It’s too early to write off globalization

Trump’s tariffs may be throwing sand in the gears of international trade but the engine is robust, writes Alan Wheatley

The World Today
5 minute READ

Alan Wheatley

Former Associate Fellow, Global Economy and Finance Programme

A Chinese docker helps load a container ship in the port of Qingdao in eastern China

A Chinese docker helps load a container ship in the port of Qingdao in eastern China

In 1920, John Maynard Keynes looked back on the heyday of globalization just a few years earlier, before the First World War ushered in an abrupt reversal.

‘The inhabitant of London could order by telephone, sipping his morning tea in bed, the various products of the whole Earth, in such quantity as he might see fit, and reasonably expect their early delivery upon his doorstep,’ Keynes wrote in The Economic Consequences of the Peace.

He could invest his wealth – Keynes was writing about a well-heeled Londoner like himself – in commodities or start-ups anywhere in the world and secure ‘cheap and comfortable means of transit to any country or climate without passport or other formality’.

Keynes went on: ‘But most important of all, he regarded this state of affairs as normal, certain and permanent – except in the direction of further improvement. Any deviation from it would be seen as aberrant, scandalous and avoidable.’

A century on, with Donald Trump waging a trade war against China and brandishing threats against Europe, especially its car manufacturers, Keynes’s reflection raises the question of whether globalization is once again doomed to shrivel.

A cautious response is: No. Unlike in the past, when protectionism devastated world goods trade, the global economy is now integrated in too many additional ways – business services, manufacturing supply chains, digital traffic, mass tourism – for it to be derailed by tit-for-tat tariff wars.

The risk is not so much that globalization will collapse, as in 1914, but rather that it will corrode into regional technological and trade blocs as the United States, the incumbent superpower, and China, its up-and-coming challenger, vie for supremacy while old Europe finds itself caught in between.

In a nuclear age, the price for such balkanization would, presumably, not be a new world war, but global growth would be lower and geopolitical tensions would be a constant. The chances of accidental confrontations would increase.

Globalization on the ropes

It is of no surprise that political and public support for globalization is flagging. In the decade since the global financial crisis,
incomes have stagnated and inequality has grown in many countries, breeding resentment. This, together with the loss of well-paying manufacturing jobs due to technological innovation, is nourishing populism. The temptation is to pull up the drawbridge and look inwards for economic solutions – hence Trump’s tariffs and Britain’s decision to throw up obstacles to trade and investment with its biggest trading partner by voting to leave the European Union.

Furthermore, Trump’s disdain for multilateralism has undermined the institutions that have enabled globalization to flourish. The United States is vetoing the appointment of new judges to the World Trade Organization’s Appellate Body, threatening the WTO’s key function as a court to resolve trade disputes.

The Trump administration has shown its distaste for international organizations by blocking the Group of Seven and Apec, the Asia-Pacific economic grouping, from agreeing consensus communiques, and the president’s nominee for World Bank president has been a vocal critic of international financial institutions.

No wonder that global trade shrank 0.9 per cent in the fourth quarter of 2018. This is a sharp break with the past: historically, world merchandise trade volumes have grown on average 1.5 times faster than real world GDP.

Reasons to be optimistic

But, looking past the disruption to trade and investment plans caused by punitive levies, there are grounds for concluding that global economic integration is mutating but is not withering.

Take the WTO. Although the Geneva-based body has failed to conclude a substantive trade liberalization deal since 1994, a critical mass of 76 countries – including the US and China – have agreed to launch negotiations on new digital commerce rules.

The importance of this initiative is clear: the amount of data crossing borders in 2017 was 148 times larger than in 2005, according to the McKinsey Global Institute, the research arm of the consulting firm. Not all this internet traffic involves the downloading of cute cat videos. The institute reckons trade in services has grown more than 60 per cent faster than goods trade over the past decade.

And tellingly, Trump’s decision to pull out of the Trans Pacific Partnership, an ambitious attempt to set global new-economy standards, did not deter the remaining members from pressing ahead with the project, clumsily renamed the Comprehensive and Progressive Agreement for Trans-Pacific Partnership.

Trade liberalization therefore is not dead. Countries that retaliated against US steel tariffs did so more in sorrow than in anger, and at the bilateral level an important EU-Japan free trade deal came into force on February 1. Even before Trump’s tariff tirade, commerce between regions had been ceding ground to trade within regions. The institute calculates that the share of output moving across the world’s borders fell from 28.1 per cent in 2007 to 22.5 per cent in 2017, while the share of world goods traded within regions has increased by 2.7 percentage points since 2013.

This is good news insofar as it shows emerging markets are consuming more of what they produce at home instead of shipping it to faraway rich countries. China in particular has been shifting to an economic model based on consumption – which relies less on imports – rather than on investment and exports.

