17 April 2015

The future of globalisation is in doubt


Is globalisation under threat? That may seem like a ridiculous question, especially if you’re reading this on a Chinese-made smartphone, while sipping a Colombian coffee, served by an Italian barista, in an American-owned coffee shop, next to a gaggle of tourists. For decades, the world economy has been growing together as distance-shrinking technology and market-opening government policy enable ever more products, money, people and information to cross borders – spurring innovation, enhancing consumer choice, lifting living standards and alleviating poverty. But since the crisis, those seemingly inexorable trends have been disrupted. Worse, cracks are appearing in the global economic system. Economic weaknesses, geopolitical rivalry, resurgent regionalism, new-fangled nationalism and old-fashioned protectionism all pose big threats to our open world and the freedom and prosperity it brings.

Many people assume that globalisation is irreversible. Barring an apocalypse, technologies such as airplanes and the internet can’t be uninvented, while the costs of breaking our foreign ties seem prohibitively high. But that’s what people thought just over a century ago too. Back then, the world was connected by steamships, railways and the telegraph, with Britain committed to unilateral free trade and the United States’ door open to (mostly European) migrants. So intertwined was the global economy that in The Great Illusion, penned in 1909, Norman Angell famously argued that interdependence made war futile. Yet that earlier era of globalisation was soon sundered by the First World War and the Russian Revolution and finished off by the Great Depression and the Second World War.

Things don’t have to get that bad for the global economy to fracture. Globalisation can also gradually be chipped away. Remember that even before the crisis it was patchy and incomplete. Trade in manufactures is relatively free; trade in many services and agricultural products much less so. Advanced economies are typically more open than emerging ones; North Korea is near to autarky. Britain is one of the few countries that is so open to foreign investment. Many countries, notably China, maintain stiff capital controls. Except within the European Union, and between Australia and New Zealand, migration is almost everywhere tightly controlled. Even the internet is not truly global: the Great Firewall of China keeps out Facebook, Twitter and much else.

Since the crisis, some dimensions of globalisation have stalled and others retreated. In the two decades before the crisis, world trade grew by 7% a year, twice as fast as GDP. As a result, trade (exports plus imports) soared from 35% of global GDP in 1986 to 60% in 2008. But since then, after bouncing back from the collapse in 2009, world trade has barely kept pace with GDP. This week the World Trade Organisation (WTO) confirmed that global trade growth was again sluggish last year.

Companies often do business internationally by opening (or buying) overseas operations. In the pre-crisis years, foreign direct investment (FDI) rocketed: from $208 billion worldwide in 1990 to $2 trillion in 2007. But since then, FDI flows have plunged by more than a quarter. In 2013 they were back down to where they were in 2000.

Financial flows have fallen most. Cross-border capital flows have plummeted from more than 20% of global GDP in 2007 to only 6% in the first half of 2014, according to Willem Buiter, chief economist of Citigroup.

International migration has slowed. Between 2000 and 2010, the total number of migrants worldwide rose from 175 million to 221 million, from 2.8% of the global population to a still-small 3.2%. By mid-2013 the United Nations reckons that there were 232 million migrants worldwide: still only 3.2% of the (increased) global population.

On the plus side, information generally flows more freely than ever. Apple’s iPhone was launched in June 2007, just as the financial crisis kicked off, and since then smartphones – and hence mobile internet access – have become ubiquitous. Facebook, Twitter and YouTube have grown explosively over that period. But unfortunately, countries such as Turkey have taken a leaf out of China’s book and periodically block access to those services.

No doubt part of the disruption to globalisation since the crisis is cyclical. One reason why trade growth has been so weak is the stagnation in the eurozone. Also, with Western banks shrinking their balance sheets, it is not surprising that cross-border lending has collapsed. Given banks’ orgy of bad lending in the bubble years, that is often not a bad thing.

