Globalisation had made the whole world richer in every sense, intellectually and wealth-wise also. There is a consensus among economists that globalisation is a win-win game for the entire world by piloting trade, immigration and capital flows through Ricardian efficiency. Since globalisation picked pace in the 1980s, the global trade has jumped 2-2.5 times faster than the world GDP. We are very much a global village today. Any new invention or innovation or life-saving drugs move to all parts of the world very rapidly. While globalisation began in the post-war era when the world economy was recovering from the great depression in the 1950s, it picked pace in the 1980s. It continued for almost six decades, seeing the rise of south-east Asian giants, the rise of the Dragon and emergence of the US as a unipolar superpower.
Deglobalisation has begun on the ashes of the great recession, which saw a new wave of protectionism engulfing the world. At a time when the major economies of the world are showing signs of credible recovery in a synchronised manner from recessionary phase, which began in 2008, US President Donald Trump’s ‘Buy American, Hire American’ theme threatens to disrupt global trade in goods and services. Trump’s slogan is addressed to American audience much like MK Gandhi’s clarion call of ‘Be Indian, buy Indian’ was against the British, but Gandhi’s call was to rescue the domestic industry and induce patriotism among the masses.
Today, immigrants make 13% of the total US population, but they account for 25% of the new business owners and 30% of the people working in Silicon Valley. This statistics clearly give the picture why Trump is pitching for protectionism even though the US economy is expanding at a respectable 3% and unemployment is at almost a five-decade low. This trend has left a new breed of Americans who are demanding protections, in what we may call an anti-thesis of the American mercurial rise. We may say that American high capitalism is in danger because deglobalisation might hit the very backbone of American surge, research, invention and innovation led by migrant American.
Deglobalisation has three facets-movement of goods and services, capital flows and migration of labour force from developing countries to the developed world and vice-versa. We will examine all three aspects including the current trade war unleashed by Trump whose country faces a trade deficit of almost $375 billion per year with China.
Periods of deglobalization (1914-1950, and 2010-till date) have mainly been seen as interesting comparators to other periods, such as 1850–1914 and 1950–2007, in which globalization had been the norm, given that globalization is the norm for most people and because the interpretation of the global economy has mainly been framed as inevitably increasing integration. While globalization and deglobalisation are antitheses, they are no mirror images.
The two phases of deglobalisation were equally triggered by a demand shock in the wake of a financial crisis. Both in the 1930s and in the 2000s the composition of trade was a second key determinant: manufacturing trade bore the brunt of the contraction. The two major phases of deglobalisation are not identical twins. One important finding is that country experiences both during the Great Depression and Great Recession are very heterogeneous so that one-size-fits-all policies to counter negative impacts of deglobalization are inappropriate. In the 1930s, democracies supported free trade, and deglobalisation was driven by autocratic decisions to strengthen self-sufficiency. In the 2010s, political institutions are just as significant, but now democratic decisions such as the election of President Trump with an America First agenda and Brexit drive the deglobalisation process worldwide. Indeed, while the industrialised countries in the 2010s avoided the pitfalls of protectionism and deflation, they have experienced different political dynamics.
The term deglobalisation is used by economic and market commentators to highlight the trend of several countries wanting to go back to economic and trade policies that put their national interests first. The present talk around ‘trade war’ and ‘deglobalisation’ cropped up after the US, in March, imposed 25% and 10% duty on steel and aluminium imports, respectively, from certain countries, citing national security and job creation as the triggering factors.
From 1990 to 2008 the global economy grew rapidly but trade grew 2 to 2.5 times faster. As a result between 1990 and 2008, global trade expanded from less than 35% of global GDP to almost 60% but since it has retracted by almost 5% of global GDP.
At the height of protectionists wars that helped prolonged the depression of the 1930s, the average tariff in the US on imported good hit 60% but it fell to 5% in 1980s where it remains today. Developing countries began to cut their import tariff on the imported goods, which fell on average from a high of nearly 40% to less than 10% by 2010. The share of South-South trade in total world exports has doubled to more than 25% over the last twenty years and the share of developing world exports that go to other developing countries has risen from just over 40% to near 60%.
Deglobalisation has started taking its toll, as the world trade has been almost flat for last 4-5 years. Indian exports have been shrinking from December 2014 to September 2016, due to a weak global demand and slide in oil prices. India’s exports grew at its fastest pace in five years by 4.7% to $274.65 billion during the financial year 2016-17. International trade statistics have also recently been showing unusual trends. After strongly rebounding from the Great Recession of 2009, international trade has grown at a sluggish pace that further deteriorated in 2015. Trade statistics for 2015 have been at odds not only with previous trends but also with respect to the overall economic environment. While the global economy continued to grow in 2015, world trade declined by about 10%.
However, the volume of global trade was flat in the first quarter of 2016, then fell by 0.8% in the second quarter, while in the US the total value of American imports and exports fell by more than $200 billion last year. Through the first nine months of 2016, trade fell by an additional $470 billion. This is the first time since World War II that trade with other nations has declined during a period of economic growth. Though it has recovered in 2017 it was quite modest. A gauge of world trade tracked by Oxford Economics, a research firm in London, recently registered its weakest showing since early 2017. Threats to trade are emerging just as the global economy contends with other substantial challenges. Worldwide, flows of goods amount to about $18 trillion significantly greater than both services and capital which account for about $4 trillion each.