Trump’s tariffs can only accelerate the regionalization of trade, especially in Asia. To avoid punitive US levies – currently suspended to allow for further US-China talks – mainland manufacturers are increasingly moving production to Southeast and South Asia. New supply chains, bringing components or finished goods back to China, are thus taking shape.

As labour costs rise in China, this is a natural evolution. Bangladesh and Vietnam are among the countries that have benefited from the relocation of low-end manufacturing of goods such as textiles and shoes.

Trade and China’s geopolitical ambitions

The development of China-centred regional supply chains is a trend being re-inforced by Beijing’s ambition to exercise more international influence – an ambition that, indirectly, may pose the greatest threat to globalization.

On taking office in 2013, President Xi Jinping quickly abandoned Deng Xiaoping’s principle of ‘hide and bide’ – the notion that China should keep a low profile abroad until it had built a strong economy.

Already disgruntled that the world economy has been refereed since the Second World War by US-dominated institutions, Beijing seized on the West’s failure to prevent the global financial crisis to promote an alternative version of global governance.

It has challenged the status quo by launching the Belt and Road Initiative, a vast web of transport and energy links connecting more than 60 countries, and by setting up the Asian Infrastructure Investment Bank. To China, these two projects afford ‘win-win’ opportunities. To its detractors, they are the skeleton and sinews of a new Sinocentric economic order under which the beneficiaries of China’s largesse will be expected to pay political and economic tribute to Beijing.

China’s high-tech goals

In parallel, Xi has declared the goal of turning China into a technological leader in areas such as robotics, artificial intelligence and quantum computing that hold the key not only to future economic progress but to military supremacy.

In Trump’s eyes, China’s goals thus pose an existential threat to America’s status as sole superpower and the global order its power has underpinned. Importantly, this view is now broadly shared across party lines in the US.

The principle of constructive engagement that used to guide US-China relations is defunct. Beijing is now regarded as a strategic competitor. Hence the mutation of the trade tiff into a broader campaign to thwart China’s high-tech ambitions.

To that end, Washington is demanding protection of foreign investors’ intellectual property rights and a halt to US companies that want to do business in China being forced to transfer their technology to local firms; it is seeking on national security grounds to exclude Huawei, China’s biggest telecommunications manufacturer, from providing gear to US companies; and it has introduced rules making it much harder for China to acquire US technology.

The crackdown, which has elicited sympathy in Europe, has already led to a slump in Chinese foreign direct investment in the US, prompting Xi to urge state-owned companies to try harder to reduce China’s dependence on imports of key components.

Xi’s call for greater self-reliance highlights the risk that China will establish its own sphere of technological influence. This is as serious a long-term threat to globalization as the imposition of tariffs on goods.

Underlying resilience

China’s strict online censorship has already led to a partial fracturing of the internet; it is seeking to export the controversial surveillance technology it is using at home to exercise social control; and some researchers are concerned about the technical fragmentation of the internet because of the refusal of China to adopt a new standard for the global network.

Set against this dystopian scenario of bifurcation if not disintegration of the existing economic order, the optimistic case for continued economic interdependence rests partly on the fact that modern technologies cannot be ‘uninvented’.

Today, sea-borne containers and intercontinental air freight speed the transport of goods, computers manage global supply chains and the internet enables services such as remote healthcare and lets anyone, at the tap of a smartphone, buy anything from pretty much anywhere in the world.

None of these existed back in the 1930s, the last time globalization was thrown into reverse. With goods making up nearly all trade, the Smoot-Hawley Tariff Act and retaliation by America’s trading partners wreaked havoc. US exports and imports halved, exacerbating the Great Depression. Yes, Trump’s tariffs are once again throwing sand in the gears of global commerce, but the engine today is much more robust, the world connected in many more ways.

Trade networks, already mutating in response to Trump’s campaign against China, will evolve further thanks to technology. Automation and 3D printing will allow multinational companies to carry out more just-in-time manufacturing in their regional markets rather than in Asia.

But global supply chains as a building block of the modern economy look certain to survive. For one thing, cosseted western consumers who have come to take cheap manufactured imports for granted will not thank politicians who try to impose a form of autarchy. And for what it’s worth, financial investors are still backing globalization. An index of shares in US companies that generate most of their revenues abroad has handily outperformed a companion index of domestically focused firms.

There are good reasons to expect cross-border flows of goods, services, data, capital and tourists to keep expanding – but more slowly than in recent years. Historians may therefore look back at the first two decades of this century as another high-water mark of globalization.

For all the positive economic indicators today, Keynes’s lament for life just before 1914 is a reminder that there are no grounds for complacency. It would not be the first time geopolitics had trumped economic rationalism.