Unwinding global economic ties
SA must look to its neighbours as countries turn inward and co-operation among nations begins to lose its attraction worldwide
Nothing signifies the threat to globalisation better than the UN’s recent disclosure that it may not be able to pay staff salaries in November if member states don’t pay what they owe.
The prime delinquent is the US, which owes $674m towards the UN’s 2019 regular budget. But the backlash against globalisation is not confined to the US under President Donald Trump.
According to research consultancy Capital Economics, the latest wave of globalisation, which started in the 1990s and was driven by technological advances like the internet, peaked about a decade ago — long before Trump’s trade war with China.
Over the past decade, nominal exports of goods and services have flattened off as a share of global GDP, as have capital flows. In addition, the number of nontariff trade barriers introduced by countries has been increasing since 2010, while the Doha round of multilateral trade talks that began in 2001 eventually collapsed in 2015.
A general rise in protectionism, coupled with a surge in populist parties in Europe, the US-China trade war and Brexit, all seem to indicate that disenchantment with globalisation is fairly broad based.
This suggests that even if a Democratic candidate beats Trump in the 2020 US election, it won’t necessarily halt the unravelling of global co-operation, though it might well de-escalate the immediate US-China trade war.
"Globalisation as we know it has peaked and there is unlikely to be any further major integration," says Vicky Redwood, senior economic adviser at Capital Economics.
"In fact, a policy-driven period of deglobalisation is increasingly likely."
She cites several reasons why globalisation in its current form may have run its course.
First, with 93% of the world’s population now residing in World Trade Organisation (WTO) member countries, all the major steps to integrate the global system have already been taken. Under the WTO, trade restrictions have been dismantled to the point where the average global tariff on goods is just 2.6%.
Second, advanced manufacturing techniques are making it cheaper for countries to produce domestically, instead of "offshoring" to low-wage countries such as China.
This "reshoring" phenomenon has halted the slide in the share of manufacturing employment in several developed countries as companies have brought robot-operated factories home to be closer to their customers.
University of the Free State economics professor Philippe Burger describes this as "deglobalisation not because of conflict, but because it makes economic sense".
Third, surveys suggest that many firms are trying to shorten complicated global supply chains to increase quality control and improve speed and flexibility.
What happens next depends on policy, according to Redwood.
She warns of the growing risk of "a malign form" of deglobalisation driven by the deliberate erection of tariff barriers, capital controls and limits on migration.
Several commentators have forecast a move towards regionalisation, in which the world splits into separate spheres of influence such as, for instance, a US-led bloc and a Chinese-led bloc.
At worst, Capital Economics envisages "a technological iron curtain" between blocs, including a separation of payments systems, different standards of regulation, technological divergence and even different internet networks (the so-called splinternet).
This could wreak havoc with global supply chains and inhibit technology transfer, leading to much weaker global growth.
Or, in its mildest form, regionalisation could simply manifest as disengagement from multilateral institutions.
"The rules-based international system and WTO may not survive or may be applied only voluntarily and/or in limited parts of the world," suggests Redwood.
The power of multilateral institutions has been undermined in recent years, notes Burger, either financially through nonpayment of member contributions or politically when countries have simply ignored their prescripts. Some, like the International Monetary Fund (IMF), still have political and financial clout. But even the IMF relies on global co-operation and voluntary subscriptions.
Some believe globalisation has become so entrenched that it can’t be unwound. But Capital Economics disagrees, saying capital controls would be fairly easy to impose, and reshoring is possible as long as countries are willing to invest in domestic production.
So, what are the economic implications for SA, which has lacked the competitiveness to succeed at export-led growth and sits midway between the US and China geographically?
Burger says that instead of looking overseas to expand exports, SA should look overland, to the 300-million people living in the Southern African Development Community. If only 10% of them join the middle class in the next 10 years, it will create a market of 30-million people in need of goods and services.
Investing in regional infrastructure and alleviating border congestion should therefore be SA’s big priorities as it seeks to maximise trade with the rest of the region over the coming decade.