Globalisation: History and Now

 

Source:

Trade globalisation in the last two centuries

Globalization Hits a Wall

Sinking Ships

What Happens When Global Trade Goes Virtual

Maybe This Global Slowdown Is Different

Should Slowing Trade Growth Worry Us?

Global trade plateaus

 

In last post we touched a little bit about the recent cycle of globalisation, and reached some popular reasons for the turing of globalisation, including but not limiting to

“The reorientation of Chinese growth to the domestic market should reduce its dependence on international trade.
Growing inequalities in western countries generate opposition to globalisation.
Renewable energies may reduce trade in hydrocarbons.
The development of foreign direct investment substitutes local production for international trade.”

Today’s post is going to read something further on two sub-topics.

 

History: Two trade globalisation cycle

Most studies based on trade statistics date the emergence of the First Globalisation around 1870.

But Michel Fouquin and Jules Hugot argue that

These studies, however, generally rely on data that begins in 1870.
The most comprehensive bilateral trade dataset to date tells us that the First Globalisation began in Europe in the 1840s, before expanding to other continents later in the 19th century.

If it goes ture, it means some statement can’t be the case

“Technological innovations (oceangoing steamships, transcontinental telegraph) and pro-trade policies (bilateral free trade treaties, the gold standard) of the second half of the 19th century are considered the sparks for globalisation. ”

There data shows some different pictures than we used to think

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1.Export openness ratios (total exports/GDP) doubled between 1827 and 1870 but then stagnated until WWI 

2. The real rally in post-war period did not begin until late 1960s and it is only in the late 1970s that openness returns to the levels already reached a century before.

However trade openness is a crude measure of globalisation.

<- In a world of scattered economic activity, countries are naturally more interdependent.
<- What we call ‘globalisation’ is the convergence between observed world trade and a theoretical situation in which international trade barriers would be equally as constraining as domestic ones.

Therefore the degree of globalisation can be divided to two dimensions

  1. the degree of concentration of the world economy
  2. the degree of international trade barriers

We first deal with the second one

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Aggregate international relative trade costs [1] shows that trade barriers have fallen by more than 70% since 1840.

1. The First Globalisation had therefore already begun in the 1840s, before steamships, the telegraph or the gold standard, and before the wave of bilateral trade treaties signed by Western European countries in the 1860s. This was, however, a period of political stability in Europe after the Congress of Vienna in 1815. [2]

2. In the first cycle, it was shocked since 1914 as we used to believe, but in the second one high protectionism lasted until 1970s [3]

The indication here is that the degree of concentration of the world economy should be increased since 1870s, which impairs globalisation naturally. While the post-war time shows no divergence until very recently.

3. Globalisations are also regionalisations. The more trade grows, the more distance matters.

Globalisation spreads:
the decline of intra-European trade barriers after 1840 preceded the reduction of transatlantic trade barriers that happened around 1890. In Europe, the fall of trade costs in the northwest preceded the fall in the south.

But distance also matters:
In 1830, a 10% difference in the distance between two countries would have reduced bilateral trade on average by 3%. On the eve of WWI, it would have reduced trade by 13%; and in 2010, the reduction would have been 19%.

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The major role of regionalisation is surprising given during both periods of globalisation, nations focused on long-distance trade.
(The First Globalisation was built on colonial trade, and the Second was inspired by European-American and Asian-American trade.)

[4]

Several hypotheses may explain this phenomenon:

  1. pro-trade policies have been primarily adopted between neighbouring partners.
    The post-war integration of Europe is the most obvious example.
  2. regionalisation may also be due to the increased complexity of the goods that are traded. Language and cultural barriers, which are highly correlated to distance, may have become more important.
  3. the fixed costs associated with trade (e.g. information gathering on local preferences, loading and unloading) may also have decreased relative to the actual cost of carrying goods from one country to another, which is strongly linked with distance.

 

 

Now: Globalization hits a wall

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There was a big leap in trade’s share of global GDP in the 1970s when oil prices rose, but otherwise long periods of relative stability.
Then, from 1987 onward, came the era of seemingly unstoppable globalization.
Since the initial bounceback from the last recession, this has no longer been true.

The shipping business suffers most directly recently:

“Of the top 15 container lines that were in operation nine months ago, four have gone out of business or are in the process of doing so.” while “The global container fleet is still getting bigger.” [5]

 

A puzzle

The lack of overall trade growth since 2010 is more of a puzzle, though, and lots of economists have been writing lots of words:
the International Monetary Fund, the World Bank, the Federal Reserve, the European Central Bank and the Bank of Canada, plus a 349-page e-book from the Centre for Economic Policy Research in London.

