International trade makes the world go around
Despite a huge financial crisis, the trend towards integration of the global economy has continued
Why has the global economy continued on its path towards integration?
Protection is the dog that did not bark. Despite a huge financial crisis, the trend towards integration of the global economy has continued. This is surely remarkable. So why has this happened? Will it last? And what still needs to be done?
Foreign direct investment and trade have risen far more rapidly than global output since 1990, with FDI rising faster even than trade. The FDI stock jumped from 9 per cent of world output in 1990 to 33 per cent in 2012; exports of goods and services went from 20 per cent of world output to 31 per cent.
By 2012, these ratios were even above where they had been before the crisis. As Arvind Subramanian and Martin Kessler point out in a thought-provoking paper, both trade and FDI are also substantially bigger, relative to global gross domestic product, than ever before, with goods and services increasingly freely traded.
“Hyperglobalisation” contributed hugely to emerging countries catching up with the living standards of high-income nations in the “great convergence”.
So: “Until the late 1990s, only about 30 per cent of the developing world (21 of 72 countries) was catching up with the economic frontier (the US), and the rate of catch-up was about 1.5 per cent per head per year.” The authors continue: “Since the late 1990s, nearly three-quarters of the developing world (75 of 103 countries) started catching up, at an accelerated annual pace of about 3.3 per cent per head. Although developing country growth slowed during the global financial crisis (2008-2012), the rate of catch-up . . . remained close to 3 per cent.”
Protectionism, inevitably, emerged in the years of crisis. But it is remarkable how limited it has been: look at the recovery of world trade in 2010. Why has it been possible to resist protectionism? I would suggest five explanations.
World Trade Organisation
First, liberal trade is institutionalised in the World Trade Organisation and a number of trade pacts, not least the EU. Second, despite failures, notably in the euro zone, monetary and fiscal policies have been incomparably better than in the 1930s. Third, global capitalism has increasingly replaced national capitalism. Businesses are no longer on the same side as their workers. Fourth, the ideology of markets and globalisation remains dominant. Finally, the social safety net, albeit tattered, shields people from the worst results of joblessness.
Can one assume, then, that globalisation is irreversible? No. Its progress seems likely, driven as it is by ideas, interests and technology. Yet there are also threats, some coming from outside the trading system and others from within it.
One external threat is global imbalances. Policies aimed at export-led growth impose contractionary pressure on trading partners, particularly in times of deficient aggregate demand and ultra-low interest rates. In the last decade, we have seen the largest and most persistent exchange rate interventions ever.
Another threat may come from global environmental externalities. Suppose some countries imposed taxes on emissions of carbon dioxide, the goal being to reduce a global ill. If production shifted, that aim would not be achieved. The argument for countervailing taxes on imports would then be strong. Cycles of retaliation might well follow.