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The forward march of globalisation has paused since the financial crisis,
giving way to a more conditional, interventionist and nationalist model. Greg
Ip examines the consequences.
FIVE YEARS AGO George W. Bush gathered the leaders of the largest rich and
developing countries in Washington for the first summit of the G20. In the face
of the worst financial crisis since the Great Depression, the leaders promised
not to repeat that era s descent into economic isolationism, proclaiming their
commitment to an open global economy and the rejection of protectionism.
They succeeded only in part. Although they did not retreat into the extreme
protectionism of the 1930s, the world economy has certainly become less open.
After two decades in which people, capital and goods were moving ever more
freely across borders, walls have been going up, albeit ones with gates.
Governments increasingly pick and choose whom they trade with, what sort of
capital they welcome and how much freedom they allow for doing business abroad.
Virtually all countries still embrace the principles of international trade and
investment. They want to enjoy the benefits of globalisation, but as much as
possible they now also want to insulate themselves from its downsides, be they
volatile capital flows or surging imports.
Globalisation has clearly paused. A simple measure of trade intensity, world
exports as a share of world GDP, rose steadily from 1986 to 2008 but has been
flat since. Global capital flows, which in 2007 topped $11 trillion, amounted
to barely a third of that figure last year. Cross-border direct investment is
also well down on its 2007 peak.
Much of this is cyclical. The recent crises and recessions in the rich world
have subdued the animal spirits that drive international investment. But much
of it is a matter of deliberate policy. In finance, for instance, where the
ease of cross-border lending had made it possible for places like America and
some southern European countries to run up ever larger current-account
deficits, banks now face growing pressure to bolster domestic lending, raise
capital and ring-fence foreign units.
World leaders congratulate themselves on having avoided protectionism since the
crisis, and on conventional measures they are right: according to the World
Trade Organisation (WTO), explicit restrictions on imports have had hardly any
impact on trade since 2008. But hidden protectionism is flourishing, often
under the guise of export promotion or industrial policy. India, for example,
imposes local-content requirements on government purchases of information and
communications technology and solar-power equipment. Brazil, which a decade ago
compelled its state-controlled oil giant, Petrobras, to buy more of its
equipment from local companies, has been tightening restrictions steadily
since. And both America and Europe imposed, or threatened to impose, tariffs on
Chinese solar panels, alleging widespread government support. At the same time,
though, Western countries themselves offer hefty subsidies for green energy at
home.
Capital controls, which were long viewed as a relic of a more regulated era,
have regained respectability as a tool for stemming unwelcome inflows and
outflows of hot money. When Brazil imposed a tax on inflows in 2009-10, it was
careful to emphasise that not all foreign investment was unwelcome. Nobody
here is rejecting people that want to invest in our ports or our roads, says
Luiz Awazu Pereira, a deputy governor at the central bank. But if you are here
just because you are running an aggressive hedge fund and noticed that our
Treasuries pay 10% while US Treasuries pay zero, this is a less desirable
outcome.
The world has not given up on trade liberalisation, but it has shifted its
focus from the multilateral WTO to regional and bilateral pacts. Months before
Lehman Brothers failed in 2008, the WTO s Doha trade talks collapsed in Geneva
largely because India and China wanted bigger safeguards against agricultural
imports than America felt able to accept. Shortly afterwards America joined
talks to form what is now called the Trans-Pacific Partnership, which also
includes Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New
Zealand, Peru, Singapore and Vietnam. Barack Obama has held up the TPP as the
sort of agreement China should aspire to join.
The trend in foreign direct investment, too, is still towards liberalisation,
but a tally by the UN Commission for Trade and Development shows that
restrictions are increasing. Last December Canada allowed a Chinese state-owned
enterprise to buy a Canadian oil-sands company, but suggested it would be the
last. When we say that Canada is open for business, we do not mean that Canada
is for sale to foreign governments, explained Stephen Harper, the prime
minister.
The flow of people between countries is also being managed more carefully than
before the crisis. Borders have not been closed to immigrants, but admission
criteria have been tightened. At the same time, however, many countries have
made entry easier for scarce highly skilled workers and for entrepreneurs.
Mr Obama sees globalisation not as something to be stopped but to be shaped in
pursuit of broader goals. He wants other countries to raise their standards of
labour, environmental and intellectual-property protection so that American
companies will be able to compete on a level playing field and, perhaps, pay
decent middle-class wages once again. When a clothing factory collapsed in
Bangladesh in April, killing more than 1,000 people, Mr Obama suspended America
s preferential tariffs on many imports from Bangladesh until it improves
workers rights.
A clear pattern is beginning to emerge: more state intervention in the flow of
money and goods, more regionalisation of trade as countries gravitate towards
like-minded neighbours, and more friction as national self-interest wins out
over international co-operation. Together, all this amounts to a new, gated
kind of globalisation.
A state of imperfection
The appeal of gated globalisation is closely tied to state capitalism, which
allowed China and the other big emerging markets India, Brazil and Russia to
come through the crisis in much better shape than the rich world. They proudly
proclaimed their brand of state capitalism as superior to the Washington
consensus of open markets and minimal government that had prevailed before
2008. But the system also covered up structural flaws that are now becoming
more obvious. In China, state-owned enterprises and state-directed lending have
siphoned credit from the private sector and fuelled a property bubble. In India
and Brazil, inadequate investment in infrastructure has resulted in rising
inflation and sharply slowing growth.
The globalisation in the West before 2008 certainly had its flaws. The belief
that markets were self-regulating allowed staggering volumes of highly levered
and opaque cross-border exposures to build up. When the crisis hit, first in
America, then in Europe, the absence of barriers allowed it to spread
instantly. Voters, who had never been keen on wide-open borders, took this
badly, and support for anti-globalisation parties grew.
A few constraints on global finance are not necessarily a bad thing. Limiting
banks foreign-currency borrowing, as South Korea has done, makes them less
likely to fail if the exchange rate falls. But gated globalisation also carries
hidden costs. Policymakers routinely overestimate their ability to distinguish
between good and bad capital, and between nurturing exports and innovation and
rewarding entrenched interests. The opening up before the crisis had done
wonders for channelling capital to the best investment opportunities, lowering
prices for consumers and promoting competition. Interfering with this process
reduces a country s growth potential.
This special report will seek to answer two big questions. Is gated
globalisation merely a pause on the path to more openness, or is it here to
stay? And is it, on balance, a good or a bad thing? The report will look at
finance, capital controls, international trade and protectionism in turn to see
how gated globalisation affects them for good or ill. Start with finance.