The globalization is dying

Source:

THE DYING BIRD OF GLOBALIZATION

The tide of globalisation is turning

Why Has Trade Stopped Growing? Not Much Liberalization and Lots of Micro-Protection

The global economy will never be the same again

高柏:新发展主义与古典发展主义——中国模式与日本模式的比较分析

 

First, let’s agree with this:

Trade – free exchange between individuals – is mutually beneficial.
It’s not a competition between nations, it’s not a ‘global race’, and it’s not a winner-take-all game of international treaty poker. The whole bloody point is that both participants gain.

But, rather than overstating the threat to free markets that come from politics, we might better regard globalisation as a century-long cycle and the turning tide as nothing but a natural process just like live and death.

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A simple History Review

For six decades after the WWII (1945 to 2005), unprecedented growth of trade in goods and services and spectacular expansion of foreign direct investment (FDI) were powerful drivers of the best half-century in human history.

Global trade maintained an annual growth rate of 6 percent in real terms, while the global stock of FDI grew at 15 percent annually in nominal terms between 1980 and 2005.

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It looks like the impetus towards further economic integration has stalled and in some respects gone into reverse.
Globalisation is no longer driving world growth.

 

A simple answer to: Why have global trade and investment not rebounded as they did after past recessions?

less liberalization & more micro-protection

Reductions in trade barriers is lagged

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And imposition of local content requirement measures affects global trade in goods and services, reducing global exports.

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Above all, important segments of the western public no longer believe increased trade benefits them.

 

But as we have argued at very first, the reverse (if true) would not be the first time since the industrial revolution.

A (if not the first) period of globalisation, in an era of empires, occurred in the late 19th century.
The first world war ended this and the Great Depression destroyed it.

A principal focus of US economic and foreign policy after 1945 was to recreate the global economy, but this time among sovereign states and guided by international economic institutions.

Let’s see the picture again, and think again

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A. Part of the reason for the slowdown can be that many opportunities are radically diminished.

When, for example, the production of essentially all labour-intensive manufactures has moved out of the rich countries, the growth of trade in such products must fall.

Just review what we have learned here about new pattern of labour growth 

B. Maybe we have just produced too much

We have China, the biggest investment boom in the history of the world, to blame for, which affects the demand for many commodities.

See herehere and the whole business model is changing, see here and here.

C. the end of once-in-a-lifetime global credit boom is sure to lead to a decline in the cross-border holdings of financial assets.

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D. after decades of FDI, a host of companies with something to gain from it will have taken their opportunity and succeeded or, in important cases, failed.

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There are just nothing lucrative

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E. The world has reached a demographic peak.

“In the modern era it seems that ever since the beginning of the 1980s the global economy has been dominated by globalisation and also a complimentary and massive change in demographics … We will argue that this era is close to being over and the economic, political, policy and asset trends that accompanied it could soon start to reverse.”

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A surge in high earning, high spending workers to dramatically increase the global productivity ratio is a base of globalisation since 1980.

China – cheap labour force – is an one-off factor for globalization and yet no substitution appears.

 

Anyway,

At a time of poor economic performance in leading countries, aging, rising inequality and big shifts in the balance of global power, another collapse must be a possibility.

Recently, even tech giants begin to suffer this 

 

Despite we have just discussed, a way simple answer may be behind the history

During the turning of globalisation from 1910s, there were governments relentlessly printing currency in order to gathering money.

History does not repeat itself, but it rhymes. 

And still referring to the history, some would argue the resurgence always requires a hegemonic power: the UK before 1914 and the US after 1945, or even China after 1980s.

It may take long times.

 

 

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Research on China

 

“Research on China” from AB Investment

https://blog.abglobal.com/Instrumentation/White-Papers/Research_on_China.pdf

 

investors may be underestimating China’s upside potential

China’s extraordinary capacity to marshal its social and economic resources in the pursuit of its policy objective

the key policy challenge is

  1. reducing excessive systemic debt
  2. while avoiding a hard economic landing  and preserving social harmony
  3. pushing through much-needed financial and economic reform in the face of institutional inertia and vested interests

Given the pace of China’s reforms to date has outrun many expectations, the country has better-than-even chance of turning its aspirations into reality

 

The decisive factor: the will and the ability of the government to drive the changes

  1. China’s one-party political structure, backed by a network of elites with strong connections to both politics and business, is highly conducive to the successful implementation of national government policy
  2. track record to date (reform and open the market in 1970s, reform to market-oriented economy in 1990s)

(2 is not evidence but result,and if 1 is the reason for 2, we should review whether 1 have been changed or still works under recent environment)

Internal reforms:

  1. the overhaul of SOEs and the financial sector
  2. stimulate consumer demand and private sector
  3. crackdown on corruption
  4. liberalization of capital markets

External reform:

  1. internalization of RMB
  2. liberalization of capital markets

(They are all interlinked, in other words, their impact will be cumulative and mutually enforcing)

 

Internalization of RMB

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The currency already accounts for 9% of the global letter-to-credit market, ahead of euro and yen and behind only the US dollar

Expects: 1. no CNH CNY, offshore and onshore as RMB; 2. more flexible guide to rate-setting; 3. sufficiently liberalized capital account

 

6 likely disruptive changes from China’s reform

  1. RMB will expand to 50% of country’s global trade settlements
    With continuing deglobalization, the US dollar, euro and RMB will have own currency bloc, which will dilute US monetary policy effects
  2. China’s slower growth economy will win investor support
    Reason: a bigger domestic consumer sector, a more diverse and stable economy, more opportunity for investors comparing to the rest of the world
  3. Benchmark changes, reallocation in bond market
  4. First sector plays, particularly consumption.
    Then less volatile with more institutional investors, stock selection
  5. “Made in China” will set trends that the Western consumer will follow
  6. Geopolitical realignments in Eurasia

 

Economic rebalancing: enter the consumer

The problem is the middle-income trap [1]

The key lies in reorganizing the financial system and capital markets – more efficient capital allocation

Prerequisites:

  1. more effective application of the rule of law
  2. market pricing in financial system
  3. restructuring of the SOE sectos

Results:

  1. a number of corporate defaults and even collapse
  2. productivity rise, helped by competition, new tech and exports moving up value chain
  3. growth in small business finance, no longer LGFVs, rapid expansion of China’s domestic debt market
  4. increased private participation in key industries
  5. growth in company profit leads to higher wages and the rise of insurance, healthcare, and pension schemes

 

Capital market liberalization

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China’s capital markets – equity and fixed income – were worth about RMB44.5 trillion at Jan 2015, the amount of foreign capital permitted to be invested at that date was 715 billion, less than 2%.

 

A worldwide cultural influence and deglobalization

creative industry: industry design, advertising, and marketing

AIIB and NDB, “New Silk Road”

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Trends towards divergence and desynchronization in global patterns may intensify

 

[1]

A developing country loses its competitive advantage in export markets as wage rises