Economy, explained.
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The G7 meeting comes at a time when economic globalisation is widely said to have stalled, if not moved into reverse, but there is plenty of data that suggests otherwise.
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No, wait! Globalisation makes a comebackNo, wait! Globalisation makes a comeback
The hilltop Sicilian town of Taormina is best known for its medieval buildings, the ruin of an immense Roman theatre, a disturbing view of Mount Etna smoking nearby, and a pasta sauce made with eggplant. In recent weeks the tourist town has also been cluttered by bored, heavily armed carabinieri as it prepares to host the first meeting between US President Donald Trump and other leaders in the G7.
Once the rules committee for economic globalisation, the G7 has long been superseded by the far more inclusive G20. On Friday, the leaders of Western Europe, the UK, Canada and Japan will hope to regain relevance for the G7 by drawing Mr Trump into the usual affirmations of the importance of economic openness, trade and cross investment. That, after all, is why G7 exists.
Their chances are not good. In a troubling portent, the US last weekend vetoed a final press statement from the APEC trade ministers in Hanoi. In Vietnam, it was 20 to one against the US on free trade and resisting protectionism. While the Hanoi debacle has been overlooked, a six to one line-up against the US in the telegenic surrounds of Taormina would be a bigger story. Like the line-up in Hanoi, it would demonstrate the increasing isolation of the rhetoric of the Trump administration from that of America’s closest allies on issues of economic globalisation.
The G7 meeting comes at a time when economic globalisation is widely said to have stalled, if not moved into reverse. ‘Whatever Happened to Free Trade?’ asked the Wall Street Journal on 29 March, as part of series of pieces titled ‘Globalization in Retreat’. As the Journal pointed out, nine years after the financial crisis, global trade is barely growing compared to GDP, international capital flows are well down, and immigration into the rich countries faces a ‘deepening backlash’.
Last year the United Kingdom voted to leave the European Union, and Donald Trump was elected President on an ‘America first’ platform of hostility to migration and trade. The two English-speaking nations that can rightly claim to have led economic globalisation through the last half century have both queried their economic direction. The global economic order underpinning globalisation, it is sometimes said, is crumbling for want of American leadership.
What about the last 50 years?
If globalisation was indeed stalling or reversing, the implications would be startling. Led by cross border trade and investment, global output has increased more than six fold over the last half century. As a share of that global output, exports have nearly tripled, and cross border direct investment has increased seven fold. A global economy once based on America, Europe and Japan has expanded through trade and investment to include Asia, South America, Eastern Europe, much of the Middle East and now Africa.
Australia is an exemplar. Australia’s exports have grown markedly faster than GDP over the last 20 years, and accounted for around one quarter of the growth of GDP in the period. Foreign direct investment in Australia and direct investment abroad by Australian businesses are both very strong. Foreign direct investment in Australia is now worth $850 billion. Australia’s businesses offshore direct investment is now over $600 billion, three quarters of the value of foreign direct investment in Australia.
Yet for all the pessimistic reports, the evidence that economic globalisation is stalling - let alone retreating - is not the least compelling.
On World Bank numbers, world exports as a share of world GDP were 29.5% in 2015, somewhat below the 31% in 2008 but otherwise higher than any year before 2005. The small decline of global exports to global GDP compared to the recent peak is more than explained by the sharp decline in exports as a share of China’s GDP. (Using World Bank data, in 2006 China exported a hefty 37% of GDP. By 2015 that was down to 22%. Since China accounts for roughly one quarter of global GDP, the fall in exports to GDP there could account for a nearly 4% decline in the global figure).
Over the same period other countries increased their export shares. Germany, for example, was exporting 47% of its GDP in 2015, its highest share to that time. The US was also doing well. Between 2006 and 2015 its exports increased by two percentage points of GDP.
The declining growth of China’s exports is not due to retreating globalisation. Much is due to a change in China’s priorities towards domestic development, consumption, and services.
Moving beyond the GFC
And while it is true that export growth has been weak since the financial crisis, there is some evidence global trade in now picking up. Earlier this month, the World Trade Organisation reported ‘sustained momentum’ in global trade in the second quarter. Its trade index reached its highest level in six years, and pointed to further increases.
Global capital flows are certainly well down compared to the years immediately preceding the 2008 crisis, but much of that is the intended (and desirable) outcome of tighter regulation. Banks have been restrained from speculating on their own account. Lenders have also been reminded of risk.
The cross border capital flow most closely associated with globalisation – foreign direct investment in businesses – has been rising quite strongly. In 2015 FDI increased as a share of global output. It was below the peak in 2007, but well above the shares of GDP reached in the 1990s, or any time before.
