Trade’s grave new world

A new pattern of commerce exists after a golden age of globalisation.

A container ship is loaded at a terminal in the harbour of Hamburg, Germany. Picture: Reuters

Large and sustained increases in the cross-border flow of goods, money, ideas and people have been the most important factor in world affairs for the past three decades. They have reshaped relations between states both large and small, and have increasingly come to affect internal politics, too. From iPhones to France’s ­gilets jaunes, globalisation and its discontents have remade the world.

The golden age of globalisation, 1990-2010, was something to behold. Commerce soared as the cost of shifting goods in ships and planes fell, phone calls got cheaper, tariffs were cut and the financial system liberalised. International activity went gangbusters as firms set up around the world, investors roamed and consumers shopped in supermarkets with enough choice to impress Phileas Fogg.

Recently, though, the character and tempo of globalisation have changed. The pace of economic integration around the world has slowed by many — though not all — measures. “Slowbalisation”, a term used since 2015 by Dutch trend-watcher Adjiedj Bakas, describes the reaction against globalisation. How severe will it become? How much will a trade war launched by US President Donald Trump exacerbate it? What will global commerce look like in the aftermath?

There have been periods of more and less globalisation throughout history. Today’s era sprang from the US’s sponsorship of a new world order in 1945, which allowed cross-border flows of goods and capital to recover after years of war and chaos. After 1990 this bout of globalisation went into warp speed as China rebounded, India and Russia abandoned ­autarky and the European single market came into its own.

Containerising freight sent shipping costs plummeting. America signed NAFTA, helped create the World Trade Organisation and supported global tariff cuts. ­Financial liberalisation freed capital to roam the world in search of risk and reward.

Harder blew the trade winds

World trade rocketed as a result, from 39 per cent of GDP in 1990 to 58 per cent last year. International assets and liabilities rose too, from 128 per cent to 401 per cent of GDP, as did the stock of migrants, from 2.9 per cent to 3.3 per cent of the world’s population. On the first two of those measures, the world is far more integrated than in 1914, the peak of the previous age of globalisation. Nonetheless, parts of the world remain poorly integrated into the global economy.

About one billion people live in countries where trade is less than a quarter of GDP. World trade can be split into tens of thousands of separate potential corridors between pairs of countries: the US and China, say, or Gabon and Denmark. In a quarter of those corridors there was no recorded commerce at all.

When did the slowdown begin? Consider a dozen measures of global integration (see graphic). Eight are in retreat or stagnating, of which seven lost steam around 2008. Trade has fallen from 61 per cent of world GDP in 2008 to 58 per cent now. If these figures exclude emerging markets (of which China is one), it has been flat at about 60 per cent. The capacity of supply chains that ship half-finished goods across borders has shrunk. Intermediate imports rose fast in the 20 years to 2008, but since then have dropped from 19 per cent of world GDP to 17 per cent. The march of multinational firms has halted. Their share of global profits of all listed firms has dropped from 33 per cent in 2008 to 31 per cent. Long-term cross-border investment by all firms, known as foreign direct investment, has tumbled from 3.5 per cent of world GDP in 2007 to 1.3 per cent last year.

GLOBAL STOPS AND STARTS - Inq

As cross-border trade and companies have stagnated relative to the economy, so too has the intensity of financial links. Cross-border bank loans have collapsed from 60 per cent of GDP in 2006 to about 36 per cent. Excluding rickety European banks, they have been flat at 17 per cent. Gross capital flows have fallen from a peak of 7 per cent in early 2007 to 1.5 per cent. When globalisation boomed, emerging economies found it easy to catch up with the rich world in terms of output per person. Since 2008 the share of economies converging in this way has fallen from 88 per cent to 50 per cent (using purchasing-power parity).

A minority of yardsticks show rising integration. Migration to the rich world has risen slightly over the past decade. International parcels and flights are growing fast. The volume of data crossing borders has risen by 64 times, according to McKinsey, a consulting firm, not least thanks to billions of fans of Luis Fonsi, a Puerto Rican crooner with YouTube’s biggest ever hit.

Braking point

There are several underlying causes of this slowbalisation. After sharp declines in the 1970s and 80s trading has stopped getting cheaper. Tariffs and transport costs as a share of the value of goods traded ceased to fall about a decade ago. The financial crisis in 2008-09 was a huge shock for banks. After it, many became stingier about ­financing trade. And straddling the world has been less profitable than bosses hoped. The rate of return on all multinational investment dropped from an average of 10 per cent in 2005-07 to a puny 6 per cent in 2017. Firms found that local competitors were more capable than expected and that large investments and takeovers often flopped.

