A brief on the future of Globalisation and how it will shape us
It was the end of May. 24th May 2019, in an emotionally melting speech, Theresa May, then the Prime Minister of Britain, announced that she would step down as the Conservative leader and remain in office until a successor is found. In short, she was done. She had tried very hard over the last eighteen months to get parliamentary support and close the Brexit deal but in vain. The Conservative leaders were highly disappointed with her deal, they had to say she had made too many concessions to the EU and the European common market. The UK had to comply largely with the policies and terms that it said were not compatible. The air in Great Britain was of resentment. Resentment of a European alliance that had done worse than good to the natives and made sovereignty difficult. They were affected in many ways from the immigration influx of 2015.
The result of this has been a rising pan-Europe populism of Eurosceptic parties like UKIP of Nigel Farrage (UK), Viktor Orban in Hungary and Marie le Pen in France amongst others, who have made use of the narrative that “Globalisation favours the elites”. We saw the similar sentiments across the Atlantic after Trump was elected in November of 2016, with stringent immigration and protectionist outlooks and a crusade of ‘Make America Great Again’.
In this article, we mainly discuss the receding pace of globalisation, integration and the prevailing mentality of closed borders that seems to have taken the centre-stage, notably post-2008. The trembling pillars of the global organisations, the trade wars and the pandemic have made nation-states call out for greater space to increase tariffs and delimit free trade while being cynical towards the process of cultural mingling. But we also argue that many in fact, want to remain in the global village and reap the benefits. An idea that better interdependence and trade is benign for all, is not completely faded, but perhaps hibernating.
Slowbalisation, the state we are in!
There is no doubt to the fact that Covid-19 has been successful in disrupting global interconnectedness in ways the world never imagined. The pandemic has seen a substantial decline in the flow of workers, money and goods. Nations have closed doors and many temporary immigrants have returned to their country of origin. The talk of the day is that Global supply chains have been disrupted. With national borders closed, many commodities that particularly rely on global outsourcing have failed to keep up. China along with the US, EU forms the core global supply chain. Foxconn, an electronics manufacturing contractor known for its assembling units for Apple, has disrupted the supply for Apple products, given the anti-China policies around. The effect of the pandemic is visible in terms of industrial activity in China, which has fallen by 13.5% in January and February. UNCTAD estimates a 30% reduction in global foreign direct investment during 2020-21. Needless to say that the real Slow-balisation had begun somewhat after the 2008 crisis. A growing sense of cynicism and folded borders emerged and undid all the benevolence of the post-War era.
In the Cold War times, economic policy and certain trade policies were the key drivers behind the popularity in globalisation. This implied an elimination of restrictions on international trade and financial flows. A lot of nation-states eased their balance of payments restrictions, making their currencies convertible. Large scale deregulation, privatisation to increase market competition – was also part of the policy mix that came along with globalisation. Added to this was the emergence of transportation techniques in the form of container and storage facilities. Then came into existence the European Coal and Steel Community (1952) and later the European Free Trade Association (1960), the General Agreement on tariff and Trades (GATT) which majorly formed the starter pack for the global village. According to WTO, the average annual growth of global merchandise exports, corrected for price changes, reached 8% from 1950 to 1973. One must realise that in true sense Globalisation kept room for the Ricardian theory of Comparative Advantage– producing what one is good at and trading that for other goods. Taiwan, Vietnam, Bangladesh, and many African nations took good advantage of this. Having added to the line of outsourcing units, their industries thrived mainly upon it. Globalisation has helped lift more than a billion people out of poverty since the collapse of communism in 1991 and delivered unparalleled stability and prosperity to much of the planet.
In the last three decades, there were several reasons for China’s rapid economic growth but the central factor was its intent and potential to use international trade to boost domestic growth, raise incomes and reduce poverty. China becoming the hot export centre of the world served well. They provided affordable labour and outsourcing units that pushed their balance of payments high and pleased the Western world that considered China to be secluded. The inclusion of China in WTO in 2001, sealed the deal for them. We soon come back to the story of China.
Having reached its peak before the 2008 global financial crisis and never recovering since then, globalisation was already in decline well before the outbreak of Covid-19. The Great Recession of 2008, when excessive risk-taking by banks combined with the bursting of the United States housing bubble due to toxic financial instruments and weak regulation, damaging financial institutions globally, culminating with the bankruptcy of Lehman Brothers, led to a collapse that hollowed out personal savings and national reserves. The interconnected world felt the shivers and ripples immensely, more than even the Oil shocks of the 1970s. The decade that followed saw a renaissance of protectionism and restricted globalisation; global trade patterns and foreign direct investments never got their groove back.
