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Is local the new global...?

What do the Federal Open Market Committee (FOMC), the refugee crisis and Volkswagen’s new Chief Executive all have in common? 

At first glance, not much. The FOMC sets US interest rates, the refugee crisis is the result of geo-political conflict and, to put it mildly, the new Volkswagen Chief has just taken on probably the world’s biggest poisoned chalice as he embarks on the process of re-building its, indeed Germany’s, technological and manufacturing reputation..

A slightly more considered look at all three yields one common theme: the new face of globalisation. Globalisation is, and always has been about the interconnectedness between individuals and nations caused by increased trade, and of course, enabled by the advance of information technology. Yet what we have been watching over the past few years, arguably since the global financial crisis, has been a materially different phase of globalisation. 

For economists, and at the risk of repeating myself, the biggest puzzle has been the slow-down in global trade, from 14% in 2010 to around 2% in 2015.  It can no longer be taken for granted that trade will grow at, roughly, two and a half times the rate of GDP growth, for example and while to a non-economist this is monumentally unexciting, it does mean that we need to re-assess what is happening with globalisation in order to understand how to formulate policies, and effective business strategies, to deal with it.

This is not to say trade isn’t growing: the total value of trade going around the world is worth well over $18 trillion a year.  But this is lower than most economists were expecting just five years ago and the three examples tell us why we need to look at globalisation differently. 

First, the slowdown in trade is symptomatic of the very problem that the FOMC was grappling with during September when it was deciding whether or not to hike rates for the first time in almost nine years. At its simplest, the Fed decided that the slowdown in China, lagging global demand and the threat of global deflation were bigger threats to the US economy than any inflationary pressures domestically.  This consideration could well keep rates on hold for some time to come as there is no sign from China yet of things picking up.

Second, the refugee crisis is a humanitarian crisis that is caused by the interplay of economics and geopolitics.  The crisis was geopolitical in origin but Syria’s trade has slumped by 20% annually over the past five years and is now, except in a few areas of agriculture, practically at zero.  As a result, GDP is between 38% and 48% of its 2010 levels and poverty is estimated at above 82% of the population.  A drop in trade is an early indicator of the severity of a geopolitical crisis; the collapse in trade has meant that Syria’s economy is no longer part of the globalised economic system and the impact on its people is plain to see.

To the third example: Volkswagen.  Volkswagen embodies globalisation but make no mistake, the effects of this will impact the German export engine.  Volkswagen accounts for nearly 10% of cars sold globally. My calculations suggest that German exports of cars to the US could fall by as much as 3% in 2015 and by over 2.5% globally this year representing a loss of some $3.7bn to the German economy.

Berenberg Bank economists estimate that the total impact will be a loss of German GDP of around 0.2% which isn’t much. But just before everyone starts to think that this is the ideal way of closing Germany’s trade surplus with the rest of the world, think too of the impact on global markets.  Commodity prices (particularly copper) fell as the full weight of the VW crisis was digested and the Dax Index led other global equity markets lower.  More than this, it is likely that global regulations will tighten even as the EU is claiming that - although it was aware of the VW technology to avoid emissions compliance two years ago - responsibility for the oversight of regulations falls at a national rather than a regional or global level.  Would they have been able to argue this under TTIP (Transatlantic Trade and Investment Partnership), I wonder?

This last point is actually the most important. Globalisation exists through trade, but more importantly through the way in which trade flows around the world.  Trade finance, arguably, contributes to the way in which economic contagion is spread around the world: as we are seeing in Greece, the drop in imports is linked strongly to the near 7% drop in export finance from Europe to Greece. Yet trade itself, is affected by geopolitics which, in turn is arguably a struggle between and within countries as well as a struggle for global power. Global structures, like the WTO, are less capable of dealing with the unforeseen consequences of greater complexity and the response is more regional and targeted trade agreements, such as the Trans-Pacific Partnership and TTIP.

In other words, economic and the geopolitical consequences of globalisation are playing out at a regional and, increasingly, national/local level.  As with the case of the FOMC – global deflation was more worrying than national inflation; as with the case of Syria – geo-economics and geopolitics create a crisis between nations that should be dealt with globally but that is national in impact; and as with the case of VW – a global business whose sheer size gives it the confidence to develop technologies that circumvent national regulatory requirements with potentially devastating environmental consequences. Global structures are insufficient to deal with this reality and that presents a huge risk to everyone.

But are we anti-globalisation?   Definitely not!

I won’t be signing up for the anti-globalisation campaign any time soon, however. Global integration and shared economic interests are, arguably, far better weapons against Mutually Assured Destruction than any nuclear deterrent. 

That said, we are dealing with a new reality of the post-financial crisis global era.  The world is more, not less connected.  These connections, while global in reach are national, even local, in impact.  Monetary policy is no longer formulated in a national context alone;  similarly national policies to deal with the refugee crisis are wholly inadequate until they consider that geopolitical and geo-economic migrants may well be a feature of the global social framework, and nationally formulated regulatory structures (whether financial or technical) should incorporate the burgeoning powers and global reach of business.

Localisation may well be the next phase of globalisation. Our current structures are inadequately equipped to deal with the consequences.

 

 

 

 

 

 

Liveryman Dr Rebecca Harding

Independent Economist