Medium-term prospects suggest globalisation set to continue

Decades of growth in trade and foreign investment have seen economies around the world become more interconnected 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 economic specialisation in areas of comparative advantage, and regional economic and political integration, have proceeded in a single 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 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) 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 central concerns when the WTO last met 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. Additionally, 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 that has followed in advanced economies, in particular, has caused many to call its central tenets into question. While there were clearly many factors behind the election of Donald Trump as president of the US, economic discontent among swathes of the population was among them, and helps explain the success of his protectionist rhetoric. Immediately upon entering office, 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 by the time President Trump entered office in early 2017, prospects for a deal remain weak, despite his administration signalling potential interest in reopening renegotiations. 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 in 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, the spectre of Brexit and the potential exit of Catalonia from Spain, and therefore the EU, 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. First established in 1981, the 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 impacted in June 2017 following 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.

Perhaps most importantly, emerging economies are, in general, characterised by far greater trade tariffs and investment restrictions than their advanced economy counterparts. A slowdown, or a reversal, in liberalisation may thus be even more of an issue for some emerging markets, with negative implications for their 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 a more protectionist stance.

Cause for Optimism

Even if the media is dominated by high-profile threats to free trade and open investment regimes, such as Brexit and the renegotiation of NAFTA, 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 remarkably positive. According to Matos, the global shift towards protectionism particularly affects countries like Mexico, but there is still hope from other global 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 and renamed 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.” 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.

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 (FTAs) – Australia, China, India, Japan, South Korea and New Zealand – have been pursuing the RCEP since 2012. Although the target date for concluding negotiations has slipped from 2017, there is growing confidence that an agreement could soon be reached.

In September 2017, after years of negotiation and 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. 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 well 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, and while progress was made, Cecilia Malmström, the European Commissioner for trade, said, “We’ve made a lot of progress and we are very close to a deal, but we are not there yet.”

Other ongoing EU trade talks include those with Japan, with negotiations being finalised in December 2017, following the settlement of the main elements of an Economic Partnership Agreement at the EU-Japan Summit of July 2017. Bilateral negotiations are at various stages between the EU and ASEAN members, and in 2018 all parties are due to explore the possibility of resurrecting a region-to-region agreement.

Regional Integration

While political and economic integration within Europe may be at something of a crossroads, other regions have continued their own integration efforts. 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 alliance moved forward with plans to upgrade the status of four of its observer countries – Australia, Canada, New Zealand and Singapore – to associate members, facilitating 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%. The latest estimates from the WTO, however, 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 average masks much steeper declines in some regions, such as 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 in foreign investment, with FDI flows to reach an estimated $1.85trn in 2018, although this is still below the record levels that had been seen in 2007.

Global economic growth is now picking up, helped by a resurgence in trade flows and 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 2019, 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 in spite of the recent instances of trade and investment relationships caught in the crossfire of political dispute, such as the pro-independence drive in Catalonia and the economic embargo of Qatar. It is conceivable that these episodes could be resolved soon, leading to the normalisation of economic relationships. In any case, the bigger picture suggests that progress towards globalisation is unlikely to end in the near term.