Medium-term prospects suggest globalisation is set to continue for the foreseeable future

 

Decades of growth in trade and foreign investment have made the economies of the world more interdependent than ever before. The production of goods and, increasingly, the provision of services has become fractured across borders as corporations integrate into regional and global value chains – a process reinforced by international trade and investment regimes. On aggregate, advanced economies have benefitted from these changes, while emerging markets have become the main drivers of growth around the world. However, recent years have seen a new scepticism towards globalisation emerge, alongside more protectionist policies that could threaten this global economic landscape.

Political Fallout

Globalisation has always had its critics, but the global financial crisis of 2007-08 and the widespread political backlash that followed, particularly in advanced economies, have called its principles into question. Many regard the election of Donald Trump as US president on the strength of protectionist rhetoric, along with the UK vote for Brexit in 2016 and the revival of the Catalonian independence movement, as evidence of economic discontent in these communities.

This deglobalisation phenomenon is not confined to the most advanced economies. The GCC founded a formal Customs union in January 2015 as part of a regional integration effort. However, this process stalled in June 2017 with the imposition of an embargo on Qatar and the severance of diplomatic ties with several GCC states. Similarly, the trading bloc Mercosur, which was founded by Argentina, Brazil, Paraguay and Uruguay in 1991, indefinitely suspended its fifth member, Venezuela, in August 2017 for violating the common market’s democratic principles.

Emerging economies are often characterised by greater trade tariffs and investment limits than their advanced counterparts. As a result, any reversal of liberalisation may pose a greater threat to development in emerging markets, leading to negative implications for their further integration into global value chains.

Cause for Optimism

There have been positive developments in the face of this trend. When the US withdrew from the Trans-Pacific Partnership (TPP) in January 2017, its 11 other parties resurrected the pact as the Comprehensive Progressive Agreement for TPP, and the deal entered into force in December 2018 for its first six ratifiers. Similarly, the Comprehensive Economic and Trade Agreement between Canada and the EU entered into provisional force in September 2017. If ratified, it will eliminate tariffs on 98% of traded goods and provide a new means for resolving investor-state disputes. The EU has also signalled that it could work as a model for the EU-UK relationship following Brexit.

Integration & Growth

While political and economic integration within Europe may have arrived at something of a crossroads, other regions have continued their own integration efforts. In Africa, plurilateral integration has a long pedigree, and the African Union currently recognises eight regional economic communities. In June 2017 the Economic Community of West African States, which was founded in 1975 to achieve collective self-sufficiency for its 15 members, approved in principle Morocco’s application to join the bloc.

While trade growth has been disappointing for most of the decade since the global financial crisis, data from the World Trade Organisation suggest that merchandise trade is picking up again. The growth rate for global trade reached 4.7% in 2017, 1.5 times that of global GDP, and was projected to moderate only slightly in 2018, to 4.4%, against a GDP growth forecast of 3.2%. The UN Conference on Trade and Development also expected global foreign direct investment (FDI) for 2018 would grow by as much as 10% over the $1.43trn recorded in 2017, though FDI flows were expected to remain below the $1.83trn high recorded in 2007.

Even if progress has slowed, the renewed interest in regional economic agreements, combined with forecast growth of trade and FDI, suggest that the processes and dividends of globalisation are unlikely to end soon.

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The Report: Kuwait 2019

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