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The End of Globalisation?

by internationalbanker

By John Manning, International Banker

2016: the year that saw populism sweep across much of the world. Countries around the globe, from the United Kingdom to Italy to the Philippines, saw a new breed of leader emerge, often charismatic, invariably dedicated to stoking nationalism among the people, and attempting to instigate a push-back against globalisation. As such, it was a year in which the political world became increasingly fractured into two distinct camps. This time, however, those camps appear to be less aligned with the traditional “right” and “left”, as has historically been the case. Instead, one group continues to favour globalisation and is keen to advance economic integration around the world; while the other prefers national security, a sense of national identity and sovereignty at the expense of more open borders. The latter now appears to be in the ascendancy.

On the basis of such fracturing, the two most clearly eventful moments of last year were the election of Donald Trump and the UK’s decision to leave the European Union, both of which largely occurred on the back of much discontent from their respective native peoples, and which now have serious implications for the hope of a more connected world. Indeed, some of the general charges that have been levelled at globalisation in the past 12 months or so are that it has increased wealth inequality, weakened job security (especially for the working class) and suppressed wages as a result of businesses preferring cheap labour in developing countries over homegrown employment. Technology and automation have also played crucial roles in rendering numerous manufacturing jobs obsolete.

As such, the recent victories for populism represent a backlash against globalization—a “victory for ordinary people”, in the words of Brexit mastermind Nigel Farage following last June’s historic referendum result. In turn, what could emerge in the aftermath of those seismic events is a battle for the continued advancement of globalisation between the two aforementioned camps, represented most prominently by China and the US. In a somewhat bizarre turn of events, it is the once-closed society of China that now seeks to become more connected with the outside world, while at the same time, the Trump-led US seems intent on turning its back on that very world, primarily through more protectionist trade measures and tougher immigration rules.

One could pick from a plethora of quotes to illustrate Trump’s position on the issue, including the need to “protect our borders from the ravages of other countries making our products, stealing our companies and destroying our jobs. Protection will lead to great prosperity and strength”. Indeed, if Trump’s message needed any further underlining after a campaign that made his anti-globalisation position explicitly clear, he provided it at his presidential inauguration by promising that the US would simply follow two rules from now on: “buy American, and hire American”. He then immediately followed up on this promise in his first day in office by indicating that trade protectionism will be at the heart of his economic policy; that he would withdraw from the 12-nation Trans-Pacific Partnership (TPP) and that he would place a “very major” border tax on companies that locate their production facilities overseas and then export their products back into the US.

It should be mentioned that while Trump is implementing a significantly more protectionist agenda, such measures are not entirely new for the United States. After cheap Chinese tyres began flooding the American market back in 2012, much concern was raised over the threatened survival of domestic producers; so in order to make China fall in line, the Obama Administration imposed heavy tariffs on imported Chinese tyres. Indeed, the US has been the most active country in the world in recent years when it comes to implementing protectionist measures.

With the slew of executive orders that he has signed since taking office, however, Trump has made clear his intention to significantly accelerate the level of protectionism around US trade, and pursue the explicitly anti-globalist, anti-trade agenda that helped to secure him the presidency. He has effectively held globalisation responsible for the discontent of millions of mostly working-class Americans. In some ways, Trump has a point—the US’s manufacturing sector has been on the decline for some time, with six million jobs being lost between 1999 and 2011, according to the Bureau of Labor Statistics. Trump’s claims that those jobs have gone to China seem to have less supporting evidence, however.

The proposed trade policies of the new US administration now severely threaten the progress of globalisation, purportedly disrupting trading relationships, employment and supply chains all around the world. Many consider these policies to be a replication of those implemented during a previous era in US history, namely during the time of its first Treasury secretary, Alexander Hamilton, in the late-18th century. Specifically, Trump appears to be implementing a policy of import substitution, whereby globalisation is prevented by replacing foreign-made goods in the US market with American-produced ones. Whereas Hamilton largely focused on providing subsidies to nascent US industries, however, Trump seemingly prefers to impose more antagonistic tariffs instead.

Such measures, coupled with the government’s extremely hawkish approach to immigration, set a dangerous precedent, one that the nationalist governments pursued in the 1930s prior to the Second World War. Indeed, aside from President Xi Jinping’s defense of globalisation, the World Economic Forum in Davos also saw the director-general of the World Trade Organization (WTO), Roberto Azevêdo, recall that decade, when several governments raised tariffs and eliminated approximately two-thirds of global trade in the space of three years.

Today, it is global supply chains that are firmly in the crosshairs of the Trump regime. According to the head of the new White House National Trade Council, Peter Navarro, a priority of the administration is to unwind and repatriate those international supply chains that are often crucial to the operations of US multinational companies. Speaking to the Financial Times at the end of January, Navarro underlined the new government’s intentions to instead “manufacture (foreign) components in a robust domestic supply chain that will spur job and wage growth”, a position that will, therefore, need to be addressed across “all bilateral trade relations”. Navarro also lamented the effect a strong dollar is having on worsening the US trade deficit and “on our rates of economic growth and income growth”.

