For the first time ever, luxury items from China started to show up on the far side of the Eurasian expanse – in Rome. These items made their way there after being transported thousands of miles along the Silk Road. Trade transitioned from being a local or regional endeavor to becoming global.

This, however, does not imply that globalization had genuinely begun to flourish. Silk was primarily a luxury good, and the same could be said for the spices that were incorporated into the international trade between Asia and Europe. When compared to the overall economy, the value of these exports was minuscule, and a myriad of intermediaries were involved to deliver the goods to their final destination. Yet, global trading connections were established, becoming a goldmine for those engaged. The discrepancy between purchase and final sales price often soared into the dozens.

The Silk Road was able to thrive largely due to two powerful empires controlling much of the route. Trade interruptions mostly occurred due to blockades imposed by local adversaries of Rome or China. The eventual closure of the Silk Road, after several centuries, was directly linked to the decline of these empires. Upon its reopening during Marco Polo’s late medieval period, it was influenced by the emergence of a new powerful empire: the Mongols. This pattern is a recurring theme in the chronicles of trade: it flourishes when nations safeguard it and weakens when they do not.

Spice Routes (7th-15th Centuries)

The subsequent chapter in trade emerged through the influence of Islamic traders. As the new faith propagated in all directions from its Arabian origins in the 7th century, trade simultaneously expanded. The founder of Islam, the prophet Mohammed, was notably a trader, as was his wife Khadija. Consequently, trade was ingrained in the essence of the new religion and its practitioners, a fact that was evident. By the early 9th century, Muslim merchants already dominated trade across the Mediterranean and the Indian Ocean; following this period, they established a presence as far east as Indonesia, which gradually evolved into…

The primary concentration of Islamic commerce during the Middle Ages revolved around spices. In contrast to silk, spices were predominantly transported by sea since antiquity. However, by the medieval period, they had emerged as the genuine centerpiece of global trade. Among the most significant were cloves, nutmeg, and mace from the legendary Spice Islands – the Maluku islands in Indonesia. These commodities were exceedingly costly and in substantial demand, particularly in Europe. Yet, akin to silk, they remained a luxury commodity, resulting in trade volumes that were relatively low. Globalization had yet to flourish, but the initial Belt (maritime route) and Road (Silk Road) of commerce between East and West had begun to take shape.

Age of Discovery (15th-18th Centuries)

Truly global commerce commenced during the Age of Discovery. It was in this period, beginning at the close of the 15th century, that European adventurers linked East and West – ultimately uncovering the Americas by chance. Supported by breakthroughs from the so-called “Scientific Revolution” in astronomy, mechanics, physics, and navigation, the Portuguese, Spanish, and eventually the Dutch and English not only “discovered” but also dominated and integrated new territories into their economies.

The Age of Discovery transformed the world dramatically. The most (in)famous “discovery” was Columbus’s America, which virtually brought an end to pre-Colombian societies. Yet the most significant exploration was Magellan’s circumnavigation: it paved the way to the Spice Islands, eliminating the need for Arab and Italian intermediaries. While trade remained minimal compared to the overall GDP, it undeniably changed lives. Europe saw the introduction of potatoes, tomatoes, coffee, and chocolate, leading to a steep decline in spice prices.

Nevertheless, contemporary economists do not fully identify this period as one of genuine globalization. Trade undeniably began to take on a global aspect, even serving as a key driver for initiating the Age of Discovery. However, the emerging global economy was still notably compartmentalized and uneven. European empires constructed global supply chains primarily with their own colonies. Furthermore, their colonial model primarily perpetuated exploitation, including the deplorable legacy of the slave trade. Consequently, these empires established both mercantilist and colonial economies, but not a truly globalized one.

First Wave of Globalization (19th Century-1914)

This began to transform with the first wave of globalization, which mostly unfolded during the century concluding in 1914. By the late 18th century, Great Britain had begun to assert its dominance over the world both geographically, through the establishment of the British Empire, and technologically, with advancements such as the steam engine and the industrial weaving machine among others. This was the epoch of the First Industrial Revolution.

