Cover story: Has globalisation had its day?

011216_worldThe movement against globalisation hit the headlines when mobs of angry students took to the streets of Seattle and Genoa at the turn of the century. Now it can boast the most powerful man in the world within its ranks. The election of Donald Trump as US president has come as a message delivered by millions of Americans that globalisation has outstayed its welcome. And they are not alone in harbouring those feelings.

Britons who decided to get out of the European Union share many of the woes that mobilised anti-establishment voters on the other side of the pond. In continental Europe, support is on the rise for political parties across the ideologic spectrum who share a belief that globalisation has failed honest, hardworking citizens in their countries. France, Germany, Belgium and The Netherlands face elections in 2017 that could further advance the anti-globalisation agenda.

Are we watching the retreat of a globalisation process that has been credited with bringing an unprecedented number of people out of poverty since the Second World War? That could well be the case. In fact, Brexit and Trump’s meteoric political career are the most conspicuous manifestations of a phenomenon that is not actually new.

Ever since the global recession, the precepts of the long-running globalisation process that started with the Bretton Woods agreements have been increasingly questioned around the world. The principle that has most often been in the news is the free movement of people – the main factor behind the Brexit referendum result in June. But the new trend also has an important element of economic policy that could have significant implications for investors.

Politicians are not afraid anymore of challenging long-held paradigms that oriented policymakers in the West for several decades, such as the mutual benefits of free trade and the autonomy of central banks. Capital controls, which used to be anathema among respected economists, are now back in the agenda of international economic policy meetings, and not only as something that should be avoided, notes Sebastien Jean, the director at CEPII, a Paris-based thinktank.

More to the point, the Trump victory has put heterodox ideas at the core of the decision-making process in the country that has for a long time acted as a guarantor of the Bretton Woods system, the global system managing commercial and financial relations, which was established in 1945. As a result, the ditching of established wisdom creates the kind of uncertain environment that unnerves investors.

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“It is very difficult at this point to know what is going to happen in the US,” says Daniel Morris, a senior investment strategist at BNP Paribas Investment Managers. “A lot of the things that Trump said runs counter to generally accepted economic principles about the benefits of trade, and that certainly gives people some pause. But it is necessary to keep in mind that the Republicans remain a pro-trade party. Even among Trump’s advisors there are some who are anti-trade, and others who favour it.”

No matter which wing of the future president entourage wins the tussle, it is undisputable the Trump election has raised the prospects of a trade war, which is one of the clearer symptoms of a deglobalisation process. His verbal attacks against Mexico and China especially reverberated among working-class Americans, and similar kinds of outrage can be found in other parts of the world. The UK is a case in point. Research by Italo Colantoni and Piero Stanig, two economists at the Bocconi University in Italy, shows the “Chinese import shock” was a key driver of the Brexit vote. Regions that were most affected, in terms of job and income losses, by the transfer of manufacturing to cheaper jurisdictions were more likely to vote to leave the EU.

Protectionism is also on the rise in France, where the safeguarding of local producers constitutes one of the flags waved by ultranationalist leader Marine Le Pen. In October, politicians from Wallonia, a region of Belgium, almost derailed a free trade agreement between the EU and Canada following the angry reaction of the local business community. Before them, Dutch voters had already blocked a trade deal with the Ukraine.

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“It is safe to say that the threat of protectionism is rising, and this is worrying,” says Léon Cornelissen, chief economist at Robeco. The trend is not without reason, though. Even ardent free-trade economists concede that, although globalisation has the potential to increase overall wealth, it creates winners and losers in the process. Protectionist measures such as the imposition of trade barriers or higher tariffs are therefore touted as effective tools to address the woes of communities who have suffered the most with the process.

The problem is they generate tit-for-tat reactions from countries that are affected by the restrictions. When the first and the second largest economies of the world are the ones locking horns, consequences could be dire.

“Of course, the Chinese will retaliate if they are the target of trade restrictions,” Cornelissen says. “The lesson of the 1930s is that, if all countries retaliate, we all end up poorer.”

A succession of retaliatory moves by large trade nations would likely accelerate the slowing down of trade that is already under way. In a study published in October, credit insurer Euler Hermes noted that global trade growth is expected to shrink 2.9 per cent by value in 2016 after falling 10.4 per cent in the previous year. Consequently, in the past two years the world has lost $3.12trn in exchange goods and services, an amount that is almost equivalent to the German GDP.

In a sign that the drop in trade values is not due to economic conditions alone, Euler Hermes stressed that 792 new protectionist measures were adopted by countries in 2014 and 705 in 2015, with the number reaching 352 during the first six months of 2016.

What is doubtful, however, is to what extent such measures can actually help the millions of people left behind by globalisation, and whose fears they are meant to assuage. “The new policy environment is favourable to bilateralism and protectionism and motivated by political gains, rather than concrete economic effects that will reduce income and employment,” says Peter van Bergeijk, a professor of Economics at Erasmus University, in Rotterdam, who in 2010 published a book presciently titled On the Brink of Deglobalisation.

