The age of ‘Slobalisation’: What tectonic shifts in global trade means

The Economic Times, April 13, 2022

Nothing demonstrates globalisation like McDonald’s. Its burgers and fries retain a trademark flavour no matter where they are sold. Yet, the company does not shy away from embracing local tastes.

January 1990 was momentous for globalisation as McDonald’s opened its first outlet in the Soviet Union, signalling the then communist superpower’s desire to move towards a more open market. In 2022, the fast-food company temporarily closed its 850 outlets in Russia and 108 in Ukraine as the two countries battled each other, keeping pace with the recent phenomenon of “slowbalisation”.

Experts across the world have declared that after decades of economic growth, the world is now set for a period of slower global integration or slowbalisation. Former WTO chief Pascal Lamy said recently that the world has realised it has to take a lot more factors into account while doing global trade.

Though experts claim slowbalisation started after the 2008 global financial crisis, they point out that it has gained pace because of the Covid outbreak, the Russia-Ukraine war, spiralling costs of procurement through global value chains and a general tendency by several nations to tilt towards protectionist policies. In fact, some argue globalisation — often feted for helping poorer countries create wealth and get access to new tools and technology — is today under threat to a degree never experienced before. Time-tested models of trade flows are no longer relevant suddenly and are being redrawn or reshaped. This is slowing down the global economy.

Take the example of Europe, home of the world’s largest trading block, the European Union. The EU accounts for 16.5% of the world’s trade in goods, imports about 40% of its natural gas from Russia. But Russia’s invasion of Ukraine threatens this bilateral mechanism. Germany, Europe’s biggest economy, is already moving towards halting gas supplies from Russian Gazprom. The state-owned gas giant was a dependable supplier of natural gas to Germany for over 40 years. According to Reuters, Germany has cut Russian gas imports to 40% from 55% and oil to 25% from 35% before the invasion. The two nations’ arrangement was not just a win-win, but a shining example of globalisation at work. But now, the arrangement’s future is subject to strict West-led sanctions.

The global economy is riddled with such examples where trade equations are being realigned, and the trend is putting a heavy burden on the pace of globalisation.

Engines losing power

Experts also point out that key players in global trade are slowly losing the motivation to stay globalised. Partly because they suddenly have huge domestic issues to address first. For example, China, a key participant in global trade, has lately been battling fresh rounds of supply chain crisis. The country with a global trade share of nearly 15% saw its factory activity slump at the fastest pace in two years in March 2022. Further, widespread Covid outbreaks have forced major Chinese cities to impose lockdowns. Shanghai, the world’s busiest and largest container port, is under a strict lockdown. These signs indicate the “world factory” has to deal with economic, and probably even social, hardships first before looking at being a global player.

Another trade engine that is sputtering is Russia. As a former G8 member, it has been a leading player in shaping global trade. However, its invasion of Ukraine has made all major countries punish Russia by imposing sanctions to make it a pariah in global trade. This has put more pressure on the supply chains of a globalised world. Some experts say Russia — a key supplier of oil, gas, wheat, metals and fertilisers — is too big an economic player to be alienated from global trade.

Trade experts say the world has gained so much because of globalisation and nations must not lose that trade momentum. As several countries have deeper economic dependence on each other, the advantages of such an arrangement will make them renew their faith in a globalised world, assert economic pundits.

Keep the boat going

Lamy, who was also the European Commissioner for Trade, says while slowbalisation is real, the tangible and lasting gains of economic integration are too clear and vast to be ignored. He does not think deglobalisation is going to be irreversible. “To paraphrase Mark Twain, I think that the news of the demise of globalisation is greatly exaggerated. Understood, as a growing economic interdependence between countries, it keeps moving forward while morphing. Numbers tell us that its pluses — more services trade, more data exchanges — remain higher than minuses,” he says, adding that the US-China tensions, the negative impact of the Ukraine invasion will lead to some reshoring and decoupling.

Globalisation is “efficient and painful” and deglobalisation is “inefficient and painful”, he says. A deglobalised world would be more dangerous. Lamy’s recommendation is that we support globalisation while building a fairer balance between those who benefit and those who lose.