The “British” Industrial Revolution served as an incredible dual engine for global trade. On one side, steamships and railways could carry merchandise across thousands of miles, both within nations and between them. On the other hand, industrialization enabled Britain to create products that were sought after worldwide, such as iron, textiles, and manufactured items. “With its advanced industrial technologies,” the BBC recently remarked, reflecting on the period, “Britain was able to penetrate a vast and swiftly expanding international market.”

The resulting globalization was evident in the figures. For roughly a century, trade expanded at an average rate of 3% annually. This growth propelled exports from a mere 6% of global GDP in the early 19th century to 14% on the brink of World War I. As economist John Maynard Keynes noted:

“The resident of London could order by telephone, while enjoying his morning tea in bed, various products from all over the Earth, in such quantities as he desired, and reasonably anticipate their swift delivery to his doorstep.”

Moreover, Keynes pointed out that a similar scenario was true in the realm of investments. Those with resources in New York, Paris, London, or Berlin could invest in internationally engaged joint-stock companies. One such entity, the French Compagnie de Suez, built the Suez Canal, linking the Mediterranean with the Indian Ocean and creating yet another channel for global commerce. Others developed railways in India or operated mines in African colonies. Foreign direct investment was also becoming a global phenomenon.

While Britain reaped the most rewards from this globalization, thanks to its substantial capital and technology, other nations benefited as well by exporting different goods. The development of the refrigerated cargo ship or “reefer ship” in the 1870s, for instance, enabled countries such as Argentina and Uruguay to experience their golden age. They began mass exporting beef from cattle raised on their expansive lands. Other nations similarly began to specialize in the production of goods where they held competitive advantages.

However, the initial wave of globalization and industrialization was not without its darker aspects. By the end of the 19th century, the Khan Academy observes, “most [globalizing and industrialized] European powers laid claim to parts of Africa, and by 1900 the sole independent nation remaining on the continent was Ethiopia.” In a similarly troubling vein, large nations like India, China, Mexico, or Japan, which were once formidable powers,with, were either not capable or not permitted to adjust to the industrial and international movements. Either the Western authorities imposed limits on their autonomous development, or they were otherwise outperformed due to their inadequate access to finances or advanced technology. Ultimately, numerous workers in the industrialized countries also did not gain from globalization, their labor reduced to commodities by industrial apparatus, or their production undermined by overseas imports.

The World Wars

It was a situation destined to culminate in a significant crisis, and it did. In 1914, the onset of World War I marked the conclusion of nearly everything the emerging elite of the West had grown accustomed to, including globalization. The devastation was total. Millions of soldiers lost their lives in combat, millions of civilians perished as collateral damage, warfare supplanted commerce, ruin replaced building, and nations once more barricaded their borders.

In the interval between the world wars, the financial markets, still interlinked in a global network, triggered a further disintegration of the global economy and its connections. The Great Depression in the United States resulted in the collapse of the boom in South America, and a run on banks in many different regions worldwide. A second world war ensued from 1939-1945. By the conclusion of World War II, commerce as a proportion of global GDP had plummeted to 5% – a level not witnessed in over a century.

Second and Third Waves of Globalization

The narrative of globalization, however, was not concluded. The conclusion of World War II heralded a fresh beginning for the global economy. Under the guidance of a new hegemon, the United States of America, and bolstered by the technologies of the Second Industrial Revolution, like the automobile and the aircraft, global trade commenced a resurgence. Initially, this occurred on two distinct tracks, as the Iron Curtain split the world into two spheres of influence. However, following 1989, when the Iron Curtain fell, globalization transformed into a genuinely global phenomenon.