Despite the stance of the Trump administration, globalisation does not appear to be in retreat in the US. Not only is the US economy enjoying one of the longest upswings since World War Two, with unemployment down to the rate last achieved (briefly) before the financial crisis. US exports are doing particularly well. The share of exports in US GDP in 2015 was a little down on the all-time records of 2011 and 2013, but it was equal to 2008, and otherwise far higher than at any previous time in US history.
Nor is a retreat from globalisation evident in US cross border direct investment. The value of foreign direct investment in the United States increased by half in the years from 2007 to 2015. The value of US direct investment in other countries increased by nearly three quarters. On the latest US numbers and using an expenditure measure, foreign direct investment in the US increased 68% in 2015, compared to the previous year.
No sign of stalled global engagement here
In the case of Australia, there is no sign whatsoever of stalled global engagement. Exports have growth briskly, inward and outward direct inflows have been strong. The number of foreign tourists in Australia and the number of foreign students has never been higher. In trend terms the number of permanent and long term arrivals in Australia is a little below the peak reached four years ago, but well above the trend level in 2008 or any time before it.
If globalisation is retreating, China has not been told. Exports as a share of GDP may be well down, but China’s direct investment abroad is well up. In 2016 China's direct investment offshore increased by 44% compared to 2015. It is weaker so far 2017 but in the previous two years China’s direct investment abroad was running at twice the levels reached before.
Along with trade and investment, global output growth has firmed. It has picked up in the European Union, often regarded as a lagging region. US output growth has been so consistent over the last eight years that unemployment is now very low and wages are rising. In Japan, China, Korea, South-east Asia, Brazil and Russia, growth this year is looking better than last.
Much of the gloom about globalisation arose from Trump’s election on a platform that was not only anti-immigrant but also highly critical of China and Mexico, big exporters to the United States. In office, President Trump has continued to talk the talk but hasn’t done much of substance to change US trade policies, other than to withdraw from the Trans Pacific Partnership negotiation. Nafta renegotiation has commenced but looks very much like the usual style of trade negotiation. The US has not placed punitive tariffs on Chinese imports, or done anything much by way of trade policy not routine in previous administrations.
In Britain, Prime Minister Theresa May insists that while the UK will withdraw from the European Union, it is not withdrawing from trade and investment with the world. And in France, despite prognostications that the anti-EU and anti-Euro Marine Le Pen could be elected president, the winner was a candidate committed to a still closer European Union and to the common currency.
The APEC debacle
But what has undeniably changed about globalisation is US participation in the rhetoric that supports it. That was vividly on display in Hanoi last weekend. In a very rare mishap, trade ministers from the 21 nation-member APEC group were unable to agree on a press statement at the end of their weekend meeting. According to Reuters, 20 did agree on the statement, but the US Trade Representative Robert Lighthizer vetoed it.
The draft statement would certainly have seemed provocative to the US delegation. In an early version it declared that ‘there are increasing numbers of people questioning the benefits of globalisation and free trade’, a statement Lighthizer may have taken to refer to his boss, President Trump.
According to the Reuters report, the US vetoed a reference to ‘protectionist trends that could have strong impacts on the process of global economic recovery and economic integration’. Instead it wanted to mention ‘unfair trade practices that result in unbalanced trade’ and call for the removal of barriers that distort trade to ensure that it is ‘both free and fair’. Reuters reported an official saying that the ‘United States did not want to have the word 'protectionism' but the other 20 economies wanted to include that’. There had been, Vietnam’s Trade Minister said, some ‘differences of opinion’.
The astonishing thing is not that Lighthizer rejected some of these formulations, but that the US allies at the APEC meeting evidently did not insist on a form of words that would accommodate US sensitivities. Trade ministers from Australia, Canada, New Zealand, Singapore and Japan were all there in Hanoi, and had so little sympathy for the US position they were apparently prepared to let Lighthizer dangle.
Earlier this year, the US had fights within the G20 and G7 finance ministers’ meetings, also over the wording of trade statements.
At Taormina the Europeans, Japan and Canada will expect the routine affirmation of resistance to protectionism and of the importance of cross border trade and investment.
The debacle in Hanoi is easily overlooked. Not so the outcome of a meeting between President Trump and his fellow G7 leaders in the full glow of hundreds of television cameras and reporters, against the backdrop of irresistibly telegenic town.
No statement from the G7 will help or hinder the forces of globalisation, which are indifferent to press communiqués. But another collision between what the rest of the world thinks about trade and what Mr Trump is prepared to go along with would isolate the US within the G7, an outcome unimaginable only a short while ago.
John Edwards
About the author
John Edwards
John Edwards is a Nonresident Fellow at the Lowy Institute and an Adjunct Professor with the John Curtin Institute of Public Policy at Curtin University.
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