Slowbalisation - Economist article on international trade from 1st Trump term:

 

The steam has gone out of globalisation Jan 24th 2019 

NB Some of the material is already out of date; we have had Covid since – but analysis is excellent and trends are clear:

When America took a protectionist turn two years ago, it provoked dark warnings about the miseries of the 1930s. Today those ominous predictions look misplaced. Yes, China is slowing. And, yes, Western firms exposed to China, such as Apple, have been clobbered. But in 2018 global growth was decent, unemployment fell and profits rose. In November President Donald Trump signed a trade pact with Mexico and Canada. If talks over the next month lead to a deal with Xi Jinping, relieved markets will conclude that the trade war is about political theatre and squeezing a few concessions from China, not detonating global commerce.

Such complacency is mistaken. Today’s trade tensions are compounding a shift that has been under way since the financial crisis in 2008-09. As we explain, cross-border investment, trade, bank loans and supply chains have all been shrinking or stagnating relative to world GDP (see Briefing). Globalisation has given way to a new era of sluggishness. Adapting a term coined by a Dutch writer, we call it “slowbalisation”.

The golden age of globalisation, in 1990-2010, was something to behold. Commerce soared as the cost of shifting goods in ships and planes fell, phone calls got cheaper, tariffs were cut and the financial system liberalised. International activity went gangbusters, as firms set up around the world, investors roamed and consumers shopped in supermarkets with enough choice to impress Phileas Fogg.

Globalisation has slowed from light speed to a snail’s pace in the past decade for several reasons. The cost of moving goods has stopped falling. Multinational firms have found that global sprawl burns money and that local rivals often eat them alive. Activity is shifting towards services, which are harder to sell across borders: scissors can be exported in 20ft-containers, hair stylists cannot. And Chinese manufacturing has become more self-reliant, so needs to import fewer parts.

This is the fragile backdrop to Mr Trump’s trade war. Tariffs tend to get the most attention. If America ratchets up duties on China in March, as it has threatened, the average tariff rate on all American imports will rise to 3.4%, its highest for 40 years. (Most firms plan to pass the cost on to customers.) Less glaring, but just as pernicious, is that rules of commerce are being rewritten around the world. The principle that investors and firms should be treated equally regardless of their nationality is being ditched.

Evidence for this is everywhere. Geopolitical rivalry is gripping the tech industry, which accounts for about 20% of world stockmarkets. Rules on privacy, data and espionage are splintering. Tax systems are being bent to patriotic ends—in America to prod firms to repatriate capital, in Europe to target Silicon Valley. America and the EU have new regimes for vetting foreign investment, while China, despite its bluster, has no intention of giving foreign firms a level playing-field. America has weaponised the power it gets from running the world’s dollar-payments system, to punish foreigners such as Huawei. Even humdrum areas such as accounting and antitrust are fragmenting.

Trade is suffering as firms use up the inventories they had stocked in anticipation of higher tariffs. Expect more of this in 2019. But what really matters is firms’ long-term investment plans, as they begin to lower their exposure to countries and industries that carry high geopolitical risk or face unstable rules. There are now signs that an adjustment is beginning. Chinese investment into Europe and America fell by 73% in 2018. The global value of cross-border investment by multinational companies sank by about 20% in 2018.

The new world will work differently. Slowbalisation will lead to deeper links within regional blocs. Supply chains in North America, Europe and Asia are sourcing more from closer to home. In Asia and Europe most trade is already intra-regional, and the share has risen since 2011. Asian firms made more foreign sales within Asia than in America in 2017. As global rules decay, a fluid patchwork of regional deals and spheres of influence is asserting control over trade and investment. The European Union is stamping its authority on banking, tech and foreign investment, for example. China hopes to agree on a regional trade deal this year, even as its tech firms expand across Asia. Companies have $30trn of cross-border investment in the ground, some of which may need to be shifted, sold or shut.

Fortunately, this need not be a disaster for living standards. Continental-sized markets are large enough to prosper. Some 1.2bn people have been lifted out of extreme poverty since 1990, and there is no reason to think that the proportion of paupers will rise again. Western consumers will continue to reap large net benefits from trade. In some cases, deeper integration will take place at a regional level than could have happened at a global one.

Yet slowbalisation has two big disadvantages. First, it creates new difficulties. In 1990-2010 most emerging countries were able to close some of the gap with developed ones. Now more will struggle to trade their way to riches. And there is a tension between a more regional trading pattern and a global financial system in which Wall Street and the Federal Reserve set the pulse for markets everywhere. Most countries’ interest rates will still be affected by America’s even as their trade patterns become less linked to it, leading to financial turbulence. The Fed is less likely to rescue foreigners by acting as a global lender of last resort, as it did a decade ago.

