Deglobalisation: be careful
what you wish for
December 2016
Luke Bartholomew
Investment Manager,
Fixed Income - EMEA
A few years ago it would
have seemed bizarre to talk
of deglobalisation.
But at seven years and counting, we are
currently experiencing the longest period
of stagnation in the pace of global economic
integration in over 70 years.
The ratio of world trade to gross domestic
product has remained at just under 60% and
foreign direct investment (FDI) flows have
declined from a peak of US$1.9 trillion in 2007
to US$1.2 trillion in 2014. Political support
across the developed world for what has been
the animating project of post-war US and
Western foreign policy is waning.
2010
Global two-way trade
Periods of relative stagnation
2005
2000
1995
1985
1980
1975
1970
1965
1960
Percentage of world GDP
65
60
55
50
45
40
35
30
25
20
1990
Figure 1: Global two-way trade in goods and
services, 1960-2014
For illustrative purposes only.
Source: United Nations Conference of Trade and Development Statistics.
2012
2008
2004
2000
1996
1992
1988
1980
2.0
1.8
1.6
1.4
1.2
1.0
0.8
0.6
0.4
0.2
0.0
1984
Figure 2: Global FDI inflows, 1980-2014
4.5
4.0
3.5
3.0
2.5
2.0
1.5
1.0
0.5
0.0
Trillions of dollars (LHS)
Percent of the world GDP (RHS)
For illustrative purposes only.
Source: United Nations Conference of Trade and Development Statistics.
2
Outlook 2017
This cooling in support for globalisation is not
especially surprising. After all, the benefits of
globalisation have not always been evenly
spread and a cohort, roughly corresponding
to the working class and lower middle class in
developed countries, has barely participated
in global growth over the last 20 years.
Trump’s election further underlines the
waning popular support for globalisation, and
the extent to which there is nothing natural
or inevitable about free trade and integrated
economies. They are the result of political
choices, and if support for these choices
reverses then so will globalisation.
It is true that progress with bilateral trade
deals has been a little more successful,
but these will only deliver limited global
effects. Furthermore, any potential benefits
are being more than offset by small-scale
protectionist policies and legislation from
governments favouring their own country’s
products over those from abroad.
For example, the International Monetary Fund
puts the percentage of products (globally)
affected by temporary trade barriers at its
highest level ever – approximately 2.5%.
The globalisation trilemma
At the heart of the matter is a threeway trade-off. Professor Dani Rodrik of
Harvard University argues that democracy,
national sovereignty and global economic
integration are mutually incompatible. We can
combine any two of the three, but we can
never have all three simultaneously and in full.
He calls this the ‘impossibility theorem’ of the
global economy.
The risks to globalisation are large. Not only
have its benefits been intangible to many,
but if we want to retain democracy and the
nation state, this will ultimately involve
some limits on how deeply economies
can integrate. Perhaps the world has now
reached the maximum level of globalisation
compatible with maintaining democratic
nation states. But such change really would
involve enormous change to our societies and
how they function. So while it may be the
right antidote, it’s not obvious that the patient
would find it palatable.
What’s more, a scaling back of globalisation
would almost certainly reduce potential
economic growth, given the strong empirical
links between global trade and economic
growth. Pre-unification East and West
Germany are prime examples. While West
Germany established itself as a dynamo of
global manufacturing, East Germany closed
its borders and sank into economic ruin.
So what does all this mean for the future
of global fixed income markets?
Lower potential growth would reduce
the equilibrium interest rate (the level of
interest consistent with full employment and
on-target inflation) as there would be less
demand for investment capital, causing less
competition for funds and a correspondingly
lower interest rate. While longer-term interest
rates would be lower, there is a possibility
that near-term interest rates would rise
more quickly, causing a sell-off in bonds
with shorter-dated maturities.
All in all, the same
workers who support
deglobalisation to
protect their jobs
and encourage
wage rises could
end up worse off.
Additionally, higher near-term interest
rates as a result of the reduction in global
integration would put upward pressure
on consumer prices. This is because
deglobalisation would boost the bargaining
power of labour in the developed world as
it no longer has to compete with low-cost
workers in the developing world. And while
this might seem like good news for workers,
it also probably means that central banks
would have to push unemployment higher to
ensure wage growth is consistent with their
inflation target. All in all, the same workers
who support deglobalisation to protect their
jobs and encourage wage rises could end up
worse off.
Globalisation is by no means perfect.
Yet tearing it up will make those people
who are most disappointed by it poorer.
It is unrealistic to expect a solution
that is both palatable and effective to
miraculously emerge next year. In the
meantime, as investors we will be watching
closely for any signs of progress. It is simply
not a subject that can be ignored.
Deglobalisation:
be careful what
you wish for
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