The costs of reversing globalization
May 27, 2019
For the past several years, a backlash to globalization has dominated world politics.
Look no further than the political mayhem surrounding Brexit and the ongoing trade tensions between the US and China as evidence that globalization is facing turmoil.
The protectionism trend has seen a resurgence in recent years. The shift toward protectionism is being promoted by various policymakers across the world who claim that globalization has “failed.”
But what are the costs of reversing globalization?
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State-centered politics on the rise
“The world is getting much more split into regional blocks. And barriers are going up everywhere,” Ruchir Sharma, chief global strategist at Morgan Stanley Investment Management, declared during an interview with CNBC.
Take the trade tensions between the US and China as an example. The world’s two largest economies have continued to increase tariffs against one another, creating uncertainty in both countries and around the world. If the situation continues to escalate, there’s potential that President Trump may even follow through on his threat to withdraw the US from the World Trade Organization (WTO). Such a move could potentially disrupt the entire global trade system.
As Barron’s noted: “Supply-chain decisions have rarely been so politically fraught.”
Trade barriers and other protectionist measures around the world have taken a toll on the global economy. In fact, the US-China trade dispute contributed to the International Monetary Fund (IMF) revising its global forecast three times in just six months. As of April, the agency said global growth would be 3.3% in 2019 – the weakest since 2009.
Of course, even once the US and China reach an agreement, the underlying tensions won’t immediately go away and the global economy won’t instantly recover.
Interestingly enough, following the last financial crisis, world leaders had pledged to avoid protectionist measures so that the global economy could have a chance at recovery and growth. But that commitment was short-lived. Among G20 economies, trade-restrictive actions have gone up steadily since 2012. That leads to the question of whether tariffs have become a “new trade normal,” which poses a risk to global growth.
“Some nationalists say ‘yeah we are against globalization,’ but what they are doing is worse,” said Guy Verhofstadt, former Belgian prime minister and member of the European Parliament, in an interview with CNN.
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The Brexit experiment
No other situation gives a better perspective on the domestic costs associated with reversing globalization than Brexit.
“Never in the last 70 years has a major advanced economy left a free-trade area. Brexit is providing the first real-world evidence of the costs that come from undoing the intricate bonds of globalization,” wrote Greg Ip of the Wall Street Journal.
And the evidence doesn’t look good.
Mark Carney, governor of the Bank of England, told British MPs that Brexit would result in massive long-term consequences, including higher prices for years to come. In another address, he warned that Brexit has already hurt the UK economy.
“With fundamental uncertainty about future market access, UK investment hasn’t grown since the referendum was called and has dramatically underperformed both history and peers,” said Carney.
When the UK held the 2016 referendum, it was the fastest growing G7 economy. Since then, its economic growth has plummeted from 2% annually to less than 1%.
The Bank of England has also warned that if a no-deal Brexit takes place, the pound could drop by 25% to its lowest level in history.
Toll on businesses
Even though the UK has yet to depart the EU, the situation has already taken a toll on many British businesses.
While the rest of the G7 has seen business investment grow at around 6% per year since 2016, investment by UK companies fell to just 3.7% in 2018. That’s contributed to business confidence across the UK dropping to the lowest level in almost a decade.
New research from Begbies Traynor, a British insolvency firm, revealed that 484,000 UK businesses are in “significant financial distress.” That number represents 14% of all economically active firms in the UK.
In the financial sector, several UK companies have reportedly announced plans to move £1 trillion (USD$1.3 trillion) in assets into the EU as a result of Brexit. Many banks have set up new offices in various EU countries to safeguard regional business after the UK’s departure from the bloc. It’s estimated that 7,000 jobs in the financial sector, which accounts for roughly 12% of the UK economy, will be relocated out of the UK.
And just recently, Britain’s second largest steel producer went into liquidation, putting 25,000 jobs at risk. Before collapsing, British Steel had sought a government loan to cover losses it had suffered due to limited European orders because of the Brexit uncertainty.
For UK businesses, it’s not likely that the situation will improve anytime soon. While the UK will continue to have a role in the global trading system, its eventual departure from the EU will almost certainly see its competitive position drop drastically.
In other words, it will lose its bargaining chip.
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No system is perfect
No system is perfect and immune to problems. And globalization is no exception.
The question shouldn’t be ‘Do we need globalization?’ but rather ‘How can we make globalization better?’ The world has changed, and so it goes without saying that the approach to globalization will need to change as well. But rejecting globalization altogether is not the answer.
Instead, world leaders need to work collectively to modernize globalization.
“To turn our back on globalization, to turn our back on helping development, is exactly the wrong approach,” Christine Lagarde, managing director of the IMF, said at a past meeting of the WEF.
There’s no question that Brexit is an experiment in reversing globalization. Some believe that Brexit will encourage further deglobalization movements elsewhere, potentially even in the US. However, as the economic, social, and political repercussions of the UK’s exit from the EU continue to unfurl, hopefully world leaders will be watching and learning.
As Michel Barnier, chief negotiator for the EU recently told Euronews: “I think we need to learn from Brexit. It’s no doubt too late for the UK, but it’s time to do it for others.”