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Deglobalisation and its discontents

Deglobalization and its discontents

Deglobalization is on the march. The second great wave of globalization, which rose out of the ashes of two devastating world wars, and went into overdrive after the fall of the Berlin Wall and the integration of China into the global trading system, is now being unwound.

Key points:

  • Globalization is changing as a result of politics
  • Cross-border capital flows are down, goods being moved between countries no longer the same

  • Support for free trade policies and multilateralism is flagging, and protectionism and isolationism are in the ascendance. At least, that’s how the conventional narrative goes. The reality is more complex.

    Cyclically, global trade has actually been rebounding of late. World trade volumes, as measured by the Netherlands Bureau for Economic Policy Analysis, have risen around 5% over the past year, the strongest pace since 2011. Measures of international air freight traffic, sea container traffic, and firms’ export orders have all surged higher in the past 12 months too.

    World trade relative to global industrial production has started to edge up again. And, although they are less timely, globalization indices, such as that produced by the Swiss Federal Institute of Technology, continue to rise.

    The increase in demand for tradeables has come alongside an ongoing recovery in global investment and industrial activity. In other words, the broad-based pick-up in global trade is not the product of idiosyncratic, one-off drivers (such as just the rise in commodities prices, or just the latest rise in the dollar), but rather a reflection of the synchronised upturn in global economic activity.

    Trading up

    Admittedly, global trade is not yet growing at the double-digit rates that prevailed in the late-1990s and early-2000s. But world trade in this period of hyper-globalization benefited from plenty of low-hanging fruit. These included China’s entry into the global trading system, the ever-closing integration of global value chains and the continued rollout of containerization and the jet engine, which brought down transport costs. It could be that this period of hyper-globalization was the anomaly, rather than today’s environment of somewhat more constrained trade growth.

    Meanwhile, despite a number of high-profile trade agreements being thrown into doubt, the total number of free trade agreements between nations continues to increase. The European Union (EU) and Canada recently wrapped up a comprehensive free trade agreement. The EU is also actively negotiating a free trade agreement with Japan. The Trans-Pacific Partnership (TPP) continues to be negotiated even without U.S. involvement; while the China-led Regional Comprehensive Economic Partnership (RCEP) could bring 30% of global gross domestic product (GDP) and half the world’s population into a single free trade zone in Asia.

    Structurally, globalization (and our understanding of globalization) is changing, rather than going to reverse. For a start, globalization’s cheerleaders are increasingly in the emerging world. Chinese President Xi Jinping has positioned himself as the defender of globalization and the embodiment of global leadership now that President Trump has renounced the U.S.’s traditional occupation of this role. But China’s version of globalization is different from that previously championed by the U.S. It will involve increasing the land-based integration of Eurasia (via the Belt and Road Initiative). China may also look to “export” its unique, state-led economic development model as one for other countries to emulate, in place of Western-style representative democracy plus free-market capitalism.

    The changing face of globalization

    That globalization creates both winners and losers is now better understood, although it took voter outrage to really bring the issue to the fore. In particular, it has become clearer that the increased global labor supply has lowered the relative wages of lower-skilled workers in many advanced economies. So even as globalization has helped reduce inter-country inequality (by boosting the incomes of workers in emerging market economies), it has exacerbated intra-country inequality (by lowering the relative incomes of many workers in developed market economies).

    Redistributive tax systems, stronger social safety nets, and better education and training for displaced workers are the correct – albeit extremely difficult – way to deal with the negative fall-out from globalization.

    Finally, the goods that are actually being moved across borders are changing. A declining share of what constitutes globalization is the movement of bulky goods; instead, trade in services is rising as a share of total trade. The nature of the movement of people across borders is also changing. An increasing driver of migration is a “security push” as opposed to pure “economic pull” factors – in many cases, people fleeing regional conflicts.

    Migration into emerging markets is now growing more rapidly than migration into developed markets.

    Migration into emerging markets is now growing more rapidly than migration into developed markets. Meanwhile, global cross-border capital flows are down significantly from their pre-financial crisis highs, and may never recover given the regulatory environment that led to the explosion in leverage in the run up to the crisis has been tightened. Global foreign direct investment flows have slowed, although by much less, while portfolio investment flows remain strong.

    There is nothing inevitable or irreversible about globalization. It is the result of political choices, and those political choices could send globalization into reverse. But, to paraphrase Mark Twain, rumors of the demise of globalization are greatly exaggerated.

    Important Information

    Foreign securities are more volatile, harder to price and less liquid than U.S. securities. They are subject to different accounting and regulatory standards, and political and economic risks. These risks are enhanced in emerging markets countries.

    ID: US-211117-52521-1

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