Davos 2019: globalisation faces bumpy road ahead

History does not repeat itself, but it often rhymes — words sometimes reputed to have been said by Mark Twain. Even if he did not say this, he should have done.

Since the industrial revolution, the world economy has experienced two great waves of economic integration or, as we now call it, “globalisation”: in the late 19th and early 20th centuries and the late 20th and early 21st centuries. Conflict among great powers, economic depression, nationalism and protectionism killed the first. The same combination, if in a different historical sequence, might yet kill the second.

Last time, the ruin started with the first world war. The great depression and soaring protection came later. This time, the rot seems to have begun with the great recession, after the 2008 crash. Protection and rising tension between great powers — the US and China, in this case — followed. But both stories are rooted in the same reality: the difficulty of maintaining an open world economy.

History may rhyme, but it has not repeated. By ignoring the advice of foolish reactionaries, policymakers managed the recent recession vastly better than their predecessors did the depression of the 1930s. Instead of a collapse in output and trade, this era has seen no more than a setback. Some of it was even desirable, notably the decline in irresponsible cross-border short-term lending. The growth of trade has slowed in relation to world output but not collapsed. Nevertheless, the pressures on globalisation are real (see charts). What explains the slowdown in the growth of trade? The weakness of investment in the post-crisis period is one factor. Another is the exhaustion of opportunities for the unbundling of global supply chains in goods (the distribution of parts of integrated production processes across countries). Instead, we see evidence of “re-shoring” (the transfer back of production into the original country) of some supply chains as the cost advantages of producing in emerging countries decline. Also significant has been the import of some supply chains into China (the transfer of production processes from other countries) a point brought out in a recent report from the McKinsey Global Institute.

The last significant liberalisations of trade were the completion of the Uruguay Round in 1994 and China’s accession to the World Trade Organization in 2001. Since then, the Doha round of multilateral trade negotiations flopped, Donald Trump withdrew the US from the Trans-Pacific Partnership and negotiation of a Transatlantic Trade and Investment Partnership between the US and EU has barely got off the ground.

More recently, the world has witnessed a shift towards outright protectionism. Mr Trump has used a controversial national security argument to justify tariffs on imports of steel and aluminium, including those from the country’s closest allies. These actions violate WTO rules, which define the national security loophole very restrictively. Most importantly, the US has launched an open-ended trade war on China. The total affected trade already comes to about 7 per cent of US imports. In addition, the US has indicated its desire to upend the WTO’s dispute settlement process and is blocking appointments to the organisation’s appellate body, with a view to rendering it unable to function.

If the actions taken so far are not hugely damaging, far more so is the ideological rejection of core principles of the global trading system by its founder, the US: instead of liberalisation, there is protectionism; instead of multilateralism, unilateralism; instead of global rules, national discretion. What is not clear is how far this represents a permanent US repudiation of past commitments. But suspicion of Chinese aspirations and a belief that trade has been “unfair” to the US are shared across US politics.

What lies ahead? Much depends on the evolution of domestic politics in high-income countries, especially the US. If allegedly perfidious foreigners continue to be made a scapegoat for failures of domestic policy — always a temptation — an inward-looking economic nationalism might become even more potent. Alternatively, in a world of resurgent great power politics, we might see protectionist trading blocs emerge around the economic superpowers: the US, the EU and China.

The evolution of economic opportunities will also shape globalisation, as it always has, from the steamships and cables of the 19th century to the container ships and internet of today. In a seminal book, out in early 2019, Richard Baldwin of the Graduate Institute in Geneva discusses what he calls “globotics” — an ugly neologism that describes the integration of artificial intelligence with robotics. The author argues that this is about to do to many services what the old information revolution did to manufacturing: facilitate offshoring and destroy enormous numbers of jobs.

The impact will be two-fold. First, improvements in technology will make it far easier to collaborate at a distance. People who are not physically present will be able to participate much more fully in collaborative work, principally as a result of improvements in virtual reality. This will promote globalisation. Second, many tasks now carried out by people will be done by AI and robots, revolutionising many service activities, with profound and highly destabilising economic and social effects.

The development of cross-border economic activities will continue to reflect the interaction between technology and politics. The former creates opportunities, the latter struggles to manage them. Politics, now, are increasingly inward looking. Yet humanity is discovering new ways of annihilating distance and jumping barriers. In the long run, the latter will probably win and globalisation proceed. But the short run looks very bumpy.