Second, slowbalisation will not fix the problems that globalisation created. Automation means there will be no renaissance of blue-collar jobs in the West. Firms will hire unskilled workers in the cheapest places in each region. Climate change, migration and tax-dodging will be even harder to solve without global co-operation. And far from moderating and containing China, slowbalisation will help it secure regional hegemony yet faster.

Globalisation made the world a better place for almost everyone. But too little was done to mitigate its costs. The integrated world’s neglected problems have now grown in the eyes of the public to the point where the benefits of the global order are easily forgotten. Yet the solution on offer is not really a fix at all. Slowbalisation will be meaner and less stable than its predecessor. In the end it will only feed the discontent.

This article appeared in the Leaders section of the print edition under the headline "Slowbalisation"

Thinking about the work we did on innovation...

 

Read in browser

MAY 23RD 2024

Essential India Your guide to an emerging great power

Arjun Ramani Global business and economics correspondent

Global business has long viewed India as the world’s “back office”. Movies such as “Outsourced” (2006) and “Slumdog Millionaire” (2008) popularised the trope that you went to India to economise on simple business services like call centres. By the 2010s the rise of Indian IT giants—from Tata Consultancy Services (TCS) to Infosys—became too hard to ignore. Today, TCS’s market capitalisation of $167bn is  larger even than IBM’s. But even so, Indian IT giants typically do not do the research and development or design work that fuels innovation in global firms. But quietly, India is levelling up. As my colleague Tom Easton explains in this week’s issue, India now boasts nearly 1,600 “global capability centres” of multinational firms, up from 700 in 2010. Collectively they employ some 2m-3m of India’s best and brightest and often do mission-critical work from research to core-software development. Tom’s reporting shows how data scientists in Lululemon’s Indian office direct operations from the Middle East to New York. Mercedes-Benz’s R&D centre, which has nearly 6,000 employees, received 32 patents last year. Pretty impressive stuff for a supposed back-office. The total value of all this is hard to measure, but a recent estimate from Wizmatic, a consultancy, suggests it could be $120bn, a third of India’s overall services exports. Two big questions, however, loom over the future of Indian services. First is the impact of AI. Recently I wrote about how some AI experts think that chatbots could eat the tech-services industry. The concern makes sense. Computer programming is the forte of large-language models and they are improving fast. Second is the risk that India’s services heft one day proves as disruptive to the world as Chinese manufacturing has been. Massive inflows of manufacturing foreign direct investment (FDI) into China in the 2000s laid the groundwork for the rise of firms like BYD and Shein that are now dominating global markets. China received technology and its workers were trained up. As we observe in our leader, the rise of global capability centres in India today appears oddly similar. Western firms are investing heavily in Indian people. You could imagine the best designers from the 85 semiconductor firms with offices in India one day starting their own shop. That would pit Western white-collar workers against Indian ones, adding tension to global trade.  Yet there are also reasons to be cheerful. After spending some time talking to global businesses and the Indian IT firms they work with, I became a bit more sanguine about the threat from AI. Yes, it will disrupt Indian techies, but it could also be a big demand shock. Businesses are often turning to their Indian arms to incorporate AI into their operations, a process which has no end in sight. As for the possibility of an “India shock” to the West, the growth of Indian services has been consistent rather than sudden. With luck that could mean the rise of the Indian services does not arouse as much hostility as Chinese manufacturing. Thanks for reading. Today I will join my colleagues for a webinar to discuss India’s election, economy and future. If you subscribe to The Economist you can join me here from 8.30pm IST.

This newsletter is free. You can forward it on to your friends and family, who can then sign up here. If you want to send us comments on this newsletter, or ideas for future editions, write to us here: essentialindia@economist.com.

Globalisation and poverty - a counter-factual

 

Globalisation may not have increased income inequality, after all

A new study questions the received wisdom on trends within countries

photograph: stephen shaver/upi/shutterstock

Mar 7th 2024

Listen to this story.

 Enjoy more audio and podcasts on iOS or Android.

Working out who earns what is surprisingly tricky. Both the very rich, who sometimes try to keep their wealth from the taxman, and the very poor, who are sometimes mistrustful of clipboard-wielding officials, are especially hard to pin down. Nevertheless, before the covid-19 pandemic, household surveys consistently found a fall in the number of people living in poverty. The World Bank counted 659m living on less than $2.15 a day in 2019, down from around 2bn in 1990.

Yet this progress came at a cost: a global “precariat” emerged, members of which were barely out of poverty and perilously exposed to shocks, while the top 1% got rich faster. That, at least, is the received wisdom. The World Inequality Database, a project associated with Thomas Piketty and Gabriel Zucman, two economists, combines tax data with other sources of information to estimate the incomes of the uber-rich. They have found that although inequality between countries has fallen, as the rest has caught up with the West, within countries it may have risen. Chinese and Indian elites have done the best relative to their countrymen. American and European plutocrats, who are busy stashing wealth in tax havens, have done well, too.

