Growth in first gear: What’s next for globalization?

Last year, headlines trumpeting omens such as “Globalization is dead” and “Slowbalization” warned that, for trade, winter was coming. Yet aside from the escalating conflict between the U.S. and China, the gloomy predictions for 2019 didn’t come to pass.

Instead, the year was largely marked by a tense, fragile stability. Despite the drama of Brexit with its attendant cliffhangers, the U.K. and the Eurozone continued to grow. Nevertheless, economic growth faced challenges including tariffs, lower manufacturing activity and lower investment, leading to slackened growth in emerging economies.

By the autumn, institutions were sounding a warning. In October, the International Monetary Fund (IMF) reported, “Global growth is forecast at 3% for 2019, its lowest level since 2008-2009, and a 0.3 percentage-point downgrade from the April 2019 World Economic Outlook,” and cited rising trade barriers and geopolitical tensions.

News on the trade front was mixed. There was good news, as the historic “cars for cheese” deal between the EU and Japan came into effect. In reaching a deal with Vietnam, the EU also established its most ambitious free trade agreement to date with an emerging economy. The African Continental Free Trade Agreement took force. There is also hope that the Association of Southeast Asian Nations (ASEAN) plus Australia, New Zealand, Japan, South Korea and China – and possibly India – will sign the Regional Comprehensive Economic Partnership, which would encompass about 40% of the global economy.

But as more people question the advantages of such trade deals, politicians are increasingly listening to their concerns. Mexico ratified the U.S.-Mexico-Canada agreement to update the North American Free Trade Agreement (NAFTA), but in the U.S., lawmakers debated its benefits. Last summer, the EU made a trade pact with Mercosur – Argentina, Brazil, Paraguay and Uruguay – and the deal now faces hurdles in the ratification process.

But the biggest source of alarm was the escalating conflict between the U.S. and China. This trade war dominated the news in 2019, with waves of mutual tariffs, not to mention the arrest of Huawei’s executive and an order tweeted by President Donald Trump that U.S. firms should “immediately start looking for an alternative to China, including bringing your companies HOME and making your products in the USA.” The IMF reported in summer of 2019 that the U.S.-China trade tensions would cumulatively reduce the level of global GDP by 0.8% by 2020.

In a surprising turnaround, China and the U.S. reached an agreement to sign a “Phase One” trade deal in January 2020.

Some experts had been sanguine about reconciliation for some time. “I’m optimistic that the U.S. and China will sort out their relationship in 2020 and that it’ll be quick; that if tariffs are removed, there will be a big bounce to international sea freight,” said John Manners-Bell, chief executive of research institute Transport Intelligence. He expects a surge in freight volumes to define 2020. Otherwise, he says, it could be a similar year to 2019, marked by slower growth. “I don’t expect a global recession – the major economies are not falling back even if they are not forging ahead.”

Manners-Bell does not believe that globalization is grinding to a halt, nor that it will be replaced by regionalism – although he notes that supply chains are changing, and those changes will bring other benefits. Any localization trends – away from shipping, for example – will help domestic road freight. “We’re looking at a reshuffle and a rejuggle,” he says, “rather than bad or good news.”

Likewise, Brexit, another main concern in 2019, will not create problems on the scale that many fear, according to Leonard Winters, Professor of Economics and Director of the U.K. Trade Policy Observatory at the University of Sussex. “Brexit is small for the world stage, although for Britain it is massive and extreme,” he points out. Likewise, he said, although many worry about the U.S. president’s policymaking style, he urges calm. “Trump is unpredictable but within a fairly narrow band.”

The recent update of DHL’s Global Connectedness Index (GCI) underscores the difference between the noise around globalization and what is actually happening. The Index – issued in full every two years and as a first this year in a compact interim update – analyzes the flows of trade, capital, information and people. It seeks to measure the depth and breadth of globalization by analyzing these four pillars and the components within them.

The data from the past year suggests that, despite manifold fears, the world’s level of connectedness remains robust. While shrinking capital flows pulled the index down from its historic high in 2017, the flow of goods, information and people continued to intensify in 2018. As the report puts it: “The world is still more connected than at almost any previous point in history.”

In particular, trade flows remained surprisingly resilient as tensions escalated during 2018. According to the GCI update, however, early data suggests that this did not extend into 2019. In the first half of 2019, there was a decline in the proportion of global output traded internationally. Nevertheless, Steven Altman, the report’s lead author and Senior Research Scholar at NYU Stern School of Business, notes that such changes should be seen in historical context. “Any dip in 2019,” he says, “looks small compared with how much trade flows have intensified over the past decades.”

The GCI also sheds light on misconceptions around trade. For example, the report notes that only 21% of all of the economic output generated around the world is actually exported – although the proportion of foreign labels on store shelves seems to be much higher. The key reason behind this phenomenon is that the service sector – which is much less globalized than goods-producing sectors – dominates most modern economies. Indeed, the data suggests potential for greater globalization.

There is also potential for growth. The IMF has predicted a 3.4% increase for the global economy in 2020 and recently indicated that officials could raise this forecast if the U.S. and China reach a deal to ease tensions on trade. And Altman notes that, after anemic trade growth in 2019, most forecasters expect at least some acceleration in 2020.

Despite the uncertain environment, the global outlook remains relatively positive. “A number of the issues this year have been cyclical. The EU economy will eventually pick up,” Winters says. “We must avoid panic just because things aren’t growing as fast as they did up until 2012. It doesn’t mean we’re going to hell in a handbasket.”  —  Allison Williams

Published: January 2020

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