But there are also more troubling structural shifts. Global trade liberalisation has been stalled for so long that the benefits of earlier deals may finally have been exhausted. Twenty years have elapsed since the last big multilateral trade agreement came into force: the Uruguay Round deal, which also created the WTO. Its Doha Round has been deadlocked for years, although in 2013 governments did ink a limited deal in Bali to cut customs red tape, which has yet to be implemented. The Information Technology Agreement (ITA), which enabled tariff-free trade in IT products, was concluded in 1996 – ancient history in our digital era. China’s accession to the WTO, which required it to open its markets unilaterally, was way back in 2001.

Trade barriers don’t need to rise for globalisation to retreat: shifts in the pattern of production towards more protected sectors and products can have a similar effect. China’s industrial structure has developed so fast that it now includes sectors, such as environmental technology, that aren’t covered by its WTO accession agreement. Across the world, products that are included in the ITA, such as printers and PCs, are giving way to ones that aren’t, such as multi-function printers and smartphones. As manufactures weigh less heavily in the economy and highly protected services become more important, the failure to open up whole swathes of the economy is becoming more costly. Set against that, technology may open up new markets that were previously non-tradable: witness Uber’s impact on local taxi markets (in cities where the authorities aren’t banning it).

With global efforts to free up trade blocked, the world economy is fragmenting as regional and bilateral agreements proliferate. A whopping 449 of these preferential pacts have been notified to the WTO, of which 262 are in force. Misleadingly known as “free-trade agreements”, these sweetheart deals segment markets, give privileged access to some at the expense of others, and tie trade up in a morass of rules-of-origin requirements and other red tape. Worse, they create their own infernal logic, whereby those that are discriminated against seek their own special deal. While comprehensive deals that are open to outsiders may be better than nothing, they are not a patch on genuinely free global trade.

A bigger fear is that the world could split into rival regional trading blocs. The Obama administration’s top trade priority is the Trans-Pacific Partnership (TPP) with 11 other countries on both sides of the Pacific. While freer trade in the Pacific may seem like a prize worth seizing, the TPP also seems designed to contain China, which is pointedly excluded from the negotiations. Such is the opposition to trade deals in the US Congress and elsewhere that it remains to be seen whether TPP will actually be concluded. But the TPP negotiations have already spurred Beijing to pursue a rival Regional Comprehensive Economic Partnership with 15 Asian countries (some of which are also in the TPP).

Geopolitical rivalry between a rising China and a (relatively) declining America poses a big challenge to globalisation – and not just in trade. China is understandably miffed that it is not given due weight at the World Bank and the International Monetary Fund. Even though its economy is second only to America’s, it has fewer votes there than the Benelux countries, because the US Congress has failed to ratify a deal that would increase its voting share. So Beijing is creating rival institutions, notably the New Development Bank and the Contingent Reserve Association (CRA), along with its fellow BRICS (Brazil, Russia, India and South Africa). Likewise, feeling that the Asian Development Bank (ADB) is too dominated by Japan, it has established an Asian Infrastructure Investment Bank (AIIB) which Britain, along with many other countries, recently joined, despite American objections. While there is certainly room for many infrastructure investment mechanisms, and more generally some institutional competition can be healthy, there is still a danger that global institutions will splinter.

The threat of a bigger and broader protectionist backlash is also growing. While global leaders rightly congratulate themselves for so far avoiding the protectionist spiral of the 1930s during this crisis, protectionist measures are proliferating, according to the independent Global Trade Alert. It has documented nearly 4,000 since 2008. They include “Buy American” requirements in the United States; “anti-dumping” duties on imports, such as Chinese solar panels, that the EU deems too cheap; and a panoply of measures enacted by the three worst offenders: India, Russia and Argentina. These aren’t just in trade. Unlike Britain’s, many governments have sought to block Chinese investment in their economies – and there are no global rules to prevent this. Many countries have tightened their immigration restrictions in recent years – including, regrettably, Britain. And in a world where, shamefully, banks remain backstopped by governments – ie, taxpayers – regulation is forcing finance to become much more national again.

