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Wealth Management: Strategy blog – Slowbalisation

Strategy team: Victor Balfour

“Flygskam” (flight shame) – one of 2019’s buzzwords - was one of the many legacies that Greta Thunberg and the broader environmental movement left it in its wake. 2020 was tipped to be the year that many eco-warriors swapped planes for trains, and global for local. This was prescient, if somewhat accidental. 

But the subject of global vs local is highly topical.  Many pundits feel that globalisation is at an inflection point, spurred by covid-19, and that an era of ‘slowbalisation’ – which has been in place even before nationalism (briefly) took hold in Europe and Trump’s mercantilist policies undermined decades of US-led trade policy – is likely to lead to a further fraying of alliances and deterioration in the pattern of global trade. 

What is globalisation?

There is no strict definition, but it encompasses the integration and interdependence of individuals, companies and nation states globally. More specifically it typically embraces the free flow of trade, people, capital, ideas and technology. It is a sensitive and complicated subject, and there are both winners and losers from such seismic shifts in the global balance of commerce and trade. 

Its critics point to the seemingly big impact it has had on fading manufacturing sectors – likely accelerating the deindustrialisation of many Western economies and leading to loss of many blue-collar jobs. One study estimates that nearly half of the five million jobs lost in the US manufacturing sector since 2000 relate to the displacement of trade, i.e. globalisation.

The mismanagement of resources, inadequate working conditions and disdain for broader ESG-related concerns are often some of issues often associated with companies that seek to exploit global scale. It is also believed to have fostered inequality - the UN estimates that the richest 20 percent of the world's population consume 86 percent of the world's resources, an equilibrium that has deteriorated over the past half century. Of course, correlation does not imply causation.

Set against this, its advocates point to this phenomenon as the single greatest factor that has lifted millions out of poverty. It has enabled countries to specialise and benefit from comparative advantage and technological change, leading to the offshoring of complex supply chains; this combination has promoted competition, boosted innovation and ultimately led to greater output. In turn, this has broadened the availability of products and has supressed the price of goods (and has likely contributed to disinflationary forces over the past two decades).  There are also the wider benefits: the movement of people and greater cultural diversity.

It is not surprising that given the complexity of these interrelations that the distribution of the gains from trade will be uneven and invariably there will be vocal proponents on both sides of the debate.

De-globalisation is not new

There have been earlier episodes of globalisation - the latter half of the 19th century, the post-war era and the liberalisation that accompanied the formation of the GATT and latterly the WTO. The two decades through to the GFC was arguably a golden period, with the dismantling of the Soviet bloc, momentous policy change – privatisation and deregulation - and China’s ascension to the WTO in 2001.

There have also been periods when globalisation has retreated, most notably the interwar period and, debatably, the past decade or so. 

It would be convenient to simply blame Trump’s ‘America First’ policy for this latest decline; this has undoubtedly accelerated the Sino-US de-coupling. But the US’ critique of China’s policies – intellectual property theft, trade imbalances and currency manipulation – is not new. Meanwhile, China’s approach may also have regressed. Deng Xiaoping’s legacy of liberalisation has given way to ‘Xi Thought’ - a bold program of national revival. Grand ambitions for ‘Made in China 2025’ will only serve to hasten the evolution from export and investment-led economic powerhouse to one predicated on domestic consumption.

The reality is that a number of influences have been at work reversing these pro-globalisation trends in the past decade. Cross-border flows of money have slowed (a function tighter bank regulation), global migration has plateaued (as a proportion of the global population) and barriers to trade (mostly non-tariff based) have increased.

More prosaically, many businesses involved in offshoring and remote supply chains had become aware that they can be difficult to manage: there are costs as well as benefits. As a result, the spread of global value chains had already slowed – and many critics now feel the latest outbreak, combined with the shifting political mood and greater technological advances – may encourage further ‘reshoring’ of production.

Fading US hegemony, but not peak globalisation

It is clear that global supply chains have had another big hit from this outbreak and there is no way yet of knowing what the impact on any resumption of world trade growth will be. And increasingly, that trade involves services, intangibles, as well as trade in goods. Trade in services has expanded dramatically and may have its own momentum. It is also important to keep things in perspective: this is not the 1930’s – when the Smoot-Hawley tariffs dramatically compounded the misery of the Great Depression. And if anything, economic nationalism may have peaked. 

The fragmentation of old alliances and institutions – notably the US’ withdrawal from the Trans-Pacific Partnership (TPP) and Paris Climate Accord, alongside its increasing disregard for WTO rules – extends the US’ gradual retreat from the international order it presided over in the post-war era. The US may be no longer be willing to accept the economic and political costs of global leadership, but this needn’t yet spell a decisive end to global economic integration and multilateralism generally.

The arguably defunct Washington Consensus and the global architecture for institutions that govern trade, investment and finance may need to be reviewed, but the commercial arguments for some global integration remain strong: comparative advantages persist. The vacuum that follows the US’ hegemony may yet create opportunities and foster new alliances – and the pendulum may yet swing back from that ‘slowbalisation’ trend.

Disclaimer

Past performance is not a guide to future performance and nothing in this blog constitutes advice. Although the information and data herein are obtained from sources believed to be reliable, no representation or warranty, expressed or implied, is or will be made and, save in the case of fraud, no responsibility or liability is or will be accepted by Rothschild & Co Wealth Management UK Limited as to or in relation to the fairness, accuracy or completeness of this document or the information forming the basis of this document or for any reliance placed on this document by any person whatsoever. In particular, no representation or warranty is given as to the achievement or reasonableness of any future projections, targets, estimates or forecasts contained in this document. Furthermore, all opinions and data used in this document are subject to change without prior notice.

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