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Deglobalisation? Not so fast
10 May 2022
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During the pandemic, the renowned Chief Economist of the World Bank, Carmen Reinhardt, stated that covid-19 was "the last nail in the coffin of globalisation"; most recently, Blackrock CEO Larry Fink's influential annual letter declared that Russia's invasion of Ukraine put an end to globalisation; finally, Financial Times editor Rana Foroohar wrote a few days ago that supply lines would be redefined not to depend on autocracies, but on "like-minded" or "friendly" countries, a phenomenon she called the "new Bretton Wood" that undoubtedly involved reversing globalisation.

Such strong statements on such a hot topic by such prominent individuals have generated a lot of media hype. However, since the issue is key for our future, it is worth looking at it in an objective way: globalisation has generated problems, but also important benefits such as making the shopping basket significantly cheaper for many Western consumers, resulting in higher living standards, or eradicating extreme poverty worldwide by 50 million people a year, the largest cut in history.

The following clarifications are worth noting:

FIRST. If globalisation is measured in terms of world trade (imports or exports) to GDP, it may not continue its upward trend, but neither should we expect a slash. World trade accounted for less than 10% of GDP in the 19th century, and in ‘globalisation’ times occurred before the First World War, it rose to a level of around 12%. Today, it stands at 21%. It is no longer rising, but there is no evidence that it is falling either. So, de-globalisation is not the issue.

 

SECOND. A massive return of factories to the West will not take place. It is true that the supply constrained observed since the covid crisis, particularly in relation to inputs from China, have fuelled the debate on the need to ‘bring the factories back’. However, the ultimate reality will be rather less impressive. Moving factories is a slow process which is subject to many variables. Surveys of US industrial companies with a presence in China show that only about 20% of manufacturing activity is being eligible for ‘coming back home’. The reason for this is that labour cost spreads between Asia, Europe and the US are still very significant. Moreover, this 20% is not being relocated to the US, but to a relevant part, northern Mexico, where wages are more competitive, thus maintaining globalisation. It is possible that we will see a movement of ‘decoupling’ (reducing manufacturing dependence on China) but this will involve moving some activity to countries such as Vietnam or Cambodia, not bringing the main manufacturing activity back to the ‘home country’.

THIRD. Globalisation is not only gauged by world trade in goods, but also by other critical variables, such as international investment flows (direct or portfolio investment), world trade in services (especially tourism), data flows or migratory flows (which will be exacerbated by climate change and huge birth disproportions). THIRD: globalisation is not only measured by world trade in goods, but also by other critical variables, such as international investment flows (direct or portfolio investment), world trade in services (especially tourism), data flows or migration flows (which will intensify as a consequence of climate change and huge birth disparities). All these indicators remain at very high levels, which calls into question the statements quoted at the beginning of this article.

FOURTH. Accelerating the transition towards ‘sustainable’ or ‘green’ energy may lead to fewer commercial interactions in the hydrocarbon market going forward (which tends to pivot much around autocracies like Russia), but to further dependencies on ‘green’ commodities, those required for such an ecological transition. Thus, to manufacture an electric car, lithium, copper, cobalt, nickel or graphite are needed, some of which (lithium, cobalt) are largely processed in China. Nickel, cobalt and copper (abundant in Russia), as well as aluminium and steel (again, dependent on China) are necessary to produce wind turbines or solar panels. The ‘green’ revolution will therefore go hand in hand with globalisation.

FIFTH: Financial interdependence will increase, not decrease. China pursuits that its currency, the yuan, becomes a threat the dollar's supremacy as the world's reserve currency. In my view, it will take decades before this may come true.  In any case, China will have first to open its capital account and boost the liquidity of its bond market - steps that will require internationalising China's financial system, not nationalising it. The Eurozone is expanding its budding Eurobond market to finance new generation funds, attracting investors from around the world, and the US continues to see strong flows of foreign investors buying its financial markets, especially as the Fed raises interest rates, which explains the dollar's depreciation.

During the so-called ‘Spanish’ flu of 1919, it was predicted that the plague would spell the end of big cities, tourism and cinemas. Nothing to do with our reality. In my opinion globalisation, with its virtues and its flaws, is here to stay.

Published in Actualidad Económica

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