Globalisation will continue for the foreseeable future

 

Decades of growth in trade and foreign investment have seen the economies of the world become more interconnected and interdependent than ever before. The production of goods and, increasingly, the provision of services has become fractured across borders as corporations create and integrate into regional and global value chains. These trends have been reinforced by the steady liberalisation of international trade and investment regimes, at the bilateral, plurilateral and multilateral levels. National economic specialisation in areas of comparative advantage – and regional economic and political integration – have typically proceeded in a single direction, broadly speaking, since the 1980s. On aggregate, advanced economies have benefitted from and have championed these developments, while emerging markets have become the main drivers of growth around the world.

Limitations

Despite the apparent success of trade and investment liberalisation, multilateral negotiations aiming for further openness have had limited success in the 21st century. Launched in late 2001, the Doha round of talks at the World Trade Organisation (WTO) finally ended in 2015 due to lack of sufficient progress. In the intervening years trade negotiators had in any case shifted focus to bilateral and plurilateral deals, while efforts at the multilateral level targeted more limited goals, such as the trade facilitation package agreed by the WTO in 2013, and the phasing out of agriculture subsidies agreed in 2015. Fisheries subsidies and e-commerce were front and centre when the WTO last met at the ministerial level in Buenos Aires on December 10 to 13, 2017.

Meanwhile, a subset – now numbering 46 countries – of the WTO’s near-universal membership began working towards an Environmental Goods Agreement (EGA) in 2014. A smaller group of 23 WTO members has been negotiating a Trade in Services (TiSA) since early 2013. Although talks on both the EGA and the TiSA stalled in late 2016, there are hopes in some quarters of new-found political impetus arising from the December 2017 WTO ministerial meeting.

Political Fallout

Globalisation has always had its critics, but the global financial crisis of 2007-08 and the widespread political backlash that has followed in advanced economies, in particular, has caused many to call its central tenets into question. While there were clearly many factors behind the election of Donald J Trump as president of the US, economic discontent among swathes of the population was among them, and helps explain the success of his protectionist rhetoric. Immediately upon entering office, President Trump announced the US would no longer participate in efforts to finalise the Trans-Pacific Partnership (TPP) with 11 other countries in the Pacific basin.

Although negotiations on the Transatlantic Trade and Investment Partnership between the US and the EU had not advanced to the same extent by the time President Trump entered office in early 2017 and his administration even signalled potential interest in reopening renegotiations, prospects for a deal remain weak. Negotiations are ongoing on the two-decade-old North American Free Trade Agreement (NAFTA) between the US and its neighbours Canada and Mexico, with success by early 2018 far from guaranteed.

In Europe, it can be said that such discontent has fuelled both the rise of radical, right-wing political groups across the continent, as well the UK’s Brexit vote in 2016. Centrifugal forces have also manifested themselves in the drive for independence in Catalonia, and similar movements in the north of Italy and elsewhere. While both the UK and Catalan political class have professed commitment to free trade and open investment regimes, the spectre of Brexit and the potential exit of Catalonia from Spain, and therefore the EU, should be seen as de facto protectionist, as both mean leaving the world’s largest free-trade zone.

An observed gradual deglobalisation phenomenon is not entirely confined to the most advanced economies. First established in 1981, the Gulf Cooperation Council (GCC) consists of six countries of the Gulf. Although the GCC Customs union had been fully operational since the beginning of 2015, with further efforts under way to integrate the region’s common market, this process was impacted in June 2017, following the imposition of an economic embargo on Qatar, and the cutting of diplomatic relations by fellow GCC members Saudi Arabia, Bahrain and the UAE, as well as by Egypt.

The South American trade bloc, Mercosur, which has existed since 1991, and counts among its members Argentina, Brazil, Paraguay and Uruguay, has seen internal discord of a similar nature. Due to its mounting political and diplomatic issues, Venezuela’s membership was temporarily suspended on December 1, 2016. This suspension was later renewed on an indefinite basis several months later, on August 5, 2017.

Perhaps more importantly, emerging economies are, in general, characterised by far greater trade tariffs and investment restrictions than their advanced economy counterparts. A slowdown, or even a reversal, in liberalisation may thus be even more of an issue for some emerging markets, with negative implications for their further integration into global value chains. Backsliding by countries that are traditionally the chief proponents of globalisation, moreover, may give political cover to leaders in emerging market countries to adopt a more protectionist stance.

Cause For Optimism

Even if the media is dominated by the most high-profile threats to free trade and open investment regimes, such as Brexit and the renegotiation of NAFTA, there has actually been some important positive developments.

Despite the challenges to NAFTA, business players in Mexico retain a pragmatic approach. “Undoubtedly, NAFTA will bring about a marked increase in market volatility over the course of 2018,” Nuno Matos, CEO of HSBC México, told OBG. That being said, Mexico’s medium- to long-term economic prospects are remarkably positive. According to Matos, the global shift towards protectionism particularly affects countries like Mexico, but there is still hope from other regions. “With increased capital flows from Asia, Mexico is not short of other trade partners that have growth rates far superior to those of the US,” he added.

