The Brexit vote and US presidential race saw contenders insist on the dangers of globalization1 this year. Luckily enough, the rise of populism was thwarted when populist parties started losing elections later in 2017. Economic nationalism – a cover for protectionism – is no panacea and is more likely to weigh on growth than support it. Government policies will need to be redefined worldwide and locally to achieve fairer globalization but it will take time.
WORLD TRADE IS NO LONGER A STRONG BOOST TO GROWTH
The expansion in international trade over the past decades strongly benefited economic activity through wider access to technological advance, improved capital allocation and lower production costs, and saw emerging countries boom. We have reached a point where more than three quarters of world growth is generated by the emerging world and essentially Asia (in purchasing power parity terms).
Protectionism may lead to slower business activity and even economic stability in some countries. For instance, the Mexican peso plunged 20% between November 2016 and January 20172 by fear of the introduction of punitive tariffs and a comprehensive renegotiation of the North-American Free Trade Agreement (NAFTA).
Throughout the world, companies took advantage of the lower tariffs and sharp fall in transport costs to go global.
Almost half the firms contributing to building Apple devices are based in China, 20% in Japan, 10% in the United States and 5% in Taiwan3. In 2016, MIT calculated that if iPhones were to be entirely built and assembled in the USA their price would rise $100 – nothing frightening but still a steep rise.
World trade has contracted severely since 2017: while it rose twice faster than global growth before the Great Financial Crisis, it is now almost outpaced. Low productive investment reduces capital spending in the natural resources and manufacturing sectors, slowing equipment exports. Restoring national preference would slow trade flows but also weigh on domestic growth through less efficient allocation of production factors (capital and labour). Lastly, with the rebalancing of growth drivers from manufacturing to consumption and services, China has managed to become less sensitive to foreign demand.
NEXT STEP: ACHIEVING FAIRER INCOME DISTRIBUTION
When China joined the World Trade Organization (WTO) in December 2001, foreign direct investment flows surged around 40 billion dollars per year. They broke above 200 billion dollars in 20104, turning the country into an assembly and reshipping platform. In the years 2000, the boom in Chinese exports contributed to reducing by one percentage point per year the price of manufactured goods consumed in the United States. Although the price decrease benefited most US consumers, some workers were directly exposed to competition from China and other low-wage countries.
Empirical studies also suggest that the offshoring of services to lower-cost countries has often worked in favour of the highly-skilled and hurt middle- and low-skilled professionals.
Overall, world trade has helped bridge the divide between the developed and emerging world but increased domestic inequality. But this is not the only factor accountable for the growing income gap in advanced economies and more especially in the United States: technological advance has reduced the need for low-skilled labour, vocational retraining still has room for improvement, and production cannot adapt to the new environment until trade unions agree to renegotiate work conditions.
Better acceptance of globalization will require fairer distribution of benefits worldwide and locally. Governments will have to rethink their economic policies. The Trans-Pacific Partnership (TPP) aimed at more environmentally-and socially-responsible production but its fate is uncertain since the United States pulled out of the deal last spring. Investment in tangible and intangible capital will have to be redirected to the regions most affected by world trade to ensure successful industrial conversion.
However, the hardest will be to raise workers’ qualification levels through continuing training to improve economic productivity and adapt to technological change.
Faster growth can only come through fairer income distribution. While these goals may seem conflicting, they are actually complementary. However, achieving success will be no easy task in an increasingly interconnected and competitive global economy.
Article written in august 2017
1/ Here, “globalization” describes the rise in global trade flows, cross-border financial traffic but also economically-motivated migration.
2/ Source: Bloomberg
3/ The All-American iPhone, MIT Technology Review, June 2016