How much will a trade war launched by America’s president, Donald Trump, exacerbate it? What will global commerce look like in the aftermath?
The Economist January 26th 2019 23
1
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.
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 Adjiedj Bakas, a Dutch
trend-watcher, describes the reaction
against globalisation. How severe will it
become? How much will a trade war
launched by America’s 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 America’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%
of gdp in 1990 to 58% last year. International
assets and liabilities rose too, from 128%
to 401% of gdp, as did the stock of migrants,
from 2.9% to 3.3% 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 1bn 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: America 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 chart 1 on next page). Eight are in retreat
or stagnating, of which seven lost
steam around 2008. Trade has fallen from
61% of world gdp in 2008 to 58% now. If
these figures exclude emerging markets (of
which China is one), it has been flat at
about 60%. 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% of world gdp
to 17%. The march of multinational firms
has halted. Their share of global profits of
all listed firms has dropped from 33% in
2008 to 31%. Long-term cross-border investment
by all firms, known as foreign direct
investment (fdi), has tumbled from
3.5% of world gdp in 2007 to 1.3% in 2018.
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% of gdp in 2006 to about 36%. Excluding
rickety European banks, they have
been flat at 17%. Gross capital flows have
fallen from a peak of 7% in early 2007 to
1.5%. When globalisation boomed, emerging
economies found it easy to catch up
The global list
Globalisation has faltered and is now being reshaped
Briefing Slowbalisation
24 Briefing Slowbalisation The Economist January 26th 2019
2
1
with the rich world in terms of output per
person. Since 2008 the share of economies
converging in this way has fallen from 88%
to 50% (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 1980s 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%
in 2005-07 to a puny 6% 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.
Instead, the Trump administration has
charged in. Its signature policy has been a
barrage of tariffs, which cover a huge range
of goods, from tyres to edible offal. The revenue
America raised from tariffs, as a share
of the value of all imports, was 1.3% in 2015.
By October 2018, the latest month for which
data are available, it was 2.7%. If America
and China do not strike a deal and Mr
Trump acts on his threats, that will rise to
3.4% in April. The last time it was that high
was in 1978, although it is still far below the
level of over 50% seen in the 1930s.
Tariffs are only one part of a broad push
to tilt commerce in America’s favour. A tax
bill passed by Congress in December 2017
was designed to encourage firms to repatriate
cash held abroad. They have brought
back about $650bn so far. In August 2018
Congress also passed a law vetting foreign
investment, aimed at protecting American
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 an American
monitor placed inside a global bank,
who raised a flag about the firm busting
sanctions. The punishment could be a ban
on doing business in America, 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. America
has abandoned climate treaties and undermined
bodies such as the wto and the global
postal authority.
On the counterattack
Other countries have reciprocated in kind
if not in degree. As well as raising tariffs of
its own, China used its antitrust apparatus
in July to block the acquisition of nxp, a
Dutch chip firm, by Qualcomm, an American
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, having sat in
the back seat for years.
Most multinational firms spent 2018 insisting
to investors that this trade war did
not matter. This is odd, given how much effort
they spent over the previous 20 years
lobbying for globalisation. The Economist
Global stops and starts
Sources: IMF; UNCTAD; BIS; OECD; Bloomberg; IATA; UPU; McKinsey *Compared with US GDP per person on a PPP basis
Trade in goods and
services as % of GDP
1
50
55
60
65
2007 18
Intermediate imports
as % of GDP
14
16
18
20
2007 18
Multinational profits
as % of all listed
firms’ profits
20
25
30
35
40
2007 18
FDI flows
as % of GDP
0
1
2
3
4
2007 18
Stock of crossborder
bank loans
as % of GDP
30
40
50
60
2007 18
Share of countries
catching up*, %
40
60
80
100
2007 18
Gross capital flows
as % of GDP
0
2
4
6
2007 18
S&P 500 sales
abroad, % of total
30
40
50
60
2007 18
International parcel
volume, m
0
50
100
150
200
2007 17
Permanent migrants
to rich world, m
0
2
4
6
2007 17
Cross-border
bandwith
Terabits per second
0
200
400
600
800
2007 17
International air
travel, revenue
passenger km, bn
0
2
4
6
2007 17
The Economist January 26th 2019 Briefing Slowbalisation 25
2
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has reviewed the investor calls in the second
half of 2018 of about 80 of the largest
American firms which have given guidance
about the impact of tariffs. The hit to total
profits was about $6bn, or 3%. Most firms
said they could pass on the costs to customers.
Many claimed their supply chains
were less extended than you might think,
with each region a self-contained silo.
This blasé attitude has begun to crumble
in the past eight weeks, as executives
factor in not just the mechanical impact of
tariffs but the broader consequences of the
trade war on investment and confidence,
not least in China. On December 18th Federal
Express, one of the world’s biggest logistics
firms, said that business was slowing.
Estimates for the firm’s profits have
dropped by a sixth since then. On January
2nd Apple said that trade tensions were
hurting its business in China, and five days
later Samsung gave a similar message.
Temporary manoeuvring by firms to get
round tariffs may have created a sugar high
that is now ending. Some firms have been
“front-running” tariffs by stockpiling inventories
within America. Reflecting this,
the price to ship a container from Shanghai
to Los Angeles soared in the second half of
2018, compared with the price to ship one
to Rotterdam. But this effect is unwinding
and prices to Los Angeles are falling again
as global export volumes slow.
