When it comes to world trade, ‘deglobalisation’ seems to be the buzzword. Hardly surprising, now that the economic trading blocs China, the US and Europe seem increasingly introverted. But is deglobalisation actually happening? Thijs Knaap, Chief Economist at APG, unpacks the figures and argues that it makes more sense to talk about ‘slowbalisation’.
Published on:
11 May 2023
Summarised
Slowbalisation instead of deglobalisation:
• US and European companies aren’t reshoring their production. Instead, they’re opening additional production facilities outside China. Consequently, international trade is increasing rather than decreasing.
• China now has a lower percentage of trade due to the growth of its GDP, not because the country exports less.
• The COVID-19 crisis made it clear that the service sector can globalise even further.
• The period of hyperglobalisation is over, though. This is partly reflected in the increasing difficulty of concluding a trade agreement and in governments curtailing organisations like the WTO.
• However, it seems that the dollar’s dominant role still isn’t over.
Since 2020, there has been a huge increase in the use of words like deglobalisation, onshoring and reshoring in the business world. “You could also regularly read in the newspaper that the production of computers and iPhones was being brought back to Europe and the US from China. Only you don’t see that in the data at all,” Knaap argues. The fact that reshoring doesn’t seem to be happening has to do with the enormous complexity of bringing manufacturing back here. “The tight labour market and high wages in the US and Europe make it difficult to produce many products there profitably. So, there’s no deglobalisation, because then we’d be seeing a long-term decline in global trade, and that’s definitely not happening.”
International trade and investment are still on track
After the 2008 financial crisis, the global volume of trade as a percentage of GDP weakened. The era of hyperglobalisation ended, and the current period of slowbalisation (term coined by Dutch trend watcher Adjiedj Bakas in 2015, ed.) began. “The trend for international trade is still considerably higher than in the 1980s, though,” says Knaap. “China, especially, has less trade now. That doesn’t necessarily mean the country is exporting less, but mainly that its GDP has grown. More and more Chinese products are now making their way into the hands of Chinese people themselves, when China used to be regarded as the world’s factory. Another factor is that wages have increased 3.5 times in China since 2008, compared to 1.5 times in Europe and the US.”
A similar pattern to the one for international trade emerges when it comes to Foreign Direct Investments, for instance when a company opens a new factory abroad. This form of international capital movement is regarded as a good indicator of future trade flows. “Up to 2008, there was an upward trend in terms of foreign direct investments. In the case of China, that line is rising further. In fact, the Chinese kept investing heavily in Asia and Africa in particular with their Belt & Road Initiative. When it comes to the US, the EU and the world as a whole, growth is levelling off. These figures confirm that the upward trend has been broken. That being said, Foreign Direct Investments figures also remain at a high level, and have not regressed to 1970s levels. Hence, the term slowbalisation seems more appropriate than deglobalisation.” The so-called China-plus-one strategy also militates against using the latter term. Many companies set up other factories in countries such as the Philippines, Taiwan or India in addition to their factory in China. That creates more production facilities and consequently more international trade.
More importantly, perhaps, the services sector is actually entering a period of globalisation. “Suddenly, services can be traded digitally now. Consider a Nairobi-based lawyer working for a tenth of the cost of a London lawyer, for example.” As a percentage of GDP, trade in services is still much lower than trade in goods at present. Nevertheless, the percentage is growing rapidly, particularly in Europe.
A lot of citizens and, by extension, politicians are still afraid to surrender sovereignty
Loss of momentum
The word slowbalisation indicates that the globalisation trend is losing momentum. International political developments also confirm that it does. “For example, it’s becoming more and more difficult to find a political majority for a new trade treaty. In Europe we’ve been taking years to ratify CETA, the trade treaty with Canada. Even though it’s a country that resembles Europe in many ways.” However, the momentum is waning because political relations have shifted compared to a few years ago, Knaap continued. “A lot of citizens and, by extension, politicians are still afraid to surrender sovereignty. Trump’s ‘America First’ is another example of this. In his first week as president, he withdrew from the Trans-Pacific Partnership, a potentially huge trade treaty between 12 countries around the Pacific Ocean that was said to total 40 percent of the global economy.” Consequently, during Trump’s presidency, the number of measures impeding international trade rose from some 500 to more than 2,000. In contrast, the number of measures promoting global trade remained well below 500.
According to Knaap, the fact that fewer trade agreements are being concluded now than before isn’t necessarily a problem. “As long as the existing treaties remain in place. What’s more dangerous is the fact that the institutions underpinning the existing trade treaties, such as the WTO, are increasingly struggling. The US refuses to appoint judges to that organisation, robbing it of its effectiveness. One possible consequence is that the provisions in trade treaties can no longer be enforced.” Incidentally, it’s difficult to pinpoint what the exact effects of a trade treaty are. “If citizens hear that a new treaty goes against their interests and then oppose it, are they wrong? You can’t deny that as a result of trade agreements, especially in the US, a lot of industries – and hence jobs – have moved to low-wage countries.”
Dollar dominance
Then there’s the role of the dollar, an indispensable linchpin of international trade for decades. The end of dollar dominance has been announced more than once, but to date the currency is still sitting on its solitary perch at the top. Will it stay that way during this period of slowbalisation? “The dollar’s share in international trade transactions is still very large, but it’s diminishing slightly,” says Knaap. “Payments are in euros more frequently nowadays, even by countries outside Europe. The role of the Chinese yuan is also increasing against the dollar, especially in Asian trade. China is also keen to pay with the yuan for its oil imports from Saudi Arabia.” What keeps the dollar’s position strong are US trade deficits. This always puts more dollars into circulation. These are still popular with trading partners, for investing in US stocks or debt securities. The yuan and euro lack those advantages for now.
The trade balance is one thing, but Knaap stresses that the financial system still runs on the dollar. “The tone for financial markets is still set by the Fed’s actions,” he says. “Apart from that, emerging markets borrow predominantly in dollars. Investments in emerging markets debt hard currency take place in the US currency. There’s no euro or yuan involved, and I don’t see that changing in the coming years. From time to time the narrative that the US is sinking as a dominant economic power is peddled around in excited tones, but its role still can’t be overstated.” After all, even though the Chinese and US economies differ little in size, the US’ role in the financial world still remains a bigger factor than any other country’s. And certainly even more so than China’s, with relatively little capital movement still taking place there. “So, I don’t think the dollar is going to lose importance in the short term. There’s just too little of other currencies in circulation internationally as yet. What’s more, it’s difficult to knock a dominant currency off its throne.”
Military superpower
Still, Knaap sees it as not entirely inconceivable that things could go wrong with the dollar one day. “The Americans do have to be reliable. If we as investors invest in US investment products that later turn out not to be sound, that poses a problem.” There’s also the regularly recurring hassle over the federal government’s debt ceiling. “According to the law, the US debt can become too large, and then no more interest can be paid on loans. Then you get the curious situation of the world’s richest country going technically bankrupt. If that happens, the damage is incalculable. This kind of development is obviously damaging to the dollar’s reputation.” Incidentally, the Americans have always been good at maintaining trust in the past, also because they’re a military superpower, Knaap concludes. “If you rely on the US to protect your country, you can put up with the financial risk that the dollar poses.”