“…World trade is projected to fall 13.4 per cent this year, its steepest drop in at least 60 years, kicking volumes back to 2014 levels….Foreign direct investment as a share of GDP is expected to fall to the lowest level since the early 1990s.” – The Washington Post
The travellers at the busiest Heathrow has dropped by 97% (year-on-year); Mexican car exports were surviving by 10% in April; 21% of transpacific container-sailings in May have been cancelled. With the rise in anti-China sentiment and ban on their apps, China, in particular, is facing a stumbling stone in the flow of capitals.
By contrast, India’s trade performance has been a dog’s breakfast, for instance, India’s share of global merchandise exports was higher a year after Independence (2.2% in 1948) than 70 years later (1.7% in 2018). Since his national address in May, Prime Minister Narendra Modi has repeatedly talked about his new vision for India: ‘Atmanirbhar Bharat or Self-Reliant India’. Over the past few years, India has been taking an increasingly cautious stance as evidenced by trade restrictions and high tariffs, which has seen a substantial increase in the shadow of Covid-19. After India’s chemical exports fell almost to $1.2 billion while those of plastics declined too, India was planning on a 15% provisional duty. Similarly, it was reluctant to push for greater open agricultural markets at the WTO Geneva summit. The pandemic has demonstrated the volatility of supply chains, induced national responses rather than cooperative global ones, and more restricted migration. Some people are calling it a Slowed Globalisation- Slowbalisation.
We all benefitted, more or less
There are three things that will emerge out of the rising protectionism and reduced pace of globalisation.
Firstly, the political debates in many nations (more so in West) will be enveloped around Populist views that will envision to undo the malevolence of Globalisation, even so after the Covid leaves the mass in a deteriorating condition. In France, despite maintaining power Macron faces opposition from the Greens, a left and Marie le Pen, ‘Ms. Frexit’ after seeing the Yellow Vest protests.
Secondly, nations will start to become less dependent on single supply chains. According to an April edition of the Pew Research Centre, 90% of Americans now see China as a threat to their economy compared to 48% in 2018. The United States is greatly reliant on Chinese supply chains for medical equipment, pharmaceutical products, automotive, and tech products, to name a few. With the advent of COVID-19, failure of unilateral supply chains has become more evident than any other time including the US-China trade war that has led to the diversification of supply chains away from China. The United States and allies such as Germany, France, and the UK who have all signalled a distaste for dependence on China can use this moment to become less dependent on single points of failure.
And lastly, while Economic nationalism might be on a rise for some time, the globalisation will be temporarily replaced by Regionalisation and bi/tri-lateralism than multilateralism. Why will this happen? As Joseph Stiglitz says, for the simple reason that the pandemic has made evident the fragility of global supply chains, and hence the vanity of just-in-time delivery, and over-dependence. Political ideologies shape economic strategies. With the rise of populism and ever evident fact that Globalisation may have increased inequalities, many right-wing nationalists are pushing in. Modi’s ‘Make in India’ and Trump’s ‘America First’ are testimony of the same. The pandemic has made clear that nations just like Adam Smith’s human, motivated by self-interest, were not ready to give up masks, sanitisers for suffering nations. This will make world trade extremely grey.
But this does not mean nations will coil up and isolate fully, for that would be a folly. Instead, they would reach out for regional support. Recently, White House brokered an America-Canada-Mexico deal -USMCA, for regional cooperation. In light of recent Chinese border issues, India might look for some aid from the SAARC. This will also be a way to remain on the global pedestal while having a cautious tactic. It will be a phase of ‘preferential trade’.
As hopefully the pandemic closes up with the discovery of a vaccine, a cross-globe debate will be about reopening of trades and returning to the earlier levels. Precariousness and volatility might prevent the world from doing so for a long time. To replace Globalisation with complete protectionism will not be the option. The upsides are too weighted to be ignored and biases aside, it has brought a better millennium, for almost all the sides. In words of economist David Ricardo, “The farmer and manufacturer can no more live without profit than the labourer without wages.” The Global Village will be taking an uneasy sabbatical and we must make good of this to rethink our policies.
Written By- Rito Chakraborty and Vibhansh Kushwah
Rito is majoring in Economics from Hansraj College, University of Delhi. He is an avid reader of contemporary Economic thought and Macroeconomic policies.
Vibhansh is majoring in Economics from Hansraj College, University of Delhi. He takes keen interest in International Trade and Policy.