Reversing globalisation would be a backward step for world’s economy

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The global economy is still hit with the surprisingly fast drop in trade. The growth has slowed down to only 3% annually since 2012, comparing with the two times bigger growth during three preceding decades. During the period between 1985 and 2003 global trade was growing two times faster than GDP, but according to the International Monetary Fund, it barely keeps up during the latest 4 years.

Such a slowdown is unbearable, as it’s impacting both developed and developing countries, as well as both service and good markets. According to the forecasts of the World Trade Organisation, the growth may be as small as 1.7% this year, which will be the first time in the latest 15 years that it will be lower than economic growth.

This drop is a thing to be highly concerned about, as the globalization was the main factor for the living standards in the world, and now it may harm many economies’ health. Developed countries benefited from falling prices, while emerging economies were able to provide better-paid jobs.

It has been a tenet of economic thinking for two centuries that trade benefits both parties through increased specialisation, greater efficiency, the exchange of ideas and ultimately increased innovation and productivity. Productivity growth ultimately drives wages and growth.

The “good news” is that so far three quarters of the slowdown appears to be caused by a collapse in investment rather than deliberate actions by governments, according to an analysis by the IMF in its latest World Economic Outlook. In this respect, slowing trade is primarily a symptom of the wider economic malaise that the world has been grappling with since the start of the global financial crisis. If policymakers can revive investment, whether by boosting demand or unblocking impediments to supply, then trade should pick up, too.

The IMF also concluded, though, that the rest of the slowdown was largely explained by a reduction in the pace of trade liberalisation and a rise in protectionism. Between 1985 and 1996 global tariffs fell at a rate of roughly one percentage point a year; between 1995 and 2008 this had slowed to 0.5 percentage points a year; since 2008, tariff reduction has largely ground to a halt. Similarly, the pace of new free trade agreements has fallen from thirty a year in the 1990s to ten a year since 2011.

Meanwhile, there has been a sharp increase in new trade barriers, whether in the form of anti-dumping measures or retaliatory duties, in the past two years, with the WTO’s Global Trade Alert recording the highest number of harmful measures last year.

The risk now is that politics, economics and finance are combining in a way that threatens to throw globalisation into reverse. Years of sluggish growth, stagnant wages and rising inequality are fuelling a growing political backlash against what some regard as unfair competition from foreign businesses and workers across developed countries, most clearly in the American election campaign and in the Brexit vote.

That, in turn, is raising fears among businesses that new barriers to cross-border trade will emerge, not least between Britain and the European Union.

At the same time, political instability is making it harder for governments to pursue the structural reforms needed to encourage investments that will improve growth and productivity.

This hostility to globalisation is particularly alarming because it comes as central banks are clearly running out of tools to support the economy. Until now, central banks have been able to respond to weak global growth by driving down interest rates to encourage investment. But with interest rates across the developed world already hovering around zero and yield curves flat, many fear that ultra-loose monetary policy risks doing more harm than good. In particular, it threatens to undermine bank business models to such a degree that they may restrict the supply of credit or charge more for loans. In the case of Deutsche Bank, doubts over its business model have led some to even question its survival.

In this fragile environment every political shock that raises further doubts about the future of globalisation risks pushing the world economy closer to the precipice, since every downgrade to global growth forecasts leads to a lowering of inflation expectations. That pushes up real effective interest rates, leading to an unwanted tightening of monetary conditions, to which central bankers feel they must respond.

Brexit has made that risk greater. At the Conservative Party conference this week, government ministers talked excitedly of the opportunities for free trade that would arise as a result of quitting the EU. But this rhetoric has yet to be tested by reality: behind the scenes, the conference was awash with lobbyists demanding protection from what Theresa May called the “speed bumps” ahead.

The rest of the world has viewed Brexit as a clear vote against globalisation. It is a potentially pivotal moment in which the centripetal forces that for 70 years fuelled deeper European economic integration gave way to the centrifugal forces of disintegration. The world may be struggling to live with globalisation, but it doesn’t know how to live without it, either.

Simon Nixon is the chief European commentator at The Wall Street Journal. Twitter: @Simon_Nixon

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