Nomura

Globalisation: Stalling or reversing?

We argue that there are several fundamental forces that are driving a ‘de-globalisation’ of the world economy and which would be in the ascendancy even if, say, Brexit and US trade protectionism were not now dominating the headlines.

  • The evidence to date suggests that globalisation has stalled but has not yet moved into reverse. Whether it now does reverse will be critical for the macroeconomic and investment landscape in the period ahead
  • We argue that there are several fundamental forces that are driving a ‘de-globalisation’ of the world economy and which would be in the ascendancy even if, say, Brexit and US trade protectionism were not now dominating the headlines

Before we delve into these in more detail we look at where we are right now in the globalisation story, and it all depends on how we measure that story. Globalisation, concerns the opening up of markets in goods, services, and financial flows and in labour. A narrow focus on trade in goods, might miss the bigger picture not least given the degree to which new technologies can help foster a globalisation of trade in services.

The globalisation of goods trade has been slowing for several years

Still, if world trade in both goods and services is the key benchmark, the evidence to date suggests that globalisation has stalled but not yet reversed. If that is so, then we have arguably reached a critical juncture. Is this stalling a precursor to a reversal of globalisation, with all that this would imply? Or is that stalling instead just a temporary cyclical blip that will shortly give way to a re-globalisation trend? Our research suggests de-globalisation is more likely than a re-globalisation.

Six forces that are slowing globalisation

1.The recycling of global savings is slowing

There has been a trend toward a de-globalisation of capital flows. To some extent the two are inter-linked of course, via trade finance and more broadly via the pace of global growth. The latter has slowed since the financial crisis via deleveraging efforts, and that has naturally had implications for the demand and supply of credit. Heightened financial regulations in the meantime and arguably bigger incentives to keep capital onshore have additionally restrained global financial flows and seem likely to continue to do so in the period ahead.

2. Labour-cost compression is reducing the incentive to reallocate labour across borders

The distribution of manufacturing unit labour costs (ULC) across countries has compressed notably over the past two decades. Fewer labour cost discrepancies across countries should discourage global value chain (GVC) labour diversification by reducing opportunities for finding lower-cost labour markets. Importantly, much of the compression in the distribution has come from an upward shift in the lower, least expensive end. Consistent with that view, the ratio of the 90th and 10th percentiles of the cross-country ULC distribution has fallen steadily from above 3.5 in 1997 to roughly 1.7 in 2017.

3. Stealth protectionism is on the rise

While average tariff rates have come down over the past few decades, many countries have increasingly turned to non-tariff barriers, which can be harder to track and contest. These measures vary, but two of the most prominent are anti-dumping (AD) and countervailing duty (CVD) orders that seek to remedy export practices deemed unfair, such as flooding certain markets with products at a price below production costs. While AD and CVD orders can be imposed for legitimate reasons, they nevertheless impose higher barriers to trade and provide an easy route for many governments to ratchet up protectionism. The outstanding number of AD and CVD orders has increased substantially, highlighting the proliferation of stealth protectionism. Moreover, the increase has not been driven by just one or two large countries. According to the WTO, the median number of AD orders in force has increased from zero to 14 over 1997-2017

4. Tariff reductions since the mid-2000s have been uneven

Another important factor that will likely weigh on globalisation is the uneven nature of average tariff reductions since the mid-2000s. Many countries have continued to lower their tariffs, opening them up to trade, but there remain a substantial number of countries with high tariffs that show no sign of converging to a lower level. This pattern underlies one of the main reasons for the aggressive US protectionist stance against China today: many US officials in the Trump administration view China’s acceptance into the WTO as a fundamental mistake and do not view China as a true market economy. Over 2006-17, China’s average tariff rate was essentially unchanged at 9.8%. Over this same time period, the average US tariff rate fell by 0.1pp from an already-low level of 3.5% to 3.4%. If the average tariff rate divergence persists, many trade hawks will likely continue to argue against globalisation and advocate a more aggressive protectionist stance.

5. Emerging technology may disproportionately benefit high-income countries

While we have solid empirical data on tariffs, non-tariff barriers and ULCs, emerging technologies have yet to show up in many trade datasets and could also play a major role in slowing globalisation. For example, further progress in 3D printing technology could reduce the value of relatively cheap labour, adding downward pressure on cross border labour reallocation. Importantly, it will likely be easier for high-income countries with a relatively high average education level, greater ease in starting a business and well-established regulations, rule of law and political stability to quickly adopt emerging technologies that may shorten global value chains.

6. China’s shifting composition of import growth

Our final factor concerns China and its influence over the world economy. The current debate concerns its high level of debt and deleveraging, which are restraining aggregate demand. Its ageing demographics and exhausted scope to reap productivity gains from further industrialisation are also widely understood. Perhaps of most significance, from the perspective of globalisation is the recent and prospective decline in the processing content of Chinese trade. We have seen their share of total exports decline to just 35% from more than 50% before 2007. Meaning that China is having to transition to becoming a processing export country where parts and components are imported and assembled into final goods for export. To the extent that this development reflects China moving up the quality and technology ladder it means more competition (not least in Asia), but arguably reduced the scope for some underlying dynamism in world trade.

Market implications of de-globalisation

Identifying how all of this might play out in coming quarters is not easy. That’s not least because markets will hone in on issues that are more easily forecast and which will in turn influence growth and inflation outcomes, profits and central bank policy. Nevertheless, there are some broad and influential parameters that will clearly be affected by de-globalisation trends. And there is some danger that structural changes in these will be mistaken for cyclical fluctuations in the months ahead.

In order to help trace some of the key issues associated with de-globalisation, we ran a simulation on the Oxford Economics model designed not only to capture some of these potential structural changes, but also to give some insight into some of the cyclical challenges that are currently confronting investors. The reduced pace of Chinese import demand by 2pp from 2019 to 2028 (the end of the model sample) instigating a modest trend tightening in US credit market conditions (relative to the easing that was assumed in the model’s baseline). To capture potential cyclical and structural challenges to market conditions from a financial de-globalisation in the period ahead.

The simulation suggests further downside for equity prices both via lower valuations and weaker profits. It also suggests further downside for US Treasury yields off the US growth-related damage that a weaker China and global tightening in credit markets might cause. A weaker growth environment, however, and its impact on the corporate sector would at the same time as this generate modestly wider credit spreads. Channels of influence for equities here concern the potential revenue, margin and valuation impacts from weaker trend GDP growth, reduced access to overseas markets, higher macro volatility and a reduced pool of recyclable global savings. Offsets, however, come in the form of the leeway and likelihood that the Fed (and China authorities) would ease monetary and/or fiscal policy.

For full insight, read De-Globalisation forces

Contributors

  • Kevin Gaynor

    Head of International Research

  • Sam Bonney

    Macro Strategy Research

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