Achieving the aims as laid out by Navarro, however, will be easier said than done. Analysis of US census data by the Peterson Institute for International Economics in 2007 revealed that the top 1 percent of US importers and exporters (which accounted for 66 percent of total imports and 60 percent of total exports) were often the same companies. Indeed, the research also found that 53 percent of the country’s biggest importers are also the biggest exporters, while 36 percent of the biggest exporters are, similarly, among the top importers. This statistic only highlights the importance of building global supply chains in boosting the competitiveness of the most successful firms. Should Trump, Navarro, et al., attempt to unwind such complex supply chains, therefore, they will be punishing either top importers or top exporters, or both.

Mexico’s car industry provides an apt example of the potential upheaval that awaits. The industry has prospered significantly since the country signed the North American Free Trade Agreement (NAFTA) with the US and Canada back in 1994. As of 2015, it was estimated that 60 percent of all cars being produced in Mexico were sold into the US market, and of those exports, approximately half belonged to the three big American car companies, General Motors (GM), Chrysler and Ford, who use Mexico’s lower manufacturing costs to produce their cars more profitably in the US. However, Ford announced in early January that it had decided to scrap its plans for a new $1.6 billion car plant in Mexico, and GM recently stated it would add about 2,000 US manufacturing jobs and shift some of its axle production from Mexico to a domestic factory, in a bid to build where they sell. The moves are widely considered to be a precautionary response to Trump’s threats to rip up NAFTA and/or to impose a 35-percent tariff on Mexican-produced imports, as well as to placate the new administration in the hopes of not being dubbed as “anti-American”.

Should Ford and GM’s precedent cause other car companies to follow suit and head for the exits, the implications for both Mexico’s investment, growth and employment rates are likely to be substantial, especially when one considers that the country has free-trade deals in place with dozens more countries around the world. Its car-manufacturing industry is the world’s seventh largest and fourth-largest exporter, and its plants and supply chains support more than 750,000 jobs. Japanese carmaker Toyota, for instance, relies heavily on the existence of NAFTA, particularly as it uses Mexico to manufacture a substantial portion of the 100,000 vehicles that it exports to the US and Canada. Although several Japanese carmakers have signaled that they will keep their factories in Mexico for the foreseeable future, Trump’s taxation plans are more than likely to change that position. Thus, it would seem that carmakers, as well as numerous other manufacturers, will have to revise their strategies in anticipation of what surely lies ahead.

Trump’s withdrawal from TPP, moreover, essentially undoes efforts made by predecessor Barack Obama to “pivot” to Asia. In so doing, Trump now risks enabling those Asian countries with whom the US developed strong trade and economic relations to fall under the influence of China instead. In terms of the geopolitical balance of power, therefore, withdrawal from the TPP would seem to undermine any global, hegemonic aspirations the US may have. Of course, enabling such a redress is not necessarily a bad thing, but it may only help China to pursue its ambitions of enabling and controlling the nature of further economic integration, certainly in the Asia-Pacific region.

While the US and the UK appear to be rolling back on globalisation, therefore, China continues to press forward, illustrating the near-180 degree turnaround in their outlooks in recent years. This should come as no surprise, especially given that China has been among the biggest beneficiaries of globalisation, which has set it on a stratospheric growth and development trajectory; it has incorporated the country firmly into the international family of nations, not only as another member but as a global leader, and most recently, enabled its currency, the renminbi, to be classed among the five base currencies of the International Monetary Fund’s special drawing rights.

At January’s World Economic Forum in Davos, Chinese President Xi Jinping made crystal clear his country’s unflappable support for a more globalised world, primarily on the basis that integration enables further human advancement and continues to improve the lives of millions of people. Xi Jinping described protectionism as being akin to “…locking oneself in a dark room. While wind and rain may be kept outside, so are light and air. No one will emerge as a winner in a trade war”; he added that globalisation could not be held responsible for many of the world’s problems, and that holding such a position—an obvious reference to Trump—is “inconsistent with reality”. China is the first on Trump’s list for the imposition of protectionist trade policies, having threatened to slap a 45-percent import tariff on all Chinese goods coming into America. Given the economic clout the world’s second-biggest economy now commands, however, it is highly unlikely that China will take any of Trump’s punitive measures lying down. Indeed, analysis by the Peterson Institute for International Economics in September 2016 calculated that as China and Mexico jointly account for around one-quarter of US trade, a trade war could see US private-sector employment fall by 4.8 million jobs.

In Europe, meanwhile, the stability of the European Union (EU) is now under grave threat in the aftermath of Brexit. Prime Minister Theresa May has indicated that she is prepared to make the UK endure a “hard” Brexit and slash tax rates if both European and UK parliaments do not agree to her terms, in spite of the likely damage it will do to the currency and national income. This would ostensibly involve abandoning any future trade agreement with the political union, should other countries attempt to impose an undesirable deal, with May recently stating that “no deal for Britain is better than a bad deal for Britain”. Surprisingly, such threats have been made despite the UK Treasury’s own projections that leaving the EU without agreeing to a trading arrangement could see gross domestic product (GDP) dropping by nearly 10 percent and national income falling by £66 billion.

