Medium-term prospects suggest globalisation is set to continue

Decades of growth in trade and foreign investment have made economies around the world more interconnected and interdependent than ever before. The production of goods and, increasingly, the provision of services have 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 specialisation in economies of comparative advantage, and regional economic and political integration, have proceeded in one direction, broadly speaking, since the 1980s. On aggregate, advanced economies have benefitted from and championed these developments, while emerging markets have become the main drivers of global growth.

Limitations

Despite the apparent progress 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) ended in 2015 due to a lack of sufficient progress. In the intervening years trade negotiators 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 in 2015. Fisheries subsidies and e-commerce were front and centre when the WTO last met at the ministerial level in Buenos Aires from 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 Agreement (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.

Limitationspolitical 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 question its central tenets. While Donald Trump’s election as US president was rooted in many factors, economic discontent among swathes of the population was prominent among them, and helps explain the success of his protectionist rhetoric. Upon entering office, President Trump announced the US would withdraw from efforts to finalise the Trans-Pacific Partnership (TPP) with 11 other countries in the Pacific basin.

Although talks 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, prospects for a deal remain weak, despite his administration signalling potential interest in reopening negotiations.

In November 2018 the presidents of the US and Mexico and the prime minister of Canada signed the US-Mexico-Canada Agreement (USMCA), which was drafted to replace the multilateral North American Free Trade Agreement (NAFTA). The USMCA largely preserves NAFTA’s structure while tweaking, among others, rules regarding the origins of automobile parts, labour standards and intellectual property protections. Pending ratification by its members’ legislatures, the USMCA will go into force in 2020.

In Europe, such discontent has fuelled both the rise of radical, right-wing political groups across the continent and 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 classes have professed commitment to free trade and open investment regimes, the spectre of Brexit and the potential exit of Catalonia from Spain should be seen as de facto protectionist, as both would leaving the world’s largest free trade zone.

A gradual deglobalisation trend is not entirely confined to the most advanced economies. First established in 1981, the Gulf Cooperation Council (GCC) consists of six countries in the Middle East. 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 interrupted in June 2017 by 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, in August 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 high-profile threats to free trade and open investment, there have been some encouraging developments. Despite the challenges to NAFTA, key business players in Mexico have retained 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 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 Da Nang, Vietnam in November 2017, the TPP was resurrected as the Comprehensive and Progressive Agreement for TPP (CPTPP), signalling its members’ 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.” 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).

Resolution

Since 2012 ASEAN’s 10 member states and the six countries with which ASEAN already has free trade agreements (FTAs) – Australia, China, India, Japan, South Korea and New Zealand – have been drafting the framework for the RCEP. While the negotiations have repeatedly missed deadlines, the summit in November 2018 culminated in a joint statement from its participants that seven of the deal’s 18 chapters had been concluded, as well as a resolution – under pressure from an escalating trade war between the US and China – to finish the multilateral deal in 2019.

On September 21, 2017, after years of negotiation, 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 under way between Mexico and the EU on a new and reformed FTA. The seventh round of these talks took place in late December 2017 in Brussels. While some progress was acknowledged, Cecilia Malmström, the European Commissioner for Trade, remarked, “We’ve made a lot of progress and we are very close to a deal, but we are not there yet.”

The EU and Japan finalised negotiations in December 2017 regarding their Economic Partnership Agreement, which is expected to enter into force in February 2019. Moreover, the August 2017 adoption of the ASEAN-EU Plan of Action (2018-22) revived formal interest in the development of a region-to-region deal, which the EU suspended citing concern for Myanmar’s internal conflict in favour of negotiating bilateral treaties. However, neither party reported making significant progress on the bloc-to-bloc arrangement in 2018.

Regional Integration

While Europe’s political and economic unification may have arrived at something of a crossroads, other countries have launched or continued efforts to facilitate regional integration. In order to proceed more quickly with economic integration, Chile, Colombia, Mexico and Peru launched the Pacific Alliance in 2011. 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 agreement 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 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%.

However, the WTO’s latest estimates suggest that merchandise trade growth is picking up and 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 global average masks much steeper declines in Asia (-15%) and Latin America and the Caribbean (-14%), while Africa also experienced a 3% decline in inflows. Worldwide, the UN Conference on Trade and Development projects modest year-on-year increases, with FDI flows expected to reach an estimated $1.85trn in 2018, although this number remains 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.

While perhaps unlikely, it is not inconceivable, however, that each of these episodes could be resolved in 2019, followed by the normalisation of economic relationships. Whether or not these resolutions come to pass, the bigger picture suggests that the march towards globalisation is unlikely to end in the near term.