The prolonged weakness of global demand is sharpening competition for market share, increasing traditional protectionist impulses. It is also focusing attention on countries that are holding down their real exchange rate to gain a competitive advantage. In the pre-crisis years, China’s vast current-account surplus made it an obvious target for those in the US Congress and elsewhere who felt it was unfairly underpricing its exports by holding down its currency. But rising Chinese wages, the renminbi’s appreciation and the shrinkage of the surplus have taken the sting out of such complaints. It is now Germany that may be in the line of fire. It has the world’s biggest (and rising) current-account surplus, in large part because wages in Germany have been artificially suppressed for the past 15 years. The euro has also plunged by 20% against the dollar over the past year, lifting German growth at the expense of America’s. In a world of deficient demand, beggar-thy-neighbour competitive devaluations can easily trigger protectionism, as the 1930s show.

Perhaps the biggest worry is the resurgence of economic and political nationalism. There is a growing popular backlash against globalisation in Western countries where wages are stagnant, unemployment is often high and many people blame foreigners – their immigrant neighbours or Chinese workers – for their problems. The failures of poorly regulated global finance are also undermining support for open, competitive markets. Crony capitalism – the capture of governments by vested interests that stifle opportunity and steal the value created by others – discredits governments, businesses and “corporate globalisation”.

In Britain, opponents of openness are riding high: both the UK Independence Party (for nationalist reasons) and the Green Party (for localist ones) want to raise the drawbridge. In France, Marine Le Pen’s National Front leads the polls with a xenophobic, statist and protectionist platform that Gaspard Koenig of Génération Libre, a liberal think-tank, describes as “national socialist”. Vladimir Putin is whipping up Russian nationalism to buttress his support in the wake of his invasion of Ukraine and the subsequent Western sanctions. Nationalist tensions between China and Japan periodically spill over into trade conflict – and could yet provoke the military kind.

It need not come to that. But our open world is more vulnerable than many people think. To safeguard and strengthen it, governments need to address the debt problems that depress demand and the barriers to innovation and enterprise that restrict productivity growth, with surplus countries such as Germany doing more to boost wages and investment. Policymakers need to crack open rigged markets and tackle rent-seeking behaviour, not least in the financial sector, promoting open capitalism, not cronyism. They ought to do more to open up opportunities for those who perceive themselves to be losers from globalisation and immigration. At the same time, they should confront and dispel protectionist, nationalist and localist arguments that would impoverish us all. It is, for instance, a myth that free trade leads to a race to the bottom: just look at Sweden, a very open economy that also has very high labour and environmental standards. Instead of pandering to the xenophobic views of the likes of UKIP and France’s National Front, mainstream politicians need to be forthright in defending the values of openness.

Far from closing ourselves off from the world, we ought to open up more. Where possible, countries should do this unilaterally – notably to people who want to come work and contribute to society. But overcoming the vested interests that fear foreign competition and opening up foreign markets often requires international negotiations. The WTO could be given a new lease of life by proceeding through plurilateral deals that involve coalitions of the willing (while remaining open to others to join later), rather than through comprehensive agreements that try – but fail – to get all 160 members to agree to everything at once. Global disciplines on investment protectionism ought to be a priority.

Last but not least, the West needs to seize the huge opportunities for mutually beneficial trade and investment that the rapid development of China and other fast-growing emerging economies provides. The flipside is that the West will need to adapt to China’s rise in all sorts of ways, preferably by trying to engage it in the liberal international order rather than seeking to exclude it. If Washington is sceptical, Britain and other European countries ought to play a more constructive role.

The future of our open world is at stake. To improve understanding of the many facets of openness and seek to break down the barriers that divide and impoverish us, I’m setting up an internationally networked think-tank called OPEN: the Open Political Economy Network. Please support us.

Philippe Legrain, who was economic adviser to the President of the European Commission from 2011 to 2014, is a visiting senior fellow at the London School of Economics’ European Institute and the author of European Spring: Why Our Economies and Politics Are in a Mess — and How to Put Them Right.