Not a recent phenomenon

History reveals that nations have tightened border controls to serve domestic interests first. Such moves have had ill effects but countries have reversed these policies after a while as they know a globalised world is better off, says June Teufel Dreyer, a professor at the Department of Political Science, University of Miami. Hopefully, history will repeat itself this time as well. “Globalisation was undone by the disillusionment that followed World War I. But then it returned with a conscious policy after World War II, with the founding of GATT, later WTO, the establishment of the World Bank, and such organisations,” she says.

As long as a crisis persists, countries may prefer a slowbalised world. “But when the crisis passes — eventually it will, though it may take a while, given current animosities — we will again realise the wisdom of the Law of Comparative Advantage (which argues that we are collectively better off if we export what we are best at and import commodities that others are best at),” she adds.

In India’s case, trade policy experts say, slowbalisation has been accompanied by factors such as greater protectionism through rising tariffs and new trade barriers. “The most striking in recent years is the shift in countries’ industrial policies towards security and away from the efficiency of supply chains,” says Nisha Taneja, a professor at the Indian Council for Research on International Economic Relations (ICRIER). On the downside, inequalities are expected to be on the rise in the coming years, she says.

Although global economic cooperation today remains on a shaky footing, several industry observers say sensible economics dictate that an interconnected world has better options for most people.

Economic drivers such as low cost and transport will continue to drive how operations and supply chains are distributed around the world, says Bhaskar Chakravorti, Dean of Global Business at the Fletcher School at Tufts University. “There is no question that the pandemic and major disruptions will cause sourcing, production, logistics and other operations to shift from their earlier locations. But for high-cost western economies to pull their supply chains into their own borders is just unrealistic. The competitive pressures to continue to look for efficiencies, superior cost structures and avoiding redundancies are just too strong,” he says. “Corporate memories are short and the market always wins.”

Multilateralism is more relevant now

Experts also reckon that the presence of the World Trade Organization (WTO) will keep a cap on incidences of countries breaching global trade obligations. There is a global movement claiming that entities such as the WTO and UN are not relevant anymore. But the principles these agencies were built upon are even more relevant in today’s fractured world.

“One must also appreciate the fact that building a consensus among 164 members of WTO is difficult,” says Rajan Sudesh Ratna, Deputy Head and Senior Economic Affairs Officer, United Nations ESCAP, South and South West Asia Office. “The Dispute Settlement Understanding of WTO is still a platform that has deterred many countries from violating their obligations and commitments. In my opinion, this phase is temporary and in a couple of years when full normalcy is reached, global trade will again reach new heights.”

How India is faring

Amid the chaos, experts see light at the end of the tunnel for India. The strength of the country’s domestic market has shielded it from economic turmoil and external shocks or protectionist measures of its trading partner, they claim.

Chakravorti says the country may even be able to gain from this chaos if it plays its cards well. The country’s labour force, for example, can be used to move the supply chain easily and India may even benefit a lot from industries such as automotive as the world looks for an alternative to China.

Taneja of ICRIER says India has been responding to the global changes in its own way. Atmanirbhar Bharat — the self-reliance vision of the government — is a mix of liberal and restrictive measures, she says. While on the one hand, tariffs on certain items have been raised, on the other hand, schemes such as the PLI have been put in place to encourage domestic investment and FDI inflows. “As supply chain vulnerabilities increase, India will have to make an attempt to identify items that are most vulnerable to supply chain disruptions and put a strategy in place to deal with these vulnerabilities,” she adds.

The need for safeguards

The Covid and Ukraine crises will not spare any country for a while. The focus should be on emerging nations’ human capital and workforce, says Pradeep S Mehta, Secretary General of think tank CUTS International. “Low-skilled workers are likely to be most affected due to slowbalisation. This is because the demand for the goods they produce is expected to fall, adding to more pressure to cut cost of production. Workers’ wages would take a further beating. Social security measures are mostly absent around the world and this will affect low-skilled workers facing job cuts.”

This is where multilateral organisations can play a crucial role. Several countries may not have enough food or fiscal space to ensure the basic needs of the poorer population are met. “United Nations’ programmes and bodies such as the World Food Programme and the International Labour Organization have to step up here,” says Mehta, adding that globalisation will return with fervour once the crises abates.

Till then, we have to ensure slowbalisation does not throw us off the path of economic progress and take away what we have gained from an interconnected global trade order, add trade pundits.

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