Deep forces are at work. Services are becoming a larger share of global economic activity and they are harder to trade than goods. A Chinese lawyer is not qualified to execute wills in Berlin and Texan dentists cannot drill in Manila.

Emerging economies are getting better at making their own inputs, allowing them to be self-reliant. Factories in China, for example, can now make most parts for an iPhone, with the exception of advanced semiconductors. Made in China used to mean assembling foreign widgets in China; now it really does mean making things there.

What might the natural trajectory of globalisation have looked like had there been no trade war? The trends in trade and supply chains appear to suggest a phase of saturation, as the pull of cheap ­labour and multinational investment in physical assets have become less important. If left to their own devices, however, financial flows such as bank loans might have picked up as the shock of the financial crisis receded and Asian financial institutions gained more reach abroad.

GLOBAL STOPS AND STARTS - Inq

Instead, the Trump administration has charged in. Its signature policy has been a barrage of tariffs covering a huge range of goods, from tyres to edible offal. The revenue the US raised from tariffs, as a share of the value of all imports, was 1.3 per cent in 2015. By October last year, the latest month for which data is available, it was 2.7 per cent. If the US and China do not strike a deal and Trump acts on his threats, that will rise to 3.4 per cent in April. The last time it was that high was in 1978, although it is still far below the level of over 50 per cent seen in the 1930s.

Tariffs are only one part of a broad push to tilt commerce in the US’s favour.

A tax bill passed by congress in December 2017 was designed to encourage companies to repatriate cash held abroad. They have brought back about $US650 billion ($904bn) so far.

In August last year, congress also passed a law vetting foreign investment, aimed at protecting US technology companies.

America’s control of the dollar-based payments system, the backbone of global commerce, has been weaponised. ZTE, a Chinese technology firm, was temporarily banned from doing business with American firms. The practical consequence was to make it hard for it to use the global financial system, with devastating results.

Another firm, Huawei, is being investigated as a result of information from a US monitor placed inside a global bank.

The punishment could be a ban on doing business in the US, which in effect means a ban on using dollars globally.

The administration’s attacks on the Federal Reserve have ­undermined confidence that it will act as a lender of last resort for foreign banks and central banks that need dollars, as it did during the ­financial crisis.

The boss of an Asian central bank says in private that it is time to prepare for the post-American era. The US has abandoned climate treaties and undermined bodies such as the WTO and the global postal authority.

On the counter-attack

Other countries have reciprocated in kind if not in degree. As well as raising tariffs of its own, China used its antitrust apparatuses in July to block the acquisition of NXP, a Dutch chip firm, by Qualcomm, a US one. Both do business in China. It is also pursuing an antitrust investigation against a trio of foreign tech firms — Samsung, Micron and SK Hynix — which its domestic manufacturers complain charge too much.

Since November, the French state has taken an overt role in the row between Renault and Nissan after having sat in the back seat for years.

The US has had bouts of protectionism before, as the historian Douglas Irwin notes, only to return to an open posture. Nonetheless, investors and firms worry that this time may be different.

Uncle Sam is less powerful than during the previous bout of protectionism, which was aimed at Japan. Its share of global GDP is roughly a quarter, compared with a third in 1985.

Fear of trade and anger about China is bipartisan and will outlive Trump. And damage has been done to US-led institutions, including the dollar system.

Firms worry that the full-tilt globalisation seen between 1990 and 2010 is no longer underwritten by the US and no longer commands popular consent across the West.

Few quick fixes

Perhaps firms can adapt to slowbalisation, shifting away from physical goods to intangible ones. Trade in the 20th century morphed three times, from boats laden with metals, meat and wool to ships full of cars and transistor radios, to containers of components that feed into supply chains.

Now the big opportunity is services. The flow of ideas can pack an economic punch; over 40 per cent of the productivity growth in emerging economies in 2004-14 came from knowledge flows, according to the IMF.

Overall, it has been a dismal decade for exports of services, which have stagnated at about 6-7 per cent of world GDP. But economist Richard Baldwin predicts a cross-border “globotics revolution”, with remote workers abroad becoming more embedded in companies’ operations. Indian outsourcing firms are shifting from running functions, such as Western payroll systems, to more creative projects, such as configuring new Walmart supermarkets.

In November TCS, India’s biggest firm, bought W12, a digital design studio in London. Cross-border e-commerce is growing, too. Alibaba expects its Chinese customers to spend at least $US40bn abroad in 2023. Netflix and Facebook together have over a billion cross-border customers.