It will be interesting to look at the capital flows in the era of deglobalisation. In 1980 global annual capital flows amounted to $280 billion or less than 2% of global GDP. The capital flows rose to a peak of $4.9 trillion and 16% of global GDP in 2007. Then came the 2008 crisis and the evaporation of optimism; by 2014 capital flows had fallen back to 2% of current global GDP. While global FDI flow was recorded at $1.9 trillion in 2016, it fell by whopping 23% in 2017 to just $1.4 trillion, less than 2% of the global GDP.
Similarly, global cross-border bank flows peaked before the crisis at roughly 4% of world GDP in 2007, then swung sharply negative next year, indicating that banks not stopped lending but started liquidating loans to bring money home.
In China, current account surplus peaked at 10% in 2007. The Chinese were saving enough to finance the often-unproductive consumption of habits of countries like the USA where current account deficit peaked at 6% in 2006. It has more than halved to 2.5% of GDP now.
Lucas Paradox, named after Nobel laureate Robert Lucas, questions the assumption that money flows tend to move from rich countries to poor ones. In the present phase of deglobalisation, the capital has not only retracted to its den of developed countries but the developing countries czars have also moved their capital to the developed countries and to the tax heavens. No doubt, stealth capital outflows through doctoring of trade invoices are the biggest source. This movement of capital flows are bound to stall the global growth and it has been a big setback for developing countries which are growing at the almost half pace of what it grew during boom years. Though the world is awash with the surplus fund and $16 trillion is earning zero or negative returns but they are not finding ways into the productive assets. Stock markets are zooming worldwide but the real economy is still starved of these financial resources. The current round of deglobalisation will hurt the global economy at its very root.
Not only that, deglobalisation has also impacted the labour migration which has been a major source of invisible earning through remittances by Indians. Between 2005 and 2010, net migration from developing countries to developed countries totalled 16.4 million people, but from 2010 to 2015 that total fell by nearly 5 million. It seems that Japanese bug has bitten Trump and other leaders of the developed countries. Japan has been the anti-Australia, closing its doors about as tightly as the modern world could. Less than 2% of its population is foreign-born compared to 30% of Australia.
Britain has voted to leave the EU, more for cultural and immigration concerns than trade, but the ever-tighter embrace of Europe has clearly caused a backlash, and Europe has been fast to threaten all kinds of protectionist responses as a result. The World Trade Organization is quoted as saying that its members had put in place more than 2,100 new restrictions on trade since 2008. Britain’s divorce with the EU is estimated to cost companies on both sides $80 billion a year without a trade deal.
The political leadership of the US seems to be fighting a pitched battle with China based on a very similar credo, which was evident during the post-war period. This is fanning global fears about a possible slowing down, if not derailment, of the global economic recovery, due to deglobalisation. But if tariff wars are one aspect of deglobalisation policies, some facets can cost countries dear too. We still live in a highly globalised world, and these protectionist moves upend the fundamental premise on the basis of which global growth is estimated and organisations such as the WTO regulate global trade.
All calculations of global economic growth, inflation and interest rates can go haywire. The US economy, for instance, imports a lot of inexpensive manufactured goods from China. If a tariff war increases costs of imports into the US, its domestic inflation may rocket and US interest rates may increase faster. A full-on trade war between the US and China would likely do significant economic damage to exporters in both countries, raise prices for US consumers, and have widespread effects on the world economy, especially on other countries in Asia that are part of China’s manufacturing supply chain.
The Trump administration’s strategy is supposedly designed to force China to negotiate a more favorable agreement for the U.S., but trade experts say that they don’t know how either side will be able to de-escalate the conflict at this point, particularly since there may not be enough time between now and July 6 to work out a new agreement that is satisfactory to both sides, particularly now that trade hardliners appear to be running policy at the White House. Even if an agreement could be reached and there was enough time for China to implement it, there is never any guarantee that the notoriously uninformed and capricious Trump will understand or respect any comprehensive strategy or international agreement for any length of time in the first place.
As the conflict broadens, shipments are slowing at ports and airfreight terminals around the world. Prices for crucial raw materials are rising. At factories from Germany to Mexico, orders are being cut and investments delayed. American farmers are losing sales as trading partners hit back with duties of their own. The Trump administration portrays its confrontational stance as a means of forcing multinational companies to bring factory production back to American shores. Trump has described trade wars as “easy to win” while vowing to rebalance the United States’ trade deficits with major economies like China and Germany.
Trump’s offensive may yet prove to be a negotiating tactic that threatens economic pain to force deals, rather than a move to a full-blown trade war. Americans appear to be better insulated than most from the consequences of trade hostilities. As a large economy in relatively strong shape, the United States can find domestic buyers for its goods and services when export opportunities shrink. Even so, history has proved that trade wars are costly while escalating risks of broader hostilities. Fears are deepening that the current outbreak of antagonism could drag down the rest of the world. The Trump administration has embroiled the United States in increasingly acrimonious conflicts with huge trading partners. Sixteen years ago, when President George W Bush put tariffs on steel, imports fell substantially. Such memories now stoke modern-day fears.
India may not be much affected by the recent rash of tariffs, given that the US derives only a little over one percent of its steel and aluminium imports from India. But deglobalisation with respect to the mobility of services and people can impact both the export of services and the trend of Indians migrating abroad for higher education and jobs. The Trump administration has been trying to hit India’s comparative advantage by launching an offensive through immigration policy and hitting at the roots of Pharmaceutical products. Two strengths of Indian economy- services exports and remittances- are bound to be hit in the era of deglobalisation.