Autumn 2022

World falling out of love with globalisation

A shift in attitudes, geopolitical flare ups and resurfacing developments in the US have prompted nations to reconsider globalisation, despite its many benefits, writes Mark Sobel, US chairman, OMFIF.

Increased globalisation and integration in past decades brought significant benefits to the world economy. But geopolitical risks and economic developments threaten to fuel significant disintegration and protectionism.

Three factors seem paramount.

First, attitudes have shifted in many quarters against increased global integration. Globalisation over the past decades raised incomes and lifted over a billion people out of poverty. Businesses integrated globally across value chains, building algorithms to deliver products just in time, enriching consumer choice and holding down price pressures. These forces were key for the great moderation.

Yet, these gains also came with challenges, in terms of changing national relative weights and power relationships in the global economy as well as increasing inequality by creating winners and losers across societies.

Attitudes towards free trade hardened. G20 leaders stated at their initial summit in Washington DC in November 2008: ‘We underscore the critical importance of rejecting protectionism and not turning inward in times of financial uncertainty. In this regard, within the next 12 months, we will refrain from raising new barriers to investment or to trade in goods and services, imposing new export restrictions, or implementing World Trade Organization inconsistent measures to stimulate exports.’

Trade is often increasingly seen as a zero sum game, not a win-win.’

The days of the so-called ‘refrain’ are long gone. Protectionist pressures now abound. Trade is often increasingly seen as a zero sum game, not a win-win. The Donald Trump administration resorted to the widespread use of tariffs. China was hit hard in view of its enormous bilateral surplus with the US, though its overall current account surplus has come down markedly and US restrictions appear to have had little impact on its still rising bilateral surplus. Further, the administration at times even trotted out bogus national security grounds to restrict trade with America’s closest allies. The rhetoric accompanying these actions can only be termed ‘bellicose’.

It takes two to tango. Lurking just beneath the surface was growing US sentiment against China in view of the country’s move towards more autocracy and statism under President Xi Jinping. The US has valid national security concerns regarding China in general as well as more specifically about excessive subsidisation, industrial policy and technology theft.

Given the state of current US-China relations and with neither Democrats nor Republicans inclined to hand the other party any chance to characterise the other as ‘soft’, the approach of President Joe Biden’s administration to China isn’t materially different from the Trump administration’s. Moreover, Republicans often seem to have abandoned their pro-free trade stance of decades past, while many elements of the Democratic party hold deep concerns about trade’s impact on US jobs and workers. Many call Biden’s approach ‘Trump light’.

Second, on the heels of geopolitical developments, the increased use of sanctions and legitimate national security concerns only reinforce the dour view of global integration and boost the potential for fragmentation.

Russia’s barbaric invasion of Ukraine, Xi’s ‘no limits’ friendship with Russia, the resurrection of Nato, the re-emergence of the G7, the diminution of the G20 and Chinese actions surrounding US Speaker of the House Nancy Pelosi’s visit to Taipei are only solidifying the shake-up of the geostrategic order. Tectonic plates are shifting, setting off ructions.

In a widely read speech in April, US Treasury Secretary Janet Yellen spoke of modernising the past multilateral approach taken towards trade integration to promote ‘free but secure trade’. She inveighed against countries possibly using their market strength in key raw materials or technologies to exert leverage on others. Thus, the US should count on its partners and promote ‘friend-shoring’ of supply chains to a large number of ‘trusted’ countries. In addition to friend-shoring, ‘re-shoring’ also has become a prominent theme. Foreign direct investment is now increasingly restricted on national security grounds and export controls are growing.

Yellen’s pitch was seemingly broad-based. But it’s not clear that the world breaks down neatly into friends that can be trusted and nations that can’t. Many countries in Asia, such as Vietnam, live in China’s economic shadow but are wary of being tied to or aligned with Beijing. They may not wish to be counted in either bloc. Further, they may produce low-value-added goods that do not pose viable national security threats. How such countries relate to a bifurcated world is unclear.

‘The increased use of sanctions and legitimate national security concerns only reinforce the dour view of global integration and boost the potential for fragmentation.’  

Regardless, the bottom line is that the use of trade and financial sanctions is clearly on the rise, disrupting the relatively free flow of goods and capital. These developments will create opportunities and challenges, but clearly at an increased cost. The International Monetary Fund’s chief economist, Pierre-Olivier Gourinchas, even compared this to putting all of one’s eggs in one basket.

Third, beyond geopolitics, specific US economic developments that have traditionally strengthened voices against freer trade may be potentially resurfacing. An appreciating dollar and strong US demand relative to others have in the past boosted US overall and key country bilateral deficits, nurturing protectionist sentiment. For example, in the early to mid-1980s, a highly imbalanced US policy mix of tight money and expansionary fiscal policy sent US interest rates, and in turn the dollar, soaring. Many US manufacturing firms, in the midwest in particular, were hollowed out. Protectionist pressures rose sharply, ultimately leading to the 1985 Plaza accord and, in 1988, to an omnibus trade and competitiveness act calling for the US Treasury to write a biannual foreign exchange report and examine whether others manipulated their currencies.

The dollar is now soaring. It’s not because of others’ exchange rate actions, but because the faster and more aggressive shift in Federal Reserve policy to tighten monetary policy, coupled with a more dynamic US economy and energy independence in contrast with others, have made the US a relatively more attractive destination for capital.

In the meantime, the US current account deficit has risen sharply with the non-oil deficit now being the only culprit. The annual US current account deficit before the pandemic had settled in around 2% of gross domestic product, coming down sharply from the mid-2000s when the US economy was performing strongly and China’s current account surplus reached 10% of GDP. But with the advent of fracking and energy independence, the US current account deficit, previously reflecting large energy imports, now consists solely of the non-oil balance. The deficit was also boosted by the demand surge from large US stimulus packages during the pandemic. The non-oil sector in the past has typically been sensitive to rising foreign competition.

The understandable concerns generated by heightened geopolitical risks and protectionism for global trade and capital flows have manifold sources. The above discussion only scratches the surface. But these forces promise to represent a shifting of the tectonic plates for years to come and will undergird an increase in global economic fragmentation.

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