Globalisation déjà vu | Deloitte UK has been saved
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This morning we are launching our quarterly “Global Economy in Charts” report, a 20-page slide deck, available here. Created by my colleague Debo, the report examines the big global macro trends and challenges. Charts can be cut and pasted into your own reports. Do drop Debo a line at firstname.lastname@example.org with ideas and comments.
With hindsight the early 2000s marked the peak of a long boom in international trade and capital flows. Since 2008 that process of globalisation has been rocked by the financial crisis, sub-par growth and protectionism.
It’s been quite a setback for what, in social and economic terms, has been one of the dominant ideas of the last 50 years. But history suggests that, far from being unprecedented, neither the up nor the down is new.
Globalisation is a new word and did not appear in the corpus of English language books until the 1980s. But the practice of international trade and commerce is as old as human society. The ancient empires, and those of Europe in the last 600 years, were, in varying degrees, trading enterprises.
The modern era of globalisation can be traced to the early nineteenth century and the ideas of the English economist, David Ricardo. He built a powerful case for free trade, based on the then radical idea that trade was mutually beneficial. Industrialisation, colonisation and technology drove trade through the nineteenth century.
This was also a period of large population movements from Europe to the ‘New World’. Between 1879 and 1913 Europe lost 13% of its working age population to migration, with countries on Europe’s periphery losing far more (Italy’s working population declined by 39%, Ireland’s by 45%). Over the same period the working age population of the US, Canada, Australia and Argentina rose by 49%.
By the early twentieth century, with trade, overseas investment and population flows booming, a European war seemed inconceivable to many. In 1909 Norman Angell, a British politician, journalist and Nobel Prize winner, published The Great Illusion. It argued that trade had created huge prosperity and that war was improbable and, were it to occur, it would be short-lived. The book was hugely influential. Angell was correct in his analysis of the gains from trade, but sadly, quite wrong in his conclusions about war.
What followed for the next 35 years, to the late 1940s, was an unwinding of globalisation. Two world wars, political and economic chaos, and the great depression stoked nationalism and protectionism. Central banks, which before the war had cooperated to stabilise the international monetary system and boost trade, instead focused on national objectives. Global trade and capital movements slumped.
With the end of the Second World War the world returned to the path of globalisation. The post-war institutions created by the US and its allies, particularly the World Trade Organization, fostered cooperation and presided over a progressive dismantling of tariffs. At the high point of protectionism, in 1931, tariffs on manufactured imports to the US hit an average of 48%. By the early 2000s, successive waves of liberalisation had reduced the average US tariff to just 3%.
New technologies, from shipping containers to the jet aircraft, collapsed the cost of transport for goods and people. Advances in Information Technology facilitated the growth of connected international financial markets.
From Deng Xiaoping’s landmark economic reforms of 1978, to the Thatcher-Reagan free market movement of the 1980s, the collapse of Soviet Communism and China’s accession to the World Trade Organisation in 2001, the tide of ideas ran ever more strongly in favour of globalisation.
The financial crisis of 2008-09 brought that era to an end, stoking a set of long running concerns around de-industrialisation, inequality and social exclusion. Globalisation has since come under fire from the left and the right. In the 2016 US primaries the leading candidate of the left, Bernie Sanders, decried the free trade deals of recent years, including NAFTA, as "a disaster for the American worker". Meanwhile, from the nationalist right, Marine Le Pen, head of France's Front Nationale, has described globalisation as "a barbarity".
Growth in international trade, a key measure of globalisation, has slowed markedly in the last ten years. The pace of trade liberalisation has cooled and, with the imposition of tariffs by the US last year, in some areas has gone into reverse. America, previously a champion of free trade and international cooperation, is now a critic.
The period between the two world wars demonstrates how far, and how fast, globalisation can unwind. It is a measure of how severe the setback was that trade’s share of world GDP did not return to 1913 levels until the 1970s.
But the forces which reversed globalisation between 1913-1945 were on a wholly different scale to those confronting it today. Two world wars, the rise of totalitarianism and a depression which, in human terms, was immeasurably worse than the 2008-09 financial crisis, inflicted huge damage on the international order.
Globalisation today is not in retreat. Growth in trade has slowed, not reversed. There’s been no reversal of cross-border capital movements, of overseas ownership of assets or foreign direct investment.
It is not hard to imagine how things could get worse, perhaps through a tit-for-tat escalation of tariffs or the weakening of international institutions such as the World Trade Organization. But a far more likely outcome is a continuation of the slow globalisation of recent years, not its wholesale reversal.
Agreed, trade has its detractors, but mainstream politicians in most rich nations remain strong advocates. In the last 40 years trade and industrialisation have propelled hundreds of millions out of poverty in emerging markets. China’s trade surplus, its dependence on exports, and it scale, make it an advocate of trade. In the West the standard of living is more than ever dependent on abundant imports of goods and services that could not remotely be produced at such prices at home.
Norman Angell was wrong to believe, exactly one hundred years ago, that globalisation was too useful to be reversed. This time, for all the challenges it faces, globalisation looks more useful than ever.
PS: Last week my colleague Tom Simmons attended a Chatham House event where MPs, including Labour’s Stephen Kinnock and the Conservative’s Nick Boles, presented an alternative Brexit plan, variously known as ‘Common Market 2.0’ or ‘Norway Plus’. The plan would see the UK exiting the EU but retaining a close economic relationship with it through membership of the European Free Trade Association and the European Economic Area . The UK would remain in the single market but would be outside the jurisdiction of the EU’s political institutions, including the European Court of Justice and the Common Fisheries Policies. The UK would also stay in a temporary customs union (the ‘Plus’ part of ‘Norway Plus’) with the EU while other arrangements are being negotiated to preserve a soft border in Ireland. One significant caveat is that the UK would have to accept the free movement of people from the EU, something which Mrs May regards as unacceptable. However, the MPs who back Norway Plus say that the UK would have the power to suspend free movement if it is having “serious economic, societal or environmental difficulties”. Its sponsors believe that should Mrs May’s deal be rejected by the House of Commons, Norway Plus is the most sensible, and politically viable, alternative.
Ian Stewart is a Partner and Chief Economist at Deloitte where he advises Boards and companies on macroeconomics. Ian devised the Deloitte Survey of Chief Financial Officers and writes a popular weekly economics blog, the Monday Briefing. His previous roles include Chief Economist for Europe at Merrill Lynch, Head of Economics in the Conservative Research Department and Special Adviser to the Secretary of State for Work and Pensions. Ian was educated at the London School of Economics.