Globalisation set to continue over the medium term

Decades of growth in trade and foreign investment have made the economies of the world more interdependent 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 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, as well as 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 in December 2017.

Meanwhile, 46 members of the near-universal WTO 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.

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 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 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.

In November 2018 representatives from three countries signed the US-Mexico-Canada Agreement (USMCA) to replace the North American Free Trade Agreement (NAFTA). The USMCA largely preserves NAFTA’s structure while tweaking rules regarding, among others, the origins of automobile parts and labour and intellectual property standards. Pending legislative ratification, the USMCA will go into force in 2020.

In Europe, such discontent has fuelled the rise of radical, right-wing political groups and the UK’s 2016 Brexit vote. Centrifugal forces have manifested themselves in the drive for independence in Catalonia, as well as similar movements in northern Italy and elsewhere. While the UK and Catalan political classes have professed commitment to free trade and open investment regimes, the spectre of Brexit and Catalonian independence should be seen as de facto protectionist, as both would be leaving the world’s largest free trade zone.

A gradual deglobalisation phenomenon 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 early 2015 and efforts have continued 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 Saudi Arabia, Bahrain, the UAE and Egypt.

The South American trade bloc, Mercosur, which was founded 1991 by Argentina, Brazil, Paraguay and Uruguay, has seen similar internal discord. While Venezuela was admitted as a fifth, full member in 2012, it was temporarily suspended in December 2016 and indefinitely suspended in August 2017 for violating the common market’s democratic principles.

Perhaps more importantly, emerging economies are frequently characterised by greater trade tariffs and investment restrictions than their advanced counterparts. A slowdown, or even a reversal, in liberalisation may be 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 markets to adopt more protectionist stances.

Cause for Optimism

Even if the media is dominated by high-profile threats to free trade and investment, there have been some encouraging developments. Despite the challenges to NAFTA, business players in Mexico have remained pragmatic. Nuno Matos, CEO of HSBC México, told OBG, “Undoubtedly, NAFTA will bring about a marked increase in market volatility over the course of 2018.” While the shift towards protectionism threatens to stress the Mexican economy, the country’s prospects remain positive, as the change is also creating opportunities to establish linkages with 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.

During the Asia-Pacific Economic Cooperation (APEC) leaders’ summit in Da Nang, Vietnam in November 2017, the TPP was revived without the US as the Comprehensive and Progressive Agreement for TPP (CPTPP). At the summit, 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 loses momentum, revitalising trade and investment is crucial to regional economic growth.” Son emphasised tapping into the opportunities presented by existing and developing regional agreements, including the Association of South-East Asian Nations (ASEAN), the Regional Comprehensive Economic Partnership (RCEP) and the Free Trade Area of the Asia Pacific. Indeed, the CPTPP itself entered into force in December 2018 for its first six ratifiers and will apply to Vietnam beginning in January 2019.

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 negotiations have repeatedly missed deadlines, the November 2018 summit culminated in a joint statement from its participants that seven of 18 chapters had been concluded, as well as a resolution – amid escalating trade tensions between the US and China – to finish the deal in 2019.

In September 2017 the Comprehensive Economic and Trade Agreement (CETA) between Canada and the EU entered into provisional force. If ratified, CETA will eliminate tariffs on 98% of traded goods and, in some respects, could be the first in a new generation of plurilateral agreements, with its new mechanism for resolving investor-state disputes. The EU has also signalled that the arrangement is a potential model for the EU-UK relationship following Brexit.

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 within the bloc, with work under way to eliminate the remaining tariffs. In late 2017 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 the negotiation of trade deals as a bloc.

Economic integration among in ASEAN continued in 2015 with the legal establishment of the ASEAN Economic Community (AEC), and a blueprint is in place to make the AEC a reality by 2025. 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 approved in principle Morocco’s application to join the bloc’s 15 members.

By the Numbers

Trade growth has been disappointing for most of the decade since the global financial crisis, lagging GDP where it once outpaced it. However, the WTO’s latest estimates suggest that merchandise trade is picking up again. The growth rate for global trade reached 4.7% in 2017, 1.5 times that of GDP, and was projected to moderate only slightly in 2018, to 4.4%, against a GDP growth forecast of 3.2%.

Having reached a post-crisis peak in 2015, foreign direct investment (FDI) flows eased by 2% to $1.75trn in 2016, before declining by 23% in 2017, to $1.43trn, despite accelerated trade and GDP growth. This average masks significant disparities: FDI to Africa fell by 21%, while flows to Asia remained stable over the period, and Latin America and the Caribbean gained 8% amid an economic recovery. The UN Conference on Trade and Development projected global FDI for 2018 would grow by up to 10% over the $1.43trn recorded in 2017, though FDI flows were expected to remain below the $1.83trn high recorded in 2007.

After a decade of sub-par performance, global economic growth is picking up, helped by a resurgence in trade 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 economic liberalisation, or at least reduce the incentives for pursuing protectionist policies. Even if multilateralism remains stalled in 2019, progress on bilateral, plurilateral and regional initiatives already suggests the most likely direction of future trade is further liberalisation, even if progress is uneven and slower than in recent decades. While unlikely, it is not inconceivable that ongoing disputes could be improved or resolved in 2019 and usher in the normalisation of economic relationships. Whether or not these resolutions come to pass, the bigger picture suggests that the march towards globalisation is not likely to end soon.