A Solution to Declining Globalisation and Rising Protectionism
by Dr Pieter Steyn
Dr Brane Semolic
Globalisation has dominated economics and trade for decades. The Merriam-Webster dictionary defines globalisation as: “the development of an increasingly integrated global economy marked especially by free trade, free flow of capital, and the tapping of cheaper foreign labour markets”. Many critics, including delegates attending the 2017 World Economic Forum event in Davos, Switzerland, are of opinion that globalisation has flat-lined and is now going into reverse (Levy, 2016). This trend started with the financial crisis in 2008, and, now with the prospect of Brexit and President Trump having assumed office in the United States, globalisation is distinctly in decline. Moreover, critics believe that the world has reached a turning point in the nature of capitalism, a view also expressed by Steyn and Semolic (2016). At the same time, protectionism is rising in popularity.
In a note to clients, Jason Rotenberg and Jeff Amato (from Bridgewater, one of the world’s largest hedge funds) averred that the political backdrop in the world looks negative for globalisation and everything associated with it. Many critics believe that globalisation, competitiveness and internationalism are firmly in retreat, and that the protectionism now rearing its head does not augur well for the future. With the financial crisis of 2008 seen as the trigger of this phenomenon, many critics, including George Saravelos, chief foreign exchange strategist at Deutsche Bank, view the retreat as a new global mega-trend. Saravelos is of the opinion that globalisation has reached its peak and that the world is about to witness an unwinding of this trend, even labelling it as the slow death of globalisation.
Saravelos identifies three crucial aspects involved in the demise of globalisation. Firstly, he believes that world exports as a percentage of GDP peaked in 2014, having been in steady decline since then. Gross financial flows into the United States peaked in 2008 with the financial crisis, and are now moving sideways. Currently the number of new trade deals is at its lowest in more than two decades. Secondly, anti-globalisation sentiments are growing in the political domain. Brexit is set to be implemented in the foreseeable future, and the recent United States election was heavily focused on concerns related to globalisation and immigration, with other countries to follow. Thirdly, changes in regulation worldwide suggest that globalisation is waning. He mentions that China is slowing down on its capital account liberalisation programme, and changes in banking regulation have forced greater national reporting and capital standards, while raising the cost of cross-border business. The position of Deutsche Bank is that the only exception in the reversal of globalisation is the global dissemination of ideas, powered by political freedom and assisted by persistent innovations in technology, such as social networks.
Saravelos’ Deutsche Bank colleagues John Reid, Nick Burns and Sukanto Chanda, are of opinion that the current economic age is reaching its cul-de-sac. They believe that the global economy will change drastically over the decades to come, and that it will be subjected to subdued growth, lower profits, higher inflation, and diminishing global trade. Moreover, they argue that the world has reached a demographic peak and that huge changes will occur in the near future, predicting what they call “a far less exciting economy”. They contend that the deterioration will lead to a situation where it is unlikely that the next couple of decades will see real growth rates returning to the pre-crisis levels. They add, however, that should a sustainable exogenous boost to productivity surface, a more optimistic scenario may result, but they find it hard to see where such a boost will come from.
Like many other critics, George Osborne, former British Chancellor of the Exchequer, believes that the forces of protectionism are increasing, and he is concerned that the pace of technology growth can be detrimental to economic well-being. The former vice-chairman of Merrill Lynch Europe, Lord Adair Turner, is concerned that advances in technology are actually undermining capitalism, killing jobs, driving inequality and preventing the global economy from recovering from the financial crisis of 2008. He believes that the current capitalist system is not delivering as it should, and also not to enough people to maintain its legitimacy. He labels this “tech-driven inequality that contributed to the popular resentment for elites and mainstream politics”, and calls for a solution to “the problems presented by the new tech economy” to restore global trust in capitalism and repair the global economy.
At the recent 2017 World Economic Forum gathering in Davos Switzerland, the same sentiments as above were expressed, accompanied by major disagreement on what the solution should be. All admitted the failure of political and business elites to predict any of the political events that occurred during 2016, and even raised questions regarding their capability to understand and to address the anti-establishment trends and events that emerged. However, all were in agreement that change for the better should occur. This group included two Nobel-laureate economists, Joseph Stiglitz and Angus Deaton, who are very critical of the current European order.