A new paper by Maxim Pinkovskiy, Xavier Sala-i-Martin, Kasey Chatterji-Len and William Nober, economists at Columbia University and the New York branch of the Federal Reserve, challenges this picture. The researchers look at how likely people in different parts of the income distribution are to understate their income. They find that as the poor become richer, they become more likely to do so. Once adjustments are made for this, poverty has fallen faster than previously thought, and inequality within countries has not risen. It may even have fallen slightly.

To reach this conclusion, the authors look at the difference between estimates of income from regional household surveys and gross domestic product in the same area. When surveys imply that a region has less overall income than official figures, it suggests more income is going unreported. The researchers find that the richer an area, the larger the gap tends to be. This makes sense, notes Mr Sala-i-Martin. As a subsistence farmer becomes a small business owner or market trader, he develops more complex income streams and has more incentive to mislead the taxman.

If the finding holds, it changes the history of globalisation. Rather than a precariat, the researchers conclude that a “true global middle class” has emerged. Its members will not be plunged back into poverty by a financial crisis or a pandemic.

Yet the study will not be the final word. Economists have been arguing about trends in global inequality—and the quality of the data that lie beneath them—for decades. When it comes to the world’s richest people, the new research has more to say about the top 10% than the top 1%, who are widely believed to have done so much better than the rest. Like most papers, this one relies on assumptions that could be challenged by other researchers. Working out the global income distribution is one thing; convincing others you have the right answer is quite another.

What will post-Covid trade look like?

OPINION

Covid-19 will end the post-1945 era of globalisation

WORLD WAR I BROUGHT VICTORIAN FREE TRADE TO A SHUDDERING HALT

The coronavirus is accelerating the ongoing shift towards protectionism and autarky, says Edward Chancellor

Past cycles of globalisation have been vulnerable to sudden shocks. World War I brought the Victorian free-trade era to a shuddering halt. The 1929 crash led to beggar-thy-neighbour tariffs. The financial crisis in 2008 damaged faith in globalisation. The Covid-19 pandemic could well prove a harder blow.

Protectionist pressures tend to increase when growth weakens. In 2015 restrictions affected a greater share of world trade than in the 1930s, according to Global Trade Alert, and world trade volumes started to decline. Since the advent of President Donald Trump in 2017, thousands of new trade distortions have been introduced.

The US-China tariff war accounts for less than a quarter of recent anti-trade measures, estimates Simon Evenett, professor of International Trade and Economic Development at Switzerland’s University of St. Gallen. Still, Trump’s preference for conducting policy on Twitter took a toll. Last October, the International Monetary Fund warned that jitters over trade policy were dampening global growth prospects. It was at this critical juncture that Covid-19 emerged.

The pandemic has exposed the fragility of cross-border supply chains. Producers have used cheap dollar funding for trade credit to lengthen their supply chains, often incorporating several countries. These chains are cost-efficient but vulnerable. When Beijing tried to halt the spread of the epidemic in January, many Chinese factories were shut.

Apple had problems sourcing parts for its iPhones. It soon became clear that many Western firms lacked an adequate understanding of their supply chains. Global trade links suddenly appeared as complex, interconnected and vulnerable to shocks as the financial world when the subprime crisis emerged.

SICKEN-THY-NEIGHBOUR 

Covid-19’s threat to world trade took a more insidious turn last month. In January, Beijing stopped the export of certain medical supplies, such as face masks, including those produced by foreign manufacturers. As the virus spread across Europe, export restrictions proliferated. Since 1 January more than 50 governments have imposed exports curbs on medical supplies. Germany stopped the export of 240,000 masks to Switzerland. France prevented Valmy from fulfilling its contract with Britain’s health service to supply millions of masks.

“FRANCE PREVENTED VALMY FROM FULFILLING ITS CONTRACT WITH THE NHS TO SUPPLY MILLIONS OF MASKS”

India, a major producer of generic medicines, imposed a range of export restrictions on medical supplies and drugs, including fever-reducer paracetamol. The European Union, which produces half the world’s ventilators, restricted their export.

Beggar-thy-neighbour trade policies have become sicken-thy-neighbour, says St. Gallen’s Evenett.

Panicked reactions to the pandemic bring short-term relief at lasting cost. Companies may be reluctant to invest for export markets if those markets are shut off at whim. Export bans also foster bitterness between trading partners. Deprived of medical supplies from Germany, Italy and Serbia turned to China for relief. Medical export restrictions succour nationalists who argue in favour of self-sufficiency in manufacturing. White House trade adviser Peter Navarro says US dependence on China for key medical supplies and drugs is a “wake-up call”.

