From globalization to deglobalization: Zooming into trade

1. Globalization as cornerstone of international economics turning the page

As probably the most prominent economic process in the 21st century, globalization has attracted wide research interests and considerable support from academia for many decades, especially after the Second World War. There are many benefits which economic research has attributed to globalization, from higher economic growth to poverty reduction and even lower inflation. For instance, Khan & Riskin (2001) finds that China’s poverty reduction can be attributed to the opening up of its economy. What’s more, Rogoff (2003) argues that the globalization process helps push down inflation and any reversal of the free flow of production factors will re-introduce price pressure. In addition, Tomohara and Taki (2011) put forward that globalization brings higher wages for local employers as foreign companies are given market access.

2. The US-China trade war

To understand the trade war and its implications, a good starting point is to review the actions taken by both sides so far. From seemingly untargeted measures announced in early February 2018 for solar panels and washing machines, the US has been moving in increasingly targeted direction against China and away from current global status quo. The most obvious instance of this was the announcement of 25 percent additional import duties to be applied to $50 billion equivalents of imported goods from China on the basis of China’s infringement of intellectual property rights. More importantly, about two thirds of those import tariffs have been applied since 6 July 2018. The speedy introduction of the announced import tariffs by the US, without allowing much time for negotiation of a deal between China and the US, shows that the US resolution to change global trade flows, at least as far as China is concerned. On that basis, China had no choice but to retaliate with equivalent import tariffs on US goods.

3. From tariffs to other types of protectionism

Apart from trade measures, the US has leveraged several other weapons against China. Most notably, on December 1, 2018 the arrest of Huawei’s chief financial officer took place in Canada at the US request, based on a potential breach of sanctions against Iran. This case testifies the US’ intention to weaponize its current hegemonic position as a rule setter. As the national champion in China’s telecommunication sector, Huawei has attracted multiple restrictions on top of the arrest. For instance, the US has tightened its control over technology transfer into China and, in particular Huawei, by placing this company into the US entity list, which effectively forbids US companies to conduct business with this company. In addition, many countries have voiced out concerns of privacy and Chinese spy suspicion for the 5G & smartphone manufacturer to harness its growth and the outlook of China’s Information and communications technology development. As such, the sniped Huawei symbolize the deterred process of technology globalization, which will in turn drive fragmentation of investment, manufacturing and employment.

4. The demise of the WTO and its implications

The WTO has become increasingly dysfunctional during the last few years and, in particular, since the arrival of President Trump to power. Three main reasons can be identified. First, the increase in membership has brought about heterogeneity as more emerging countries joined the club. This is clearly shown by the lack of agreement on concluding the Doha round of trade liberalisation measures, which launched in 2001. Second, some new members, especially China but also Vietnam, are still state-led planned economies, a model the WTO rules have not been designed for. Third, under the Trump administration, the United States has clearly turned its back on the WTO as an institution that can solve the US’s perceived trade problems. A further decision by President Trump that unsettled the global trading community in 2018 was the announcement that (continuing a policy initiated by President Obama) the US would block re-appointments to the WTO’s appeals panel, on the grounds that the appellate body took too long to reach decisions and tended to overreach. At the time of writing, the appellate body is down to only three members (out of seven) of which two will end their terms in December 2019. If the US administration continues to refuse new appointments, the WTO’s dispute settlement mechanism will no longer be able to function. This threat comes two sides: President Trump’s profound disdain for multilateralism, and China’s state-led system, which is not compatible with the liberal nature of the global trading system and might have weakened the WTO’s foundations. China has influenced the WTO’s rule setting, which is intended to ensure a level playing field. In fact, it has become increasingly clear that the existing rules governing the WTO cannot adequately control the use of non-market measures designed to favour a specific trading partner (namely China) over others. To this end, several proposals have been made to re- form of the WTO, including from the European Union, but none of them can really accommodate both China and the US under the same umbrella. The most likely scenario is for the WTO to become a zombie institution as the US disengages further. Should this scenario materialize, the pale international negotiation mechanism will become incapable of mediating international trade disputes and building multilateral trust, driving economies to seek their own leverages and solutions.

5. Some tentative conclusions

After decades of increasing globalization both in trade, capital flows but even people to people movements, it seems the trend has turned towards deglobalization. This article shows some evidence of the decrease in merchandise, capital and, to a lesser extent people to people flows. In addition, zooming into trade, the article offers an account of the importance of the strategic competition between the US and China to foster the deglobalization trend further. This is true for trade but even beyond in the tech and finance space. Finally, the demise of the WTO could be one of the most relevant turning points towards deglobalization, especially as far as trade is concerned. This should bring downward pressure to growth globally.

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