Experts have pointed out, for instance, that much of the delocalisation of jobs that has taken place in the past decades has been part of the strategy developed by multinational companies to optimise their supply chains, transferring production to countries where costs or labour skills were better suited to their needs. Bringing supply chains back to the United States, as plenty of Trump supporters desire, looks like a tough task in many industrial sectors.

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“Multinationals have complex global supply chains built up over many years, and the US has low unemployment levels,” says Richard Carlyle, investment director at the Capital Group. “It would therefore be really difficult for companies to bring their production back into the United States.”

It does not mean, however, that deglobalisation trends won’t affect investment decisions by large industrial groups. Take the case of Ford, which, just two weeks after Trump’s triumph, announced it was cancelling plans to move a production line from Kentucky to Mexico.

“We are encouraged that President-elect Trump and the new Congress will pursue policies that will improve US competitiveness and make it possible to keep production of this vehicle here in the United States,” the company said in a statement.

Another possible outcome of deglobalisation is that governments may try to boost the presence of national champions, or companies that benefit from tax advantages and other favourable treatment that enables them to compete both at home and abroad.

National champions are not a new concept in Europe, where France is particularly prone to provide juicy incentives for local business groups, with varied results. Brazil has also tried to follow a similar route in the past decade, but in its case with disastrous results, as political meddling and corruption took roots in companies handpicked by the authorities. For many economists, the latter case tends to be the most likely outcome of such policies.

“They have a tendency to be poorly targeted and to cause all kinds of issues concerning the allocation of resources in the economy, resulting to bad choices,” Jean says. “They also create obstacles to competition in the market.” A mix of eagerness to protect local investors with fears about foreign takeovers has already spurred the authorities to block M&A operations involving Chinese buyers both in Europe and the US.

Morris notes that deglobalisation could also result in a currency war, if, for example, the Trump government decrees that countries like China are currency manipulators. Once again, the expected positive effects of purposeful devaluations are far from guaranteed, especially in a world where trade is already in retreat. Euler Hermes notes in its report countries such as Colombia, Russia, Brazil, Chile and Peru have recently gone through devaluation bursts that have not resulted in significant rebounds of exports.

On the other hand, policies adopted from one country can create opportunities for others to increase their integration with the rest of the world. China, for its part, appears to have already sniffed a chance to expand its global presence in the eventuality of a US withdrawal. President Xi Jinping was actually touring Latin America in the search for closer relationships with the likes of Brazil and Chile at the time Trump announced he will take the US out of the Trans-pacific Partnership, the free trade pact that was pursued by the Barack Obama administration to counterbalance China’s growing economic clout in Asia.

“With the US leaving the coalition for multilateral trade and investment, relationships will reallocate to other countries,” Van Bergeijk says. “US isolationism is an important chance for China.”

“There is little appetite for trade agreements in the West today,” adds Jean. “But Asian countries are still looking to boost regional trade links.”

The movement against globalisation should also have consequences for the way business is done, as it implies a different environment that companies need to learn how to negotiate. In this context, good and ethical behaviour have become a must for those that want to avoid the ire of the masses and their political representatives.

In a recent note to investors, Neill Dwane, global strategist at Allianz GI, stressed the world has reached a political tipping point where evermore people believe large corporations manipulate the system to their own benefit at the loss of everybody else.

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“Multinational companies appear to have been gaming the global tax system, with the result that they have no obligation to pay taxes on goods and services as they play one government off against another,” Dwane writes. Dwane also called for corporate responsibility to be redefined in order to adapt companies to the new order.

“Firms should be transparent about the benefits they derive from international activities,” Van Bergeijk adds. “Facts will be important in this debate.”

This is not least because governments seem to have understood that complaints about globalisation are not restricted to the “deplorables” so unfortunately described by Hillary Clinton during her presidential campaign. They reflect a widespread feeling that the whole process is tilted towards a fortunate few, and voters are not accepting this situation anymore.

Carlyle says the latest Autumn Statement released by UK Chancellor Phillip Hammond has already tried to placate the public described by Prime Minister Theresa May as “just about managing” by announcing measures such as an increase in the national living wage.

The disregard of deglobalisation advocates for the mantras of economic orthodoxy could startle investors, especially if the most outlandish ideas are embraced by vote-seeking governments. A case in point is the threat made by Trump during the campaign to renegotiate US  debt. He later backtracked from the proposal, but it is the kind of plan that has met support among his constituency. “Everybody’s reaction to this threat is to think it is impossible. There is no need for the US to renegotiate its debt,” Cornelissen says. “But if the US gathers its main debtors, such as China, to renegotiate debt, it will certainly trigger a crisis. It would be a self-defeating strategy.”