What might the world look like when the pandemic passes? For a start, supply chains are likely to become shorter and more robust. Cross-border manufacturing will take on a geopolitical aspect as managers question whether production is located in trusted countries. Moves to repatriate manufacturing, especially in healthcare, will receive fresh impetus. The age of multinational oligopolies is ending. Takeover authorities will pay less attention to consumer prices when considering mergers and more to issues such as competition and security. If China becomes the scapegoat for the pandemic, as is likely, it can no longer serve as the workshop of the world.

Some of the macroeconomic consequences that follow a turn in the globalisation cycle are foreseeable. The disinflationary forces unleashed by the era of free trade will come to an end. When trading links frayed at the close of the 19th century, the great Victorian bond bull market came to an end. The current bond bull market, nearly four decades old, will be replaced by a multiyear bear market. As interest rates rise, a higher discount rate will be applied to stocks and houses, both of which will trade in future at lower valuations. Manufacturers will no longer be able to outsource manufacturing to the cheapest geographies, so costs will rise. Profits will decline and labour’s share of national income will rise.

The geopolitical consequences of an end to globalisation are more fraught. As the history of the 1930s shows, the struggle for raw materials in a multipolar world can become a casus belli. For years, Beijing has been pursuing a 1930s-style autarky, tying up supplies of commodities from various countries, such as Venezuela, with loans from the China Development Bank. More recently, Beijing’s Belt and Road Initiative has increased its number of client states. At the same time, the People’s Republic has reduced the share of foreign components in domestic manufacturing. China may unwittingly have provided the catalyst for this crisis, but if globalisation fails it will enjoy a head start.

A version of this article was first published on Breakingviews. Edward Chancellor is a financial historian, journalist and investment strategist.

MONEYWEEK

Stretch and challenge time...

Have a quick look at this; the basic premise is that what we see as FDI flows are actually [legal] tax avoidance schemes. You don't need to get into the detail of this, but it would fit nicely into an essay about tax/MNCs, or FDI/globalisation:

It is Time to Change How We View Foreign Direct Investment

FDI is increasingly driven by tax avoidance.

Blog Post by Brad W. Setser

December 17, 2019

    

A lot of financial globalization has been driven by tax avoidance.

40 percent of FDI globally comes from just seven countries, which collectively account for 3 percent of the world economy.

More on:

United States

International Economic Policy

Foreign Investment

That’s one striking result of a new IMF working paper.

It paints a picture of foreign direct investment that runs a bit against the common view of foreign direct investment as the virtuous, and low risk, form of financial integration.

Foreign direct investment is generally thought to be real investment in plant and equipment abroad—GE building gas turbines in France, GM building cars in China, Siemens building turbines in North Carolina, and BMW and Toyota building cars in South Carolina and Kentucky.

Statistically, though, FDI is often investment by one special purpose entity (generally located in a tax center) in another special purpose entity…so called phantom FDI.

That is why it is time to start viewing the direct investment data with a more jaundiced eye.

One of the biggest recent “direct” investments globally was Microsoft Ireland’s purchase of Microsoft Singapore. That transaction has a huge statistical impact on Ireland (and the euro area), but didn’t have much of an impact on the “real” Irish economy.

That same critical eye also needs to applied to the data on direct investment into and out of the United States, as it too is heavily influenced by transactions that are likely motivated primarily by tax considerations.

Consider the data on outward U.S. direct investment abroad.

That data historically has been dominated by “reinvested” earnings—the profits American firms earn abroad that they legally kept in their offshore subsidiaries.

   

This was the source of the supposedly offshore cash stash of U.S. firms (the funds were only legally offshore, as they legally were assets of say Apple Ireland or Microsoft Bermuda; in practice they were invested in U.S. financial assets—and firms that wanted to access their offshore cash to say buyback their shares could do so by borrowing against their offshore cash). The bulk of those reinvested earnings—if you looked closely in the data—weren’t being reinvested in physical assets, but rather were piling up in the offshore subsidiaries U.S. firms had established in low tax jurisdictions. From 2010 to 2018, 65 percent of all reinvested earnings were “reinvested” in jurisdictions like Ireland and Bermuda (which works out to about $200b a year of investment in those jurisdictions, or about half of all US FDI in the “pre-tax reform” data).

   

That clearly was a function of firms’ ability to defer paying U.S. tax on otherwise un-taxed global profits under the old tax law. Profits earned in high tax jurisdictions didn’t have any U.S. tax liability under the old law, as firms could deduct taxes actually paid abroad. Indefinite deferral effectively distorted the global data—raising the amount of U.S. direct investment abroad (the cash Apple held in Ireland was an asset of Apple USA, so reinvestment raised the stock of U.S. equity assets abroad even if technically the equity investment abroad was the accumulation of offshore cash) and the amount of foreign claims on the United States (U.S. treasuries purchases by Apple Ireland were counted as foreign holdings of U.S. government debt, that’s why Ireland was at one time the world’s third largest holder of U.S. Treasuries).

FULL ARTICLE HERE