BY Christopher Dembik
The globalization process has clearly stopped. The evolution of international trade in volume is close to its lowest level, which is the best proof that globalization is not working so well anymore.
Not only this, but also the glorious period of the 2000s, which corresponds to a time of accelerated globalization as a result of financial deregulation and of general decline in trade barriers, is over.
There are two main reasons to explain why globalization is stuck in a dead-end street.
The first one is linked to the decisive influence of multinational corporations on political decision making since the end of WWII. They were the main supporters, from the beginning, of the globalization process and they strongly advocated for lower trade barriers and the signing of free trade agreements all over the world, such as the Mercosur in Latin America or the Association of Southeast Asian Nations (ASEAN).
Currently, they have less business interest in a global approach and favor a local approach instead which takes into account the local specificities, especially the cultural differences. This new position of multinational corporations has had a crucial impact on the path of globalization in recent years. However, it is probably not the most important point at stake.
What every investor needs to understand is that the rise of populism is the current main obstacle to globalization.
One of the main promises of globalization was to reduce inequalities. This promise was partly fulfilled. Globalization was a key factor in reducing poverty in emerging countries in the 2000s. In this respect, the best example is probably Brazil which has developed ambitious social programs for the poor, financed by the influx of foreign capital in the country. The problem is that in recent years, inequality has risen again, particularly in developed countries that were until now the most vocal supporters of globalization. Therefore, there is a disenchantment of a large part of the population and of the political class in rich countries, concerning the long term advantages of globalization.
Brexit is, in part, the direct consequence of this disenchantment. Statistics prove that the working class, that benefited less from globalization, were more inclined to vote in favor of Leaving than the middle and the upper class. Identitarian closure and rejection of globalization will certainly gain more ground in Europe and in the United States in the future. The Identitarian movement is a Pan-European socio-political movement which originated in France in 2002 by the far right youth movement.
A major risk is linked to the return of protectionism and higher trade barriers. Such a policy is clearly supported by Donald Trump in the United States as a retaliation measure against China.
It is exactly the same thing that Marine Le Pen, leader of the extreme right wing Front National, proposes in order to finance the return to a 39 hour working week for small and medium companies in France.
The problem is that such measures are based on a misdiagnosis of the economic situation. Supporters of protectionism and trade barriers believe that national economies can perform very well in complete autarky. It may have been the case 70 years ago, but it is not anymore.
Like it or not, economies are highly dependent on each other and connected through trade balance and investment. The implementation of protectionist measures would be an economic disaster because it would stifle growth.
Christopher Dembik is head of Analysis at Saxo Bank