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Two explanations show up again and again:

  1. The global economy is still really weak, and for a variety of reasons slow-growing economies are less trade-intensive than fast-growing ones. So the trade slowdown is cyclical.
  2. After years of building globe-spanning supply chains with a heavy reliance on China, multinational manufacturers have changed direction and begun moving production closer to consumers.

 

Yes, China is a big reason: 
China, which drove the last decade of globalization, is running out its demographic bonus and trying to rebalance its economy toward services and domestic consumption.

So is a changing of traditional business model:
Automation is reducing the importance of labor-cost differences between countries, and manufacturers are rediscovering that it can be better to make products near customers rather than across the world.

<- Building global supply chains became so fashionable for Western manufacturers that they built them even when it made sense to keep production closer to customers; now they’re retrenching and revising their approach.

And new economy:
Flows of data and information are supplanting flows of goods and money.

 

Let’s check the latter two a bit further, it’s related to the statement like

Maybe people just don’t need as much stuff as they used to. And trade is going virtual. 

“we’re seeing might also be the beginnings of a plateauing in the world’s demand for things — and, even more, the resources needed to make those things.”   [8]

We’d have to see already-affluent people buying fewer things and consuming fewer resources to create shift

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There are signs of a plateau on people buying more physical stuff. And the car sales might peak soon. And China is expected to follow the fall in energy consumption .

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Accordingly, as the McKinseyites say, global economic interaction,  is going virtual:

“Flows of physical goods and finance were the hallmarks of the 20th-century global economy, but today those flows have flattened or declined. Twenty-first-century globalization is increasingly defined by flows of data and information.”

So globalization isn’t done for. It’s just going to look different going forward.

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a. “Now, you would expect some of that cross-border Internet use to show up as trade in services, and some of it clearly does.”

b. “914 million people around the world have at least one international connection on social media.” That could have economic significance – and maybe political significance, too – but it doesn’t amount to a trade flow.

c. Silicon Valley boosters argue that the value of the free services provided by tech companies is being ignored by productivity statistics

Trade in services has kept growing even during the overall trade slowdown, and McKinsey cites an estimate that about 50 percent of services trade is enabled by digital technology  and small companies. [6]

 

The overarching message of  McKinsey Global Institute publications:

1. This is a really really really big deal.

2. It’s going to create lots of new opportunities and new wealth around the world.

3. It’s going to force big, established, deep-pocketed companies to drastically change how they do business  [7].

 

Perhaps we shouldn’t worry about it at all

So, there may have a reasonable limit to how globalized the global economy needs to be, which are not necessarily bad news for the global economy.

Paul Krugman agued early in 2013 that
“Ever-growing trade relative to GDP isn’t a natural law, it’s just something that happened to result from the policies and technologies of the past few generations.”

To him, rapid trade growth since World War II was driven by two great waves of trade liberalization and one major technological innovation.

The first wave of trade liberalization involved industrial countries, and was largely over by 1980:

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The second wave involved the great opening of developing countries:

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Finally, there’s The Box — containerization, which made the vertical disintegration of production, with separate stages carried out in far-distant nations, possible.

The point is that it’s entirely reasonable to believe that the big factors driving globalization were one-time changes, so that we should expect the share of trade in GDP to plateau — and that this doesn’t represent any kind of problem.

 

But things get worse themselves

However, the problem here is that
even if the trade plateau has been brought on by relatively benign natural causes, it could lead to increasingly trade-unfriendly government policies around the world that keep trade down and make things worse. 

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“If global trade has plateaued, then net gains by one nation’s exporters must come at the expense of another nation’s. A global trade plateau enhances the risk of trade tensions, especially in an era when governments of the major trading powers are putting in place so many incentives and financing to promote exports. The risk is that a negative feedback loop could develop: policy may have contributed to the global trade plateau — and we cannot discount that future policy will be shaped by it.”

 

2016/09/19 update

Globalization can also go national:

Many nations lack integrated economic relations within their borders, and thus they could reap high gains from trade by opening up internally.

In China, for instance, there has been a long history of geographical fragmentation.

a) Many barriers to trade across regions still remain in China. For instance state-owned firms, many controlled by provincial authorities, often favor local contractors.

b) Some of these barriers are legal and regulatory, while others stem from lack of trust, physical distance, regional rivalries and missing social networks across regions.