Services rendered

It is a seductive story. But the scale of this electronic mesh can be overstated. Typical American Facebook users have 70 per cent of their friends living within 300km and only 4 per cent abroad. The cross-border revenue pool is relatively small. In total, the top 1000 US digital, software and e-commerce firms, including Amazon, Microsoft, Facebook and Google, had international sales equivalent to 1 per cent of all global exports in 2017. Facebook may have a billion foreign users but in 2017 it had similar sales abroad to Mondelez, a medium-sized US biscuit-maker.

Technology services are especially vulnerable to politics and protectionism, reflecting concerns about fake news, tax-dodging, job losses, privacy and espionage.

Here, the dominant market shares of the companies involved are a disadvantage, making them easier to target and control. The US discourages Chinese tech firms from operating at scale within its borders and American companies like Facebook and Twitter are not welcome in China.

The pattern changes

Multinational activity is becoming more regional. A decade ago a third of the FDI flowing into Asian countries came from elsewhere in Asia. Now it is half. If you put Asian firms into two buckets — Japanese and other Asian firms — each made more money selling things to the other parts of Asia than to the US last year. In Europe, about 60 per cent of FDI has come from within the region over the past decade. Outside their home region, European multinationals have tilted towards emerging markets and away from the US. American firms’ exposure to foreign markets of any kind has stagnated for a decade as firms have made hay at home.

The legal and diplomatic framework for trade and investment flows is becoming more regional. The one trade deal Trump has struck is a new version of NAFTA, known as USMCA. On November 20 the EU announced a new regime for screening foreign investment. China is backing several regional initiatives, including the Asian Infrastructure Investment Bank and a trade deal known as RCEP. Tech governance is becoming more regional, too. Europe now has its own rules for the tech industry on data (known as GDPR), privacy, antitrust and tax. China’s tech firms have rising influence in Asia. No emerging Asian country has banned Huawei, despite Western firms’ security concerns. The likes of Alibaba and Tencent are investing heavily across Southeast Asia.

Both Europe and China are trying to make their financial system more powerful. European countries plan to bring more derivatives activity from London and Chicago into the euro area after Brexit, and are encouraging a wave of consolidation among banks. China is opening its bond market, which over time will make it the centre of gravity for other Asian markets. As China’s asset-management industry gets bigger it will have more clout abroad.

Yet the shift to a regional system comes with three big risks. One is political. Two of the three zones lack political legitimacy. The EU is unpopular among some in Europe. Far worse is China, which few countries in Asia trust entirely. Traditionally, economic hegemons are consumer-centric economies which create demand in other places by buying lots of goods from abroad, and which often run trade deficits as a result. Yet both China and Germany are mercantilist powers, prioritising exports and running trade surpluses. There could be tensions over sovereignty and one-sided trade.

The second risk is to finance, which remains global for now. The portfolio flows sloshing around the world are run by money-management firms that roam the globe. The dollar is the world’s dominant currency, and the decisions of the Fed and gyrations of Wall Street influence interest rates and the price of equities around the world. When America was ascendant, the patterns of commerce and the financial system were complementary. During a boom, healthy US demand lifted exports everywhere even as American interest rates pushed up the cost of capital. But now the economic and financial cycles may work against each other. This will lead other countries to switch away from the US dollar, but until then, it creates a higher risk of financial crises.

The final danger is that some countries and firms will be caught in the middle, or left behind. Think of Taiwan, which makes semiconductors for both the US and China, or Apple, which relies on selling its devices in China. Africa and South America are not part of any of the big trading blocks and lack a centre of gravity.

Many emerging economies now face four headwinds, worries Arvind Subramanian, an economist and former adviser to India’s government: fading globalisation, automation, weak education systems that make it hard to exploit digitalisation fully, and climate-change-induced stress in farming industries. Far from making it easier to mitigate the downsides of globalisation, a regional world would struggle to solve worldwide problems such as climate change, cybercrime or tax avoidance.

Viewed in the very long run, over centuries, the march of globalisation is inevitable, barring an unforeseen catastrophe. Technology advances, lowering the cost of trade in every corner of the world, while the human impulse to learn, copy and profit from strangers is irrepressible. Yet there can be long periods of slowbalisation, when integration stagnates or declines.

The golden age of globalisation created huge benefits but also costs and a political backlash. The new pattern of commerce that replaces it will be no less fraught with opportunity and danger.