America 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 Mr Trump. And damage
has been done to American-led institutions,
including the dollar system. Firms
worry that the full-tilt globalisation seen
between 1990 and 2010 is no longer underwritten
by America and no longer commands
popular consent in the West.
Few quick fixes
Faced with this, some things are easy to fix.
The boss of one big multinational is planning
to end its practice of swapping board
seats with a Chinese firm, in order to avoid
political flak in America. Supply chains
take longer to adjust. Multinationals are
sniffing out how to shift production from
China. Kerry Logistics, a Hong Kong firm,
has said that trade tensions are boosting
activity in South-East Asia. Citigroup, a
bank, has seen a pickup in deal flows between
Asian countries such as South Korea
and India.
An exodus cannot happen overnight,
however. Vietnam is rolling out the red carpet
but its two big ports, Ho Chi Minh City
and Haiphong, each have only a sixth of the
capacity of Shanghai. Apple, which has a
big supply chain in China, is committed to
paying its vendors $42bn in 2019 and the
contracts cannot be cancelled. It relies on a
long tail of 30-odd barely profitable suppliers
and assemblers of components, which
it squeezes. If these firms were asked to
shift their factories from China they might
struggle to do so quickly—the cost could be
anywhere between $25bn and $90bn.
Over time, however, firms will apply a
higher cost of capital to long-term investments
in industries that are politically sensitive,
such as tech, and in countries that
have fraught trade relations. The legal certainty
created by nafta in 1994 and China’s
entry into the wto in 2001 boosted multinational
investment flows. The removal of
certainty will have the opposite effect.
Already, activity in the most politically
sensitive channels is tumbling. Investment
by Chinese multinationals into
America and Europe sank by 73% in 2018.
Overall global fdi fell by 20% in 2018, according
to unctad, a multilateral body.
Some of that reflects an accounting quirk
as American firms adjust to recent tax reforms.
Still, in the last few weeks of 2018,
one element of fdi, cross-border takeovers,
slipped compared with the past few
years. If you assume that the rate of tax repatriation
fades and that deal flows are
subdued, fdi this year might be a fifth lower
than in 2017.
These trends can be used as a crude indicator
of the long-run effect of a continuing
trade war. Assume that fdi does not
pick up, and also that the recent historical
relationship between the stock of fdi and
trade can be extrapolated. On this basis, exports
would fall from 28% of world gdp to
23% over a decade. That would be equivalent
to a third of the proportionate drop
seen between 1929 and 1946, the previous
crisis in globalisation.
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% of the productivity growth in
emerging economies in 2004-14 came
from knowledge flows, reckons the imf.
Overall, it has been a dismal decade for
exports of services, which have stagnated
at about 6-7% of world gdp. But Richard
Baldwin, an economist, predicts a crossborder
“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 $40bn 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% of their
friends living within 200 miles and only
4% abroad. The cross-border revenue pool
is relatively small. In total the top 1,000
American digital, software and e-commerce
firms, including Amazon, Microsoft,
Facebook and Google, had international
sales equivalent to 1% 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
American biscuit-maker.
Technology services are especially vulnerable
to politics and protectionism, reflecting
concerns about fake news, taxdodging,
job losses, privacy and espionage.
Here, the dominant market shares of the
companies involved are a disadvantage,
making them easier to target and control.
America discourages Chinese tech firms
from operating at scale within its borders
and American companies like Facebook
and Twitter are not welcome in China.
This sort of behaviour is spreading.
Consider India, which Silicon Valley had
hoped was an open market where it could
build the same monopolistic positions it
has in the West. On December 26th India
passed rules that clobber Amazon and Walmart,
which dominate e-commerce there,
preventing them from owning inventory.
The objective is to protect local digital and
traditional retailers. Draft rules revealed in
26 Briefing Slowbalisation The Economist January 26th 2019
2 July would require internet firms to store
data exclusively in India. A third set of
rules went live in October, requiring financial
firms to store data locally, too.
Furthermore, trade in services might
bring the kind of job losses that led manufacturing
trade to become unpopular.
Imagine, for example, if India’s it services
firms, experts at marshalling skilled workers,
doubled in size. Assuming each Indian
worker replaced a foreign one, then 1.5m
jobs would be lost in the West. And even the
flow of raw ideas across borders could be
slowed. The White House has considered
restricting Chinese scientists’ access to research
programmes. America’s new investment-
vetting regime could hamper venture-
capital activity. Technology services
will not evade the backlash against globalisation,
and may make it worse.
As globalisation fades, the emerging
pattern of cross-border commerce is more
regional. This matches the trend of shorter
supply chains and fits the direction of geopolitics.
The picture is clearest in trade. The
share of foreign inputs that cross-border
supply chains source from within their
own region—measured using value added—
has risen since 2012 in Asia, Europe
and North America, according to the oecd,
a club of mostly rich countries (see chart 2).
The pattern changes
Multinational activity is becoming more
regional, too. 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 America in 2018. In Europe
around 60% 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 America.
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 Mr
Trump has struck is a new version of
nafta, known as usmca. On November
20th 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 South-East 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 that run trade surpluses.
As a result there could be lots of 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 American 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. Over time this will
lead other countries to switch away from
the 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 America 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. 7
Chain reaction
Source: OECD *Measured by value added
Share of cross-border supply-chain foreign inputs*
that are from the same region, %
2
30
35
40
45
50
55
60
2005 07 09 11 13 15 16
Asia
European Union
North America
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