Indeed, during the Asia-Pacific Economic Cooperation (APEC) leaders’ summit in Danang, Vietnam in November 2017, the other 11 parties to the TPP resurrected and renamed the pact as the Comprehensive Progressive Agreement for TPP (CPTPP), signalling their intention to proceed without the US. “Efforts must be made to enhance greater regional integration and connectivity,” Som Chair Bui Thanh Son, Vietnam’s deputy minister of foreign affairs, told OBG in the context of the APEC talks. “As global trade is losing its momentum, revitalising trade and investment is crucial to regional economic growth and the achievement of the Bogor Goals [a set of targeted goals for achieving free and open trade in the Asia-Pacific region] by 2020.” Son emphasised the importance of tapping into the opportunities presented by existing and ongoing regional groups and agreements, including the Association of South-east Asian Nations (ASEAN), the TPP, Regional Comprehensive Economic Partnership (RCEP) and the Free Trade Area of the Asia-Pacific (FTAAP).

In parallel to the CPTPP, the 10 member countries of ASEAN, in addition to the six countries with which ASEAN already has free-trade agreements – Australia, China, India, Japan, South Korea and New Zealand – have been pursuing the RCEP since 2012. Although the target date for concluding negotiations has slipped from 2017, there is growing confidence that an agreement can be reached in 2018.

On September 21, 2017, after many years of negotiation and a long chain of discussions, the Comprehensive Economic and Trade Agreement (CETA) between Canada and the EU entered into force provisionally, pending its final ratification by national and regional legislatures. CETA, in some respects, represents the first in a new generation of plurilateral agreements, and has a new investor-state dispute settlement mechanism. EU authorities have signalled that the arrangement could be a potential model for the EU-UK relationship following Brexit.

Negotiations are also well under way between Mexico and the EU on a new and reformed free-trade agreement. The seventh round of these talks took place in late December 2017 in Brussels, and while progress was made, Cecilia Malmström, European Commissioner for trade, said that although they are close to a deal, they are not quite there yet. Other ongoing EU trade talks include those with Japan, with negotiations being finalised in December 2017, following the settlement of the main elements of an Economic Partnership Agreement at the EU-Japan Summit of July 6, 2017. Bilateral negotiations are at various stages between the EU and ASEAN members, and in 2018 all parties are due to explore the possibility of resurrecting a region-to-region agreement.

Regional Integration

While political and economic integration within Europe may be at something of a crossroads, other regions have continued their own integration efforts. In order to proceed more quickly with economic integration, Chile, Colombia, Mexico and Peru in 2011 launched the Pacific Alliance. Some 92% of goods can already be exchanged tariff free between the member states, while work is under way to eliminate the remaining tariffs, as well as to ensure the free movement of services, capital and people. In late 2017 the four members of the alliance moved forward with plans to upgrade the status of four of its observer countries – Australia, Canada, New Zealand and Singapore – to that of associate members, which should facilitate efforts to negotiate trade deals as a bloc going forward.

Economic integration among the 10 members of ASEAN continues unabated. A free-trade area since 1992, the ASEAN Economic Community (AEC) was formally established in late 2015, with a blueprint to make the AEC a reality by 2025. In Africa, regional integration has a long pedigree, with a large number of regional economic communities – with varying degrees of integration – recognised by the African Union. In 2017, to take just one example, the Economic Community of West African States (ECOWAS) gave a green light in principle for Morocco to join the regional grouping, which would see the North African country sign up to free trade with the other 15 member countries.

By The Numbers

Trade growth has been disappointing for most of the decade since the global financial crisis, lagging global GDP growth where it once consistently outpaced it. For example, in 2016 growth in merchandise trade was only 1.3%. The latest estimates from the WTO, however, suggest that merchandise trade growth is picking up again and is likely to reach 3.6% for 2017 – 1.3 times that of global GDP growth – before moderating slightly to 3.2% growth in 2018. In the first half of 2017 both exports and imports were up strongly in North America, at 4.9% and 3.9%, respectively; in Europe, at 2.6% and 1.2%, respectively; and, in particular, Asia with exports up by 7.3% and imports up 8.9%. Meanwhile, trade flows were relatively flat in South America, with exports down 0.7% and imports up 1%, while imports were up 0.1% in the Middle East and North Africa region, and up 2.5% in the Commonwealth of Independent States.

Having picked up to their highest level since the global financial crisis in 2015, foreign direct investment (FDI) flows eased slightly in 2016, falling by 2% to $1.75trn. However, this average masks much steeper declines in developing Asia (-15%) and Latin America and the Caribbean (-14%), while Africa also experienced an above-average decline in inflows of 3%. Globally, the UN Conference on Trade and Development projects modest year-on-year increases, with FDI flows to reach an estimated $1.85trn in 2018, although this is still below the record levels that were seen in 2007.

After a decade of sub-par performance, global economic growth is picking up, helped by a resurgence in trade flows and, to a lesser extent, FDI flows. If this is translated into more broad-based improvements in living standards than have been seen in recent years, it is possible that the political climate may become more hospitable to trade and investment liberalisation, or at least reduce the incentives for pursuing protectionist policies. Even if the multilateral agenda remains stalled into 2018, progress on bilateral, plurilateral and regional initiatives already under way suggests the most likely direction of future trade is further liberalisation, even if progress is uneven and slower than in recent decades. This is all despite recent instances of trade and investment relationships caught in the crossfire of political dispute, such as the suspension of Venezuela from Mercosur, the pro-independence drive in Catalonia and the economic embargo of Qatar.

It is not inconceivable that each of these episodes could be resolved in 2018, followed by the normalisation of economic relationships. Whether or not that comes to pass, the bigger picture suggests the march towards globalisation is unlikely to end in the near term.

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