Medium-term prospects suggest globalisation is set to continue

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 a single direction since the 1980s. On aggregate, 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 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 president of the US, economic discontent among swathes of the population 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 President Trump entered office in early 2017, 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 as 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, these situations 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. Established in 1981, the Gulf Cooperation Council (GCC) consists of six Middle Eastern nations. The GCC Customs Union had been fully operational since early 2015, with further efforts under way to integrate the region’s common market; however, this process was affected in June 2017, following the imposition of an economic embargo on Qatar, and the cutting of diplomatic relations by the UAE, Saudi Arabia, Bahrain and 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, and suspended on an indefinite basis several months later.

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.

Cause for Optimism

Even if the media is dominated by high-profile threats to free trade and open investment regimes, there have been some positive developments. Despite the challenges to NAFTA, key business players in Mexico retain a pragmatic approach. Nuno Matos, CEO of HSBC México, told OBG, “Undoubtedly, NAFTA will bring about a marked increase in market volatility over the course of 2018.” That being said, Mexico’s medium- to long-term economic prospects are remarkably positive. According to Matos, the global shift towards protectionism 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 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 the Association of South-east Asian Nations (ASEAN), in addition to the six countries with which ASEAN already has free-trade agreements (FTAs) – 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.

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. In some respects CETA represents the first in a new generation of plurilateral agreements, with a new investor-state dispute settlement mechanism. EU authorities have signalled that this could serve as a model for the EU-UK relationship after Brexit. Ongoing EU trade talks include those with Japan, with negotiations being finalised in December 2017; the seventh round of talks with Mexico on a new and reformed FTA in late December 2017; and bilateral negotiations with ASEAN members in various stages. REGIONAL INTEGRATION: Other regions have continued their own integration efforts. In 2011 Chile, Colombia, Mexico and Peru launched the Pacific Alliance. Some 92% of goods can already be exchanged tariff free between the member states, with work under way to eliminate the remaining tariffs. 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. 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 recognised by the African Union.

By the Numbers

Trade growth has been disappointing for most of the decade since the global financial crisis. In 2016, for example, growth in merchandise trade was only 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, 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. If this translates into broader improvements in living standards, it is possible that the political climate may become more hospitable to liberalisation. Even if the multilateral agenda remains stalled into 2018, progress on bilateral, plurilateral and regional initiatives suggests the most likely direction of future trade is further openness, 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. Whether or not the resolution of high-profile cases comes to pass, the bigger picture suggests the march towards globalisation is unlikely to end in the near term.