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Why some fear US-China trade battle could usher in 'the end of globalization'

Could the U.S.-China trade war be just the start of much bigger changes to the global trade system?

The rise of populism in the U.S. and around the world — defined by skepticism about free trade and hostility toward multilateral deals — have made economists concerned that globalization is at a tipping point.

It means the battle between the world’s two largest economies could be the start of something far bigger that has major implications for the global economy.

According to a sobering analysis from Capital Economics, the ongoing trade war will continue to escalate — and is likely to change how other nations do business with each other.

“The rapid increase in cross-border movement of goods, services, capital and people that has been the defining feature of the global economy over the past two decades may be about to reverse,” chief economist Neil Shearing wrote in a note to clients this week.

Warning that “we may be witnessing the end of globalization,” Shearing added that current trends have “macroeconomic implications that would extend well beyond the narrow impact of tit-for-tat tariffs.”

‘Wider backlash to globalization’

FILE - In this Saturday, March 23, 2019 file picture, anti-globalization activist Genevieve Legay, 73, center, lies unconscious after collapsing on the ground during a protest in Nice, southeastern France, as part of the 19th round of the yellow vests movement. Genevieve Legay was waving a rainbow flag marked "Peace" and a yellow vest when riot police carrying shields suddenly pushed toward the group of a few dozen protesters Saturday. (AP Photo/Claude Paris, File)
FILE - In this Saturday, March 23, 2019 file picture, anti-globalization activist Genevieve Legay, 73, center, lies unconscious after collapsing on the ground during a protest in Nice, southeastern France, as part of the 19th round of the yellow vests movement. (AP Photo/Claude Paris, File)

China’s decision on Monday to allow its currency to fall below its normal trading range —which makes its goods more competitive in worldwide markets and helps offset the added costs of tariffs —has prolonged the fight between the world’s two largest economies.

The current standoff has also created new jitters about a worldwide order that’s lasted decades.

“There is a significant risk that the current trade war between the U.S. and China represents the start of a wider backlash to globalization that ultimately leads to the disintegration of the liberal rules-based system that has governed the cross-border flow of goods, capital and labour over the past 70 years,” the economist wrote.

Shearing’s analysis is similar to warnings made by other market participants who say President Donald Trump’s antipathy toward free trade is likely to reverberate across the globe, and may even outlast his tenure.

Back in June, Trump’s threatened to impose tariffs on Mexico, which had just agreed to a new trade accord with the U.S. and Canada.

The fight with its southern neighbor was “a tipping point” that raised serious questions about the ability of allies to take America at its word on trade, according to Seema Shah, senior global investment strategist at Principal Global Investors.

“Decades of global trade now seems like it’s going completely into reverse,” she told Yahoo Finance in a June interview.

Capital Economics’ Shearing pointed out that the world has seen periods of laissez-faire trade and commerce in the past, only to see protectionism bring the growth to a screeching halt.

The fact that the periods of globalisation in the late 19th century and mid-20th century came to end means that it shouldn’t necessarily come as a great surprise if the current one also draws to a close.

Shearing believes that modern globalization could end because of technological changes— such as automation — that will make it cheaper for firms to produce and distribute in one location.

“Accordingly, whereas new technologies have previously facilitated globalization, this time they might facilitate the re-shoring of economic activity,” he wrote. “But given that this would just simply reflect firms seeking out more efficient ways of operating, this would surely be a good thing.”

But overall, current economic trends and political climate don’t bode well for the future, the economist said, warning that “in many ways, this wave of globalization may already have peaked.”

Given the tapering off of world trade flows and foreign direct investment in recent years, “it’s difficult to escape the conclusion that the recent period of globalisation is at, or nearing, an end.”

Calder McHugh is an Associate Editor at Yahoo Finance. Follow him on Twitter: @Calder_McHugh.

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