Medium-term indicators point to continued globalisation for the foreseeable future



Decades of growth in trade and foreign investment have seen global economies become more interconnected than ever before. This trend has been reinforced by the steady liberalisation of international trade and investment, at the bilateral, plurilateral and multilateral levels. National economic specialisations, and regional economic and political integration, have broadly proceeded in this way since the 1980s. Overall, emerging markets have become the main drivers of growth.

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 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 between December 10 and 13, 2017. Meanwhile, a subset of 46 WTO member states began working towards an Environmental Goods Agreement (EGA) in 2014. A smaller group of 23 WTO members has been negotiating a Trade in Services Agreement (TiSA) since early 2013. Although talks on both the EGA and the TiSA stalled in late 2016, there are hopes in a new-found political impetus arising from the December 2017 WTO ministerial conference.

Political Fallout

Globalisation has always had its critics, but the global financial crisis of 2007-08 and the widespread political backlash in advanced economies has caused many to call its central tenets into question. While there were many factors behind the election of Donald Trump as US president, economic discontent was among them, and explains the success of his protectionist rhetoric. Immediately upon inauguration, 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 as the TPP by the time the president entered office in early 2017, prospects for a deal remained 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.

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

Emerging economies are generally characterised by 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 emerging markets.

Cause for Optimism 

Despite the high-profile threats to free trade and open investment regimes, there have been some positive developments. During the APEC leaders’ summit in Da Nang, Vietnam in November 2017, the other 11 parties to the TPP resurrected the pact as the Comprehensive and Progressive Agreement for TPP (CPTPP), signalling their intention to proceed without the US. In the context of the APEC talks, Vietnam’s deputy minister of foreign affairs, Bui Thanh Son, told OBG, “Efforts must be made to enhance greater regional integration and connectivity. 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.” 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 Regional Comprehensive Economic Partnership since 2012, and there is growing confidence that an agreement can be reached in 2018. Economic integration among the 10 members of ASEAN has also progressed. 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.

Other regions have continued integration efforts. In 2011 Chile, Colombia, Mexico and Peru launched the Pacific Alliance, and some 92% of goods can already be exchanged tariff free between member states. In late 2017 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.

By the Numbers

Trade growth has been low since the global financial crisis, and in 2016 merchandise trade expanded by just 1.3%. The latest estimates from the WTO, however, suggest that merchandise trade growth was likely to have reached 3.6% for 2017 – 1.3 times that of global GDP growth – and that it would moderate slightly to growth of 3.2% in 2018. In the first half of 2017 both exports and imports were up strongly in North America, by 4.9% and 3.9%, respectively; in Europe, by 2.6% and 1.2%; and, in particular, Asia where they rose by 7.3% and 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. If this translates into wider improvements in living standards, the political climate may become more hospitable to liberalisation. Recent progress on bilateral, plurilateral and regional initiatives also suggests further openness in future trade, even if progress is slower than recent decades. This is all despite recent instances of trade and investment relationships being weighed down on by political dispute. Whether or not high-profile cases are resolved, the march towards globalisation is likely to continue.