Sunday 25 September 2016

Life in interesting times: globalisation going into reverse?

Published 13/03/2016 | 02:30

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Is the pace of globalisation slowing down or even going into reverse? There has been quite a lot of questioning of what is happening to international economic integration in recent years, largely based on unusually low growth in cross-border trade.

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As Ireland is one of the most globalised economies in the world, and as our prosperity is dependent on what happens in the global economy, this question is more important for us than for most other countries.

If one had only been paying attention to Ireland's globalisation performance recently, it might seem odd to be even posing the question - after all, in terms of the performance of exports and foreign direct investment, last year was the best since the Celtic Tiger period of the late 1990s.

As recently discussed here, the value of goods exports grew in strong double digits in 2015 - by far the best performance this century. Services exports in the first nine months of the year grew at a similar clip. Both now exceed €100bn annually.

The inflow of FDI continued apace last year, too. About the best measure of what is happening in the sector is the number of net jobs being created by foreign companies backed by IDA Ireland, the inward investment agency. Last year employment in those firms collectively grew at its fastest rate since the turn of the century.

But make no mistake, Ireland bucked the trend last year, most particularly when it comes to trade.

In recent years, world trade growth has been at its lowest since the current era of globalisation began, as the first chart shows.

From the 1980s, the rate of growth in the volume of goods trade was considerably higher than that of GDP in all bar the occasional recessionary year.

But over the last year three years, the two rates of growth have been very similar. The reasons for this period of the weakest trade growth in decades are manifold and complex. They can, broadly, be broken down into cyclical and structural factors.

The first links weak trade growth with a weak global demand since the Great Recession. The second focuses on underlying trends which are not fully connected to the business cycle. Most accept that the slowdown is a result of both, though some place greater weight on one over the other.

For sure, some of the proposed structural factors are convincing. The trade boom from the mid-1980s to the mid-2000s may prove to be an outlier. That period benefited from the fall of the Berlin Wall and China's re-integration into the world economy. New markets in Africa and Asia are still coming on stream, but they may not make as big an impact as earlier changes.

Rapid trade growth was also helped by the rise of global value chains, involving businesses outsourcing/offshoring inputs and production processes to different locations. The pace at which value chains are internationalising may not only be slowing, they may actually be renationalising. China's demand for foreign components is falling as imports are substituted by domestic production and the goal of the Chinese government to increase domestic consumption is envisioned to be met by goods made in China.

Another development that has reduced global trade is America's growing self-sufficiency in energy, with huge increases in output of shale oil and gas.

Low trade growth has led some to suggest that the structure of global trade is changing.

Although it is unlikely to explain the current slowdown, the digitalisation of the economy and new technologies such as 3D printers may transform global trade away from the traditional image of large container ships plying the world's sea lanes.

One possibility is that global trade may shift from goods to services. In Ireland, this has been happening in recent years, and service exports now exceed foreign sales of tangible goods. However, Ireland is one of the exceptions. Service have remained at about one-fifth of total global trade over the past two decades.

Regardless of the structural factors, it is difficult to explain global trade's slowdown without reference to a weak global economy. And with China's February trade figures (released last week) showing a sharp fall, it is easy to feel pessimistic.

A cyclical reason for anaemic global-trade growth is the poor economic performance of the EU. Europe accounts for a third of world trade but has been hit by recession and ongoing trouble in the Eurozone. Eurostat's first estimate for 2015 shows that the EU's imports from outside the bloc increased by a mere 2pc, while exports grew by 5pc. Intra-EU trade grew by 5pc.

And what of the second pillar of globalisation - cross-border investment in productive capacity? As the second chart shows, global flows of FDI peaked in 2008, but then plummeted in the aftermath of the Lehman crisis. They then recovered partially, but trended downwards in the years up to 2014.

The UN's Conference on Trade and Development has a preliminary estimate for last year showing a solid rebound. It estimates that global FDI flows rose by 36pc in 2015, to an estimated $1.7 trillion - the highest level since the financial crisis. While at first glance these figures appear positive, closer examination gives reason for caution.

The growth was largely due to cross-border merger and acquisitions (M&As) in developed countries. The United States, in particular, received large FDI inflows. But this is likely due in part to tax inversion deals by American multinationals now headquartered in Ireland, the UK and the Netherlands. (Inversions involve small foreign companies taking formal ownership of US companies, which is counted as an investment inflow into the US.) The inversion phenomenon changes little in terms of production patterns internationally, but it does inflate the FDI figures.

The OECD, which also monitors FDI flows, noted huge increases in Irish FDI activity in the first half of 2015. This correlates with at least two large pharma mergers. Such activities have gained some unwelcome attention in the US. For instance, in a recent campaign advert, the Democratic front-runner Hillary Clinton called tax moves by corporations an "outrage".

Given uncertainty in developing economies and only a modest recovery in developed ones, the prospects for FDI this year is mixed. The UN predicts that unless there is a further wave of M&A deals and corporate reconfigurations, FDI flows will decline in 2016.

But while there is uncertainty aplenty about the outlook - for investment as well as trade - there has not been any marked increase in protectionist policy measures since the 2008 crisis. One of the near miracles of the bad economic times of the past eight years is that it has not led to greater anti-free-trade policy measures.

This remains a source of solace, because Ireland's economic model would no longer be tenable if there was any significant reversal of the globalisation process.

Sunday Indo Business

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