But these days the internet is bringing the whole country’s economy together through Alibaba, WeChat, and other services that ease the online purchase, shipping, and advertising of goods at the national level.

<- Domestic integration is lowering costs, smoothing out price differences and allowing differing cultures and linguistic areas to exchange ideas.

-> The more economically integrated China becomes, the more it may retreat from some kinds of global trade.That will register statistically as a decline in globalization, but actually it is an increase in efficient economic integration.

India also is seeing its different states and regions being tied together through migration, trade, and investment.

 

[1]

The difference between observed trade and a counterfactual in which there would be no international trade barriers then reveals the aggregate cost that is specifically associated with international trade. These costs come from transportation and protectionist policies, but also factors like communication and exchange rate volatility (Jacks et al. 2008).

[2]

In the mid-19th century there were also unilateral reductions of trade protection, for example the repeal of the British Corn Laws in 1846. We found similar examples in other European countries. In the 1870s the Russian and American ‘grain invasion’ prompted higher tariffs in most of continental Europe. Trade costs, however, kept falling during this protectionist backlash, which suggests that it was compensated by the decline of other trade barriers.

[3]

After 1918, totalitarian regimes emerged in the USSR, Italy and Germany, and the protectionist measures that were adopted after the Great Depression condemned any possibility of returning to the liberal golden age.

High protectionism lasted until after WWII and the adoption of the GATT in 1947, which created multilateral liberalisation among developed economies. The Treaty of Rome (1957) began European integration, and internal customs barriers were abolished altogether in 1968. Finally, the generalisation of containerisation in the 1970s reduced transport costs.

[4]

The rise of international trade during the 19th century was supported by European liberal trade policies and, later, by technological improvements in transportation and communication. The Great Depression and the two world wars challenged this trend, while trade was partly reallocated to more distant partners due to geostrategic reasons and European colonialism. Both globalisation and regionalisation resumed in the 1960s.

But regionalisation has recently been fading, as the WTO has grown to include almost all countries in the world. The conversion of emerging and former socialist countries to free trade in the 2000s has stimulated long-distance trade.

[5]

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Container shipping is certainly getting more concentrated than it was. That shift to a less competitive market ought to provide some help in lifting container rates.

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The problem for lines is that reduced competition hasn’t been enough to juice container rates back into positive territory.

There’s simply not enough trade going on to fill all the ships on the ocean. The value of global goods exports touched its lowest level in six years in February and has been running at subdued levels all year, according to the International Monetary Fund.

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Shipping lines have two main options to survive this hurricane.

1.They can sit tight, hope their debts don’t overwhelm them in the way that Hanjin’s and Hyundai Merchant’s have done, and trust that trade will eventually recover and start filling their holds again.

2.The shorter route back to profitability will be to reduce the size of the fleet by turning some of those excess ships into scrap metal — but that will take a while.

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[6]

And cross-border connectivity is changing the composition of the global goods trade, with e-commerce allowing smaller companies to go global:

“The increasing globalization of small businesses is starting to show up in national statistics. It is most clearly seen in the United States, where the share of exports by large multinational corporations dropped from 84 percent in 1977 to 50 percent in 2013.”

[7]

meaning that they should probably hire a bunch of management consultants to help them figure it out.

“The convergence of globalization and digitization means that the world is changing rapidly—and business leaders will need to reassess their organization, strategy, assets, and operations accordingly. The approaches that worked for going global even ten years ago may no longer be relevant.”

[8]

After all, the latest United Nations population projections, released in July, do indicate that we may be nearing a plateauing of the number of people on the planet.

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Still, in the median forecast, the plateauing won’t happen till the end of the century. It’s possible that it won’t happen at all. Also, there are still billions of people around the world hoping to emerge from poverty and consume more things and resources.

[9]

The decline in Chinese demand for natural resources during 2014 has been one of the main things prompting observers to wonder if the country is undergoing a much-sharper economic slowdown than the official numbers indicate. It may well be.

-> But this also could be evidence of the Chinese economy’s shift away from resource-intensive manufacturing and infrastructure-building and toward providing services for Chinese consumers.

In general, developing countries are making the switch from goods to services much earlier in their development than the U.S. and Europe did. This may not be all good news; economist Dani Rodrik worries that it might make it harder for them to catch up with wealthy countries.

 

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