Upon exit, the UK will most likely engage in trade deals with non-EU countries, such as the US and China, under the rules of the World Trade Organization (WTO). As such, the growth of bilateral trade deals at the expense of a common trade agreement inside the EU signals further separation at the expense of globalisation. That being said, the UK in theory should be able to agree on new trading arrangements with a slew of non-EU countries, especially those with special commercial accords in place with the EU, of which around 60 currently exist, including South Korea and, in a short while, Canada. Given that such deals go above and beyond what is required by the WTO, it should be relatively straightforward for the UK to simply replicate such arrangements without major problems. For countries without such arrangements already in place with the EU—the US, China and Japan included—more problems arise. Indeed, it may take some time before trade agreements can be concluded with such countries, which would result in a drop in trade volumes for a post-Brexit UK. The remainder of the EU, meanwhile, account for approximately half of the UK’s total trade, so at this stage it may be difficult to ascertain exactly what its commercial trading arrangements will constitute once the dust settles.

One issue that appears to have emboldened the populists, both in Europe and in the US, is immigration. Indeed, Trump’s most infamous executive action to date has been to block some immigrants from entering the US as a supposed security measure; to date, however, this particular measure has been temporarily blocked by members of the American judiciary. Immigration was also among the most decisive issues in fomenting a Brexit victory, and Theresa May has duly observed that a reduction in immigration is one of the key underlying motivations for last year’s “Leave” vote. Now May herself appears firmly committed to reducing the net-migration figure—that is, the difference between those entering and leaving the country—to below 100,000 a year from current levels of 330,000.

Along with a series of terrorism incidents across Europe and a refugee crisis that many fear has spiraled out of control, the growing desire by nationals to stymie immigration is now emboldening a raft of nationalist parties throughout the continent towards substantial gains in popularity. The leader of Front National, Marine Le Pen, has praised Trump and Brexit on numerous occasions, recently remarking that “Brexit has really broken a taboo. The Brits have shown us that you can leave the European Union and come out stronger”, as well as promising to protect France from “radical Islam” and freeing it from the “failed European Union”. In fact, she has made a total of 144 promises, mostly against immigration and global trade, to bolster her “made in France” campaign that largely aspires to preserve a nation with independent borders, its own currency and a French identity that’s impervious to potential transformation by immigrants, refugees and globalisation. 

In addition to eventually spelling the end for the European Union, there is a possibility that Brexit may also sound the death knell for the UK in terms of its historic union. Scotland’s First Minister Nicola Sturgeon has stated that it is “democratically unacceptable” for Scotland to be taken out of the EU along with the rest of the country after being the only one of the four major regions to have voted “Remain”. As such, she has said that a second referendum on Scottish independence is now “highly likely”, especially given May’s unequivocal position that “Brexit means Brexit”.

Despite the rising tide of nationalism, it seems unlikely that a repeat of the 1930s is imminent, especially thanks to China’s increasingly important global role. What’s more, it’s not only China that would be keen to stave off isolationist sentiment from the US and elsewhere. Much of the world now relies on foreign participation in domestic markets. Argentina’s new reformist government, for instance, is looking out to the international markets in order to attract funding, while India—one of the world’s biggest hopes for global economic growth and opportunity in the coming years—has implemented a “make in India” policy in order to attract supply chains from all around the world. Globalisation has advanced far beyond mere trade agreements. A slowdown in global trade resulting from any heightened protectionism seems highly unlikely to prevent the development of technology, which is increasingly enabling the world to become more connected.

As per President Xi Jinping’s defense of globalisation at Davos, the movement has “powered global growth and facilitated movement of goods and capital, advances in science, technology and civilisation, and interactions among people”. Businesses, both in the US and around the world, have benefitted massively from the globalisation of markets, allowing goods and services to be opened up to new sources of demand, while also allowing firms to employ the best people from a considerably larger talent pool. Given that supply chains today invariably involve complex networks across numerous borders, moreover, it will be nigh impossible to suddenly unwind such networks on the basis of more tariffs.

Moreover, Japan and several other TPP signatories are promising to press ahead with the multilateral trade agreement even in the absence of the US. Australia’s trade minister, Steven Ciobo, for example, recently acknowledged that “there’s a lot of merit in looking at putting into place the TPP even if it’s with the 11 other countries including Australia and not the United States”. Australian Prime Minister Malcolm Turnbull even suggested that China could ostensibly replace the US as the pact’s economic leader.

As such, a somewhat sub-optimal position now seems on the table for everyone. The reneging of historic arrangements is bound to damage the reputation of the US as a reliable trading partner, whilst also provoking China into retaliation should a trade war ensue. For all the might of America, and the impact its isolationism will have on emerging markets, globalists do have other options—not only China, but also those countries eager to continue unlocking markets and opening borders. Such options may not be able to replace the loss felt by the US and other countries moving in a more protectionist direction; nevertheless, globalisation has advanced far beyond the bounds of political influence to be curtailed by a rise in nationalist sentiment. Such a distinct fracturing between the globalists and populists, however, seems likely to result in a less-than-ideal solution for all concerned.


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