When America took a protectionist turn two years ago, it provoked dark warnings about the miseries of the 1930s. Today those ominous predictionslook misplaced. Yes, China is slowing. And, yes, Western firms exposed to China, such as Apple, have been clobbered. But global growth in 2018 wasdecent, unemployment fell and profits rose. In November President Donald Trumpsigned a trade pact with Mexico and Canada. If talks over the next month leadto a deal with Xi Jinping, markets will conclude that the trade war ispolitical theatre designed to squeeze a few concessions from China, not blow upcommerce.
Such complacency is mistaken. Today’s trade tensions are compounding a shiftthat has been under way since the financial crisis of 2008-09. Cross-border investment, trade, bank loansand supply chains have all been shrinking or stagnating relative to world GDP(see Briefing). Globalisation has given way to a new era of sluggishness. Adapting a term coined by a Dutch writer, we call it “slowbalisation”.
The golden age of globalisation, in 1990-2010, was something to behold.Commerce soared as the cost of shifting goods in ships and planes fell, phonecalls got cheaper, tariffs were cut and finance liberalised. Business wentgangbusters, as firms set up around the world, investors roamed and consumersshopped in supermarkets with enough choice to impress Phileas Fogg.
Globalisation has slowed from light speed to a snail’s pacein the past decade for several reasons. The cost of moving goods has stoppedfalling. Multinational firms have found that global sprawl burns money and thatlocal rivals often eat them alive. Activity is shifting towards services, whichare harder to sell across borders: scissors can be exported in 20ft containers, but hair stylists cannot. And Chinese manufacturing has become moreself-reliant, so needs to import fewer parts.
This is the fragile backdrop to Mr Trump’s trade war.Tariffs tend to get the most attention. If America ratchets up duties on Chinain March, as threatened, the average tariff rate on American imports will riseto 3.4%, its highest for 40 years. (Most firms plan to pass the cost on tocustomers.) Less glaring, but just as pernicious, is that rules of commerce arebeing rewritten around the world. The principle that investors and firms shouldbe treated equally regardless of their nationality is being ditched.
Evidence for this is everywhere. Geopolitical rivalry is gripping the tech industry, which accounts for about 20% of world stock markets. Rules on privacy, data and espionage are splintering. Tax systems are beingbent to patriotic ends—in America to prod firms to repatriate capital, inEurope to target Silicon Valley. America and the European Union have newregimes for vetting foreign investment, while China, despite its bluster, hasno intention of giving foreign firms a level playing-field. America has weaponised the power it gets from running the world’s dollar payments system,to punish foreigners such as Huawei (see Business section). Even humdrum areas-such as accounting and antitrust are fragmenting.
Trade is suffering as firms use up the inventories they had built up in anticipation of higher tariffs. Expect more of this in 2019. But what really matters is firms’ long-term investment plans, as they begin to lower their exposure to countries and industries that carry high geopolitical risk or faceunstable rules. There are signs that an adjustment is beginning. Chinese invest mentinto Europe and America fell by 73% in 2018. The global value of cross-border investment by multinational companies sankby about 20% in 2018.
The new world will work differently. Slowbalisation willlead to deeper links within regional blocs. Supply chains in North America,Europe and Asia are sourcing more from closer to home. In Asia and Europe mosttrade is already intra-regional, and the share has risen since 2011. Asianfirms made more foreign sales within Asia than in America in 2017. As globalrules decay, a fluid patchwork of regional deals and spheres of influence isasserting control over trade and investment. The EU is stamping its authorityon banking, tech and foreign investment, for example. China hopes to agree on aregional trade deal this year, even as its tech firms expand across Asia.Companies have $30trn of cross-border investment in the ground, some of which mayneed to be shifted, sold or shut.
Fortunately, this need not be a disaster for living standards. Continental-sized markets are large enough to prosper. Some 1.2bnpeople have lifted themselves out of extreme poverty since 1990, and there isno reason to think that the proportion of paupers will rise again. Western consumers will continue to reap large net benefits from trade. In some cases, deeper integration will take place at a regional level than could have happened at aglobal one.
Yet slowbalisation has two big disadvantages. First, itcreates new difficulties. Between 1990 and 2010 most emerging countries were able to close some of the gap with developed ones. Now more will struggle to trade their way to riches. And there is a tension between a more regional trading pattern and a global financial system in which Wall Street and the Federal Reserve set the pulse for markets everywhere. Most countries’ interest rateswill still be affected by America’s even as their trade patterns become less linkedto it, leading to financial turbulence. The Fed is less likely to rescueforeigners by acting as a global lender of last resort, as it did a decade ago.
Second, slowbalisation will not fix the problems that globalisationcreated. Automation means that there will be no renaissance of blue-collar jobsin the West. Firms will hire unskilled workers in the cheapest places in eachregion. Climate change, migration and tax-dodging will be even harder to solve without global co-operation. And far from moderating and containing China, slowbalisation will help it win regional hegemony faster.
Globalisation made the world a better place for almost everyone. But too little was done to mitigate its costs. The integrated world’s neglectedproblems have now grown in the eyes of the public to the point where the benefits of the global order are easily forgotten. Yet the solution on offer is notreally a fix at all. Slowbalisation will be meaner and less stable than its predecessor. In the end it will only feed the discontent.