Globalisation is not what it used to be
Despite emerging trade frictions (another US$16b of US tariffs against China went live this week), globalisation remains in reasonable health – recovering after a muted post-crisis period. WTO data out last week reported that merchandise trade grew at 11% in 2017 in value terms (5% in volume terms), and exports of commercial services were up by 8%. This growth continued into Q1 2018, and is approaching the growth rates observed before the global financial crisis.
China’s export and import growth came in this week at 11% and 28% respectively for the year to July, beating expectations. And various other measures of world trade activity, from the Baltic Dry Index to container throughput, remain decent.
Similarly, export growth from small advanced economies, the canaries in the mine of the global economy, is running at 7.5% for the year to June (for the 9 of 13 small economies reporting to date). There is strength in both Asia (Singapore, New Zealand) and several small European countries (Sweden, Switzerland). And the economic and market performance of small advanced economies – deeply exposed to the global economy – is holding up well into Q2, with no evidence of a disproportionate impact of trade war related risks.
This is not to say that we should become complacent about the risks posed by protectionism. Trade wars clearly have the potential to do damage to the global economy, particularly if they escalate and broaden. And the protectionist measures and rhetoric have likely already reduced global economic momentum.
Indeed, there are some questions marks emerging. CPB estimates slowing world trade growth in value terms over the past few months, and that world trade growth in volume terms has moderated to about 3% in the year to May. And global FDI flows were down sharply in 2017 after a robust 2015 and 2016, perhaps suggesting that trade uncertainty is impacting on cross-border investment. PMI data also suggests a softening in forward demand.
But overall, the data flow is not bad. However, even if globalisation is not reversing, it is changing in ways that will have enduring effects. Consider two (related) structural changes.
First, the period of hyper-globalisation is over. As one measure, world trade intensity (a ratio of world trade growth to global GDP growth) is markedly lower than during the 20 years prior to the global financial crisis. The remarkable trade growth from the 1980s was partly a level effect as emerging markets integrated into the global economy. But the global export share has levelled off over the past several years at just under 30% of global GDP, slightly below pre-crisis peaks, after a sustained period of strong growth. This trend of levelling off can also be seen across the small advanced economy group.
This partly reflects the changing nature of global supply chains as the economics of production change (rising labour costs in emerging markets, new technologies) and as proximity to the end consumer becomes more important. This may depress cross-border trade flows if not underlying globalisation. Indeed, the global stock of foreign direct investment has continued to extend over the past several years, from 31% of world GDP in 2010 to 39% in 2017.
Second, globalisation is tilting on its axis. Just as the share of global GDP is moving away from advanced economies towards Asia and other emerging markets, so the centre of gravity of world trade is moving towards Asia. China now accounts for 11% of global exports of goods and services (and 10% of global imports), a share that has increased from 3% in 2000.
WTO data shows that merchandise trade growth in 2017 was stronger in emerging markets, particularly Asia (13% in value terms) compared to 10% in the EU and 7% in North America. And the monthly CPB data note that import demand from emerging markets (5.5%) is holding up much better than from advanced economies (2.8%) in the year to May.
Increasingly Asia is becoming a source of final demand not simply a production platform. Note that China’s current account surplus has basically disappeared (0.5% of GDP in the year to Q2) and its import and export shares have reduced sharply over the past decade to less than 20% of GDP.
The escalating US and Chinese tariffs will likely accelerate this global economic rebalancing, with increased incentive for more regionally organised cross-border trade and investment. The development of a more regional global economy will be further reinforced by progress on regional trading arrangements (TPP, RCEP), and by the increasing interaction between international economics and politics as the rules-based system weakens (such that trade within political groupings is lower risk). This will be a more complex global trading system, but a more complex, regional globalisation is not the same as the end of globalisation. Indeed, this process has been underway for some time.
Of course, broad-based trade conflict between the US and China would impose additional costs on the global economy, and constrain cross-border trade and investment. But the bilateral relationship between the US and China accounts directly for just 3.5% of world merchandise trade. For countries not immediately in the firing line of protectionist measures (such as most small advanced economies), it is navigating these structural changes in the global economy – such as the changing profile of global value chains and a more regional global economy – as well as risks to the global economic recovery, that matter more for national export growth than the melodrama of trade wars.
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Dr David Skilling
Director, Landfall Strategy Group