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GlobalizationsLastGaspbyBarryEichengreenProjectSyndicate

BUSINESS&FINANCE
BARRYEICHENGREEN
BarryEichengreenisProfessorofEconomicsattheUniversityofCalifornia,Berkeley;
PittProfessorofAmericanHistoryandInstitutionsattheUniversityofCambridge;and
aformerseniorpolicyadviserattheInternationalMonetaryFund.Hislatestbookis
HallofMirrors:TheGreatDepression,theGreatRecession,andtheUsesandMisuses
ofHistory.

NOV17,2016

GlobalizationsLastGasp
LONDONDoesDonaldTrumpselectionasUnitedStatespresidentmeanthat
globalizationisdead,orarereportsoftheprocessdemisegreatlyexaggerated?If
globalizationisonlypartlyincapacitated,notterminallyill,shouldweworry?Howmuch
willslowertradegrowth,nowintheofing,matterfortheglobaleconomy?
Worldtradegrowthwouldbeslowingdown,evenwithoutTrumpinofice.Itsgrowthwas
alreadylatintheirstquarterof2016,anditfellbynearly1%inthesecondquarter.This
continuesapriortrend:since2010,globaltradehasgrownatanannualrateofbarely2%.
Togetherwiththefactthatworldwideproductionofgoodsandserviceshasbeenrisingby
morethan3%,thismeansthatthetradetoGDPratiohasbeenfalling,incontrasttoits
steadyupwardmarchinearlieryears.
Thisdisturbingtrajectory,arguethemavensofglobalization,relectstheresurgent
protectionismmanifestinpopularoppositiontotheTransPaciicPartnership(TPP)and
theTransatlanticTradeandInvestmentPartnership(TTIP),andnowinTrumpselectoral
victory.Itmeansthatthebeneitsofopennessandspecializationarebeingsquandered.
Causalityineconomicsmaybeelusive,butinthiscaseitisclear.Sofar,slowertrade
growthhasbeentheresultofslowerGDPgrowth,nottheotherwayaround.
Thisisparticularlyevidentinthecaseofinvestmentspending,whichhasfallensharply
sincetheglobalinancialcrisis.Investmentspendingistradeintensive,becausecountries
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relydisproportionatelyonarelativelysmallhandfulofproducers,likeGermany,for
technologicallysophisticatedcapitalgoods.
Inaddition,slowertradegrowthrelectsChinaseconomicdeceleration.Until2011China
wasgrowingatdoubledigitrates,andChineseexportsandimportsweregrowingeven
faster.Chinasgrowthhasnowslowedbyathird,leadingtoslowergrowthofChinese
trade.
Chinasgrowthmiracle,beneitingaifthoftheearthspopulation,isthemostimportant
economiceventofthelastquartercentury.Butitcanhappenonlyonce.Andnowthatthe
phaseofcatchupgrowthisoverforChina,thisengineofglobaltradewillslow.
Theotherengineofworldtradehasbeenglobalsupplychains.Tradeinpartsand
componentshasbeneitedfromfallingtransportcosts,relectingcontainerizationand
relatedadvancesinlogistics.Buteficiencyinshippingisunlikelytocontinuetoimprove
fasterthaneficiencyintheproductionofwhatisbeingshipped.Already,motorvehicle
manufacturersshipanautomotivetransmissionbackandforthacrosstheUSMexican
borderseveraltimesinthecourseofproduction.Atsomepoint,unpackingthat
productionprocessstillfurtherwillreachthepointofdiminishingreturns.
Soshouldweworrythattradeisgrowingmoreslowly?Yes,butonlyinthesensethata
doctorworrieswhenapatientrunsafever.Feverisrarelylifethreatening;rather,itisa
symptomofanunderlyingcondition.Inthiscase,theconditionissloweconomicgrowth,
alsoknownassecularstagnation,causedbydepressedinvestment,whichinturnrelects
inancialproblemsandpolicyuncertainty.
This,then,istheunderlyingcondition.TradeagreementsliketheTPPandTTIPaddressit
onlyobliquely.Increasedspendingoninfrastructurebygovernments,toboostinvestment
andgrowthdirectly,ismoretothepoint.ButwhethertheTrumpadministrationandthe
newUSCongresscandesignandimplementaprogramofproductiveinfrastructure
spendingremainstobeseen.
Moregenerally,apoliticalconsensusisneededongrowthpromotingpolicies,sothat
investmentisnotheldhostagetopoliticalinighting.Whetherthiswillbepossibleunder
Trumpsadministrationisanotheropenquestion.
Thestoryforcrossborderlowsofinancialcapitalisevenmoredramatic.Grosscapital
lowsthesumofinlowsandoutlowsarenotjustgrowingmoreslowly;theyaredown
signiicantlyinabsolutetermsfrom2009levels.
Butdramaticisnotthesameasalarming.Infact,itismainlycrossborderbanklending
andborrowingthathavefallen.Foreigndirectinvestmentinanciallowstobuildforeign
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factoriesandacquireforeigncompaniesremainsatprecrisislevels.Sodocrossborder
borrowingandlendingthroughstockandbondmarkets.
Thisdifferencerelectsregulation.Havingconcluded,rightly,thatcrossborderbank
lendingisespeciallyrisky,regulatorsclampeddownonbanksinternationaloperations.In
response,manybankscurtailedtheircrossborderbusiness.But,ratherthanalarming
anyone,thisshouldbeseenasreassuring,becausetheriskiestformsofinternational
inancehavebeencurtailedwithoutdisruptingmorestableandproductiveformsof
foreigninvestment.
WenowfacetheprospectoftheUSgovernmentrevokingtheDoddFrankActandrolling
backtheinancialreformsofrecentyears.Lessstringentinancialregulationmaymake
fortherecoveryofinternationalcapitallows.Butweshouldbecarefulwhatwewishfor.
http://prosyn.org/QMsmTaw
19952016ProjectSyndicate

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