U.S. President Donald Trump’s populist assault on globalization has
provoked fears of the death—or the slowing—of the economic force that has
arguably done more than any other to shape how we live today. Yet those fears
ignore what globalization really is, and how it is evolving.
Globalization is a force both more powerful and ancient than Trump.
Too often we think of it—of economic integration and the exchange of ideas,
people and goods that comes with it—as a recent phenomenon.
The reality is it has been with us since the dawn of time. Religions
like Christianity and Islam are products of globalization. They also have
arguably done more to both shape and promote globalization than U.S.
multinationals or China’s new corporate giants.
Globalization also isn’t a static force. We associate globalization
today with the shipping container, the 1950s invention that increased the
efficiency and lowered the cost of the global trade in goods. Or with the
outsourcing of jobs in advanced economies and the rebirth of great trading
economies like China’s.
But we are entering a new era in which data is the new shipping
container and there are far more disruptive forces at work in the world economy
than Trump’s tariffs. New manufacturing techniques such as 3D printing and the
automation of factories are reducing the economic incentives to offshore
production. The smartphones we carry with us are not just products of
globalization but accelerants for it. For good or bad, we are more exposed to a
global culture of ideas than we have ever been. And we are only becoming more
global as a result.
How
much stuff we ship around the world is not the best measure of globalization
Is globalization really slowing? Maybe, if you only look at the trade
in physical goods. But that doesn’t take into account an explosion of the
digital economy. That’s important. Increasingly, the digital realm is where the
21st-century economy lives.
Trade wars
and the tit-for-tat tariffs between the U.S. and China have contributed to a
slowdown in global trade. The uncertainty caused by Trump’s assault on the
global trading system is likely to exact a price for years to come thanks to
the stall in business investment it caused. Less investment today equals less
growth (and trade) tomorrow.
But the
slowdown was also afoot before Trump. Since the 2008 financial crisis we’ve
seen a decline in the ratio between the growth in trade flows and that of
global output. Until the crisis trade regularly grew at twice the rate of the
global economy. Now it grows roughly in line, or even slightly more slowly than
global GDP.
The even
bigger story, though, is the longer-term structural change in the global
economy, whereby we’re increasingly trading services such as music streaming or
banking.
As economies mature, we’re selling the rights to produce something to
someone in another country rather than shipping it to that country. Those
changes also mean less physical trade in goods—no CD crosses a border if you’re
streaming the latest Ariana Grande song. Yet that doesn’t mean globalization is
slowing. It means it is maturing and evolving.
Traditional
trade measures also don’t reflect the real supply chain
There is no economic relationship bigger than the U.S. and China’s.
But how you quantify the flows matters. Traditionally, trade data measures
shifts in goods by recording products’ value when they leave a port. But the
parts in products often come from other countries these days. Even those parts
can be made up of parts from elsewhere. That means a more accurate measure of
trade and economic relationships involves recording where value is added. And
when you do that, relationships start to look different.
The result means traditional economic policy tools are not as
effective as they once were. Trump may believe a weaker dollar would boost U.S.
exports by making them cheaper for the rest of the world to buy. But products
like smartphones now include parts from all over the world and can effectively
embody four or five different currencies, making any impact more diffuse and
complicated.
There are also caveats. Calculating the value-added relationships of
economies takes time. The most recent data available from the OECD only gets to
2015, which makes it less useful in making real-time policy decisions.
In today’s world even that forensic data isn’t good enough, however.
Whole classes of products are missing from trade data. Like the software that
makes your smartphone work. A few years ago, Hal Varian, Google’s chief
economist, did a back-of-the-envelope calculation on what would happen if trade
flows recorded the true value of U.S.-made operating systems installed on
smartphones assembled in Asia. His answer: It would reduce the U.S.’s $500
billion trade deficit with the world by more than $120 billion in one fell
swoop.
Companies
are more multinational than ever
We still think of companies as national champions even though we long
ago entered the age of the multinational.
Since the 2008 crisis, there has been a slowdown in long-term,
cross-border investment, or what we call foreign direct investment. That, too,
has provoked fears of a slowdown in globalization.
Yet the
share of revenue companies derive from countries outside their home market is
far greater than it once was. Companies and their shareholders rely more on
foreign economies than they have ever before. And that’s before you even start
thinking about how international shareholder registers have become around the
world.
That
matters. As supply chains adapt to new tariffs and the growing geopolitical
rivalry between the U.S. and China sparks talk of a new technology cold war,
prominent thinkers believe we are heading for a retreat in globalization. Or a
cleaving of the world into rival economic spheres of influence.
China hawks in Washington may want to see a “decoupling” of the U.S.
and Chinese economies. But few in business see that as a realistic prospect.
American companies still want to sell to China, which in many cases is becoming
a more meaningful source of revenue and profits than the U.S. As long as
American corporate champions like Apple and Tesla still see China as a market
vital to their long-term success any decoupling may be academic.
Trump’s
tariffs are the exception, not the rule
By imposing tariffs on $250 billion in products from China and
threatening another $300 billion, Trump has committed what may be the greatest
act of protectionism since the 1930s.
Yet that doesn’t tell the whole story. The European Union and other
major economies have been securing trade agreements that lower tariffs and
other barriers. A European pact with Japan went into effect earlier this year.
One with Canada took force last year. Japan and 10 other Pacific economies have
gone ahead with the Trans-Pacific Partnership negotiated by the Obama
administration despite Trump pulling out of that on his first full working day
in office. In Africa, countries are going ahead with a continental free trade
agreement.
In other words, even as Trump is putting up new U.S. trade barriers,
the rest of the world is responding by lowering theirs with each other.
China has a long history of erecting trade barriers. It is by no means
the champion of free trade it often presents itself as these days. But one of
its responses to Trump’s tariffs has been to lower its own tariffs for other
countries on products such as cars. That has put U.S. companies at another
disadvantage versus competitors in Asia and Europe.
According to researchers at the Peterson Institute for International
Economics, as recently as early 2018 China applied an average tariff of 8% on
imports. For U.S. companies the average rate is now over 20%. For all other
exporters to China it has fallen to under 7%.
Innovation
is increasingly global
At the center of U.S. complaints about China is intellectual property
and what the U.S. argues is a long and systematic pattern of IP theft
encouraged by the Chinese state. But increasingly experts say the incentives
are changing for China. In recent years it has become a genuine contributor to
global innovation as seen in patent data.
There are still people who question China’s capacity to innovate. But
the data also points to a broader trend. Innovation has become more global than
it once was. Which is one reason why tech companies and universities worry
about the prospects of the U.S.-China trade battles turning into a broader
technology Cold War. The risk is such a war would leave the U.S. isolated and
unable to take advantage of innovation that is increasingly cross-border.
Migration
is stable, but we travel more than ever
America is a country of immigrants. But that makes it relatively rare
in the world. The reality is that more than 90% of people in the world live
where they were born. Whether it’s for work or family reasons or to flee
persecution, we cross borders to live in another country relatively rarely.
But that
doesn’t mean humans don’t like to cross borders. Even as migration figures have
remained relatively stable worldwide, short-term international travel for work
or fun has soared.
Much of that
is a product of the jet age. It’s easier and cheaper to fly today than it was
even 20 years ago. However, a large portion of the increase, particularly in
the past two decades is the result of globalization and the fact a lot more
people in developing countries like China and India can afford to travel. Or
need to travel, in the increasingly rare case when an international Skype call
or a data file uploaded to the cloud can’t do the job for them.
Source: Bloomberg