Throughout the early decades after World War II, institutions such as the European Union, along with other free trade initiatives promoted by the US, were responsible for a significant share of the growth in international trade. In the Soviet Union, there was a comparable upswing in trade, although through centralized planning rather than the free market. The impact was significant. Globally, trade once more soared to 1914 levels: by 1989, exports once again comprised 14% of global GDP. This was accompanied by a sharp rise in middle-class incomes in the West.

Then, when the wall separating East and West fell in Germany, and the Soviet Union disintegrated, globalization emerged as an all-consuming force. The newly established World Trade Organization (WTO) urged countries across the globe to engage in free-trade agreements, and most complied, including many newly sovereign nations. In 2001, even China, which had mainly been a closed, agrarian economy for the majority of the 20th century, became a member of the WTO and began producing for the global market. In this “new” world, the US set the pace and led the charge, but many others thrived in its wake.

Simultaneously, an innovation from the Third Industrial Revolution, the internet, connected individuals globally in an even more immediate manner. The orders Keynes could place via telephone in 1914 could now be placed online. Rather than waiting weeks for delivery, items would arrive at one’s doorstep within days. Moreover, the internet also facilitated further global integration of value chains. You could conduct R&D in one nation, sourcing in others, production in yet another, and distribution worldwide.

The outcome has been a globalization on an unprecedented scale. In the 2000s, global exports achieved a historic landmark, rising to approximately a quarter of global GDP. Consequently, trade, the total of imports and exports, expanded to nearly half of world GDP. In some nations, like Singapore, Belgium, or others, trade surpasses 100% of GDP. A substantial part of the global populace has benefited from this: more individuals than ever before belong to the global middle class, and hundreds of millions achieved that status through participation in the global economy.

Globalization 4.0

That brings us to the present, as we encounter a new phase of globalization once more. In a world increasingly dominated by two global powers, the US and China, the new frontier of globalization lies in the cyber realm. The digital economy, in its early stages during the third wave of globalization, is now evolving into a formidable force driven by e-commerce, digital services, and 3D printing. This transformation is further facilitated by artificial intelligence, yet is undermined by transnational hacking and cyberattacks.

Concurrently, a negative aspect of globalization is also growing, propelled by the global ramifications of climate change. Pollution in one region triggers extreme weather events in another. Additionally, the deforestation in the few remaining “green lungs” of the planet, such as the Amazon rainforest, has a further catastrophic impact not only on the world’s biodiversity but also on its ability to manage perilous greenhouse gas emissions.

However, as this new wave of globalization arrives at our shores, numerous people around the world are rejecting it. Particularly in the West, many middle-class workers are disillusioned with a political and economic framework that has led to wealth disparity, social unrest, and – in certain countries – mass immigration, even while contributing to economic progress and lower prices. Protectionism, trade conflicts, and immigration restrictions are again prevalent in numerous nations.

As a share of GDP, global exports have stagnated and have even begun a slight decline. As a political ideology, “globalism,” or the perspective of adopting a global view, is on the decline. Internationally, the force that propelled the world to its peak level of globalization ever, the United States, is retracting from its role as the enforcer and trade advocate of the globe.

It was in this context that Chinese president Xi Jinping addressed the issue of globalization in a keynote speech in Davos in January 2017. “Some attribute the chaos in the world to economic globalization,”he stated. “It has now turned into the Pandora’s box in the view of many.” However, he proceeded, “we reached the resolution that integration into the global economy is a historical phenomenon. [It] is the vast ocean from which you cannot flee.” He then suggested a more encompassing globalization, and called upon nations to partake in China’s new initiative for international commerce, “Belt and Road.”

In this context, it was also a few months later that Alibaba inaugurated its Silk Road headquarters in Xi’an. This establishment was intended to serve as the logistical foundation for the e-commerce titan along the new “Belt and Road”, the Paper reported. Yet, where the ancient Silk Road prospered due to the trade of luxurious silk via camel and donkey, the new Alibaba Xi’an facility would facilitate a globalization of a radically different nature. It would also function as a large data institution for its Alibaba Cloud services.

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