means many things–migration, the exchange of ideas and culture, and trade and cross-border
capital flows, to name a few. Increased trade tensions, especially between the US
and China, have shined the spotlight on the topic and raised the questions, “Is
the end of globalization at hand?” and “What are the implications for investors?”
we define globalization narrowly to mean trade in goods and services and
suggest that the dramatic rise in global trade flows (especially manufactured goods)
witnessed over the past three decades may have reached its zenith. We argue that
this is not a new phenomenon or related only to recent trade tensions, but
rather the continuation of a trend underway since the global financial crisis
If globalization has been waning for years, what
is the worry?
think these trends may have far-reaching implications for global growth potential
and especially for emerging market economies (EMs) and their existing growth
models. The globalization and export-oriented growth models
of many EMs have been credited as key contributors to rapid growth in per
capita incomes in EMs, especially following China’s accession to the World
Trade Organization in 2001. Of course, these externally based models have been
accompanied by better domestic macroeconomic management too, including the deepening
and opening of domestic financial markets, increased competition, and perhaps
more importantly, an increase in foreign direct investment (FDI) that has
transferred technology to EMs and improved productivity. These developments have
helped lift millions out of poverty and increased the potential growth of the
world economy, led by EMs (Figure 1). Reinforced by a dramatic decline in
transportation and communications costs, the rise of global value chains (GVC) has
led to the segmentation of the manufacturing process in which production is
allocated to various countries based on cost minimization.
Figure 1: Export
growth and per capita income
Downward trend in
foreign direct investment and trade
However, since the global financial crisis, we have seen a discernible downward trend in FDI flows to EMs and global trade in general. FDI to EMs has plateaued in recent years and the world is now trading less for each unit of GDP it produces than it did before the financial crisis. We attribute this secular decline in “trade elasticity” to several factors:
- The composition
of world gross domestic product (GDP) is changing, led by China’s rebalancing
away from investment toward consumption, but also due to globally weaker
investment since the financial crisis. Because investment tends to have a
larger import content than private consumption and government spending, trade
flows are also weaker.
- The second culprit
appears to be slower expansion of GVCs. This may be partly due to natural
limits to the fragmentation that can be achieved in GVCs. After a point,
quality control concerns, logistical and transportation costs probably make it disadvantageous
to further break down production chains. A second reason often cited for slower
GVC expansion is China’s move up the value-added chain. As Chinese technology has
improved, the share of foreign value added in its exports has declined since the
2000s. This development is not limited to China. It has been observed on a
global scale as technology diffusion has increased domestic capabilities
- In addition to these
broader trends, potential saturation in two key trade and GVC-heavy sectors–electronics
and autos–are also contributing to slower trade flows as a percent of global
GDP. At the end of 2018, there were already 105 mobile phone subscriptions for
each 100 people in the world (Figure 3), and the dramatic technological
improvement since the first smartphones were launched appears to have leveled
off. This is reflected in declining sales growth figures for mobile smartphones
since 2013. In the auto sector, global demand for motor vehicles is cooling
off, a result partly of the removal of purchase incentives in China and other
economies, global attempts to decarbonize and the attainment of peak demand in
Figure 2: Global value chain participation
Figure 3: World mobile phone subscriptions per 100
What do these
trends mean for global growth and EMs going forward?
may be reaching the limits of the export-led growth models of the past century.
Historical experience suggests that, as countries grow, the goods sector
becomes a smaller and smaller share of the economy, in terms of output and
employment. Once the basic needs for goods are met, consumer expenditures tend
to transition to services. Consumers may need a house, essential durables such
as televisions and refrigerators, and maybe a car or two. But with development,
as these needs are met, consumers begin to focus more on services–better health
care and education for their children and more sophisticated financial services,
does this mean for emerging markets? First, demand coming from advanced
economies may not be what it used to be. As the demand for highly traded goods
such autos and electronics is satiated, export growth may be limited. Second,
there is only so much growth that can be generated externally and EMs may need
to increasingly generate growth domestically. Finally, emerging market
economies are following in the footsteps of advanced economies as their focus
shifts from the consumption of goods to services.
market economies grow without relying on exports?
believe the answer is a qualified yes. It is true that the world’s most
successful growth models, such as South Korea and Japan, were based on exports.
A broader market allows larger scale investment and rapid income growth. But most
important for long-term growth is productivity growth, achieved through more physical
and human capital, and greater efficiency. After all, the global economy is a closed
one and yet we have expanded productivity since the industrial revolution.
this optimistic note for the long-run, current trade tensions and trade policy
uncertainty are disrupting existing growth models and production structures and
require painful adjustments. Decisions on investment and their locations
require longer-term policy visibility than is currently available. We,
therefore, expect continued softness in global fixed investment with a negative
impact on potential global growth.
In the short-term, trade diversion away from the US and China to avoid tariffs may create relative winners and losers for certain products. However, we see bigger risks lurking in the current uncertain environment. Despite expectations of a first stage deal with China, we think geopolitical issues extend beyond mere trade in goods. These broader issues could lead to technological de-coupling and the regionalization of technology and trade, with significant negative implications for potential global growth.
value chain (GVC) describes the people and activities involved in the
production of a good or service and its supply, distribution, and post-sales
activities (also known as the supply chain) when activities must be coordinated
Trade elasticity refers to the sensitivity of global trade to global GDP.
investment in emerging market countries carries greater risks compared to more
The opinions referenced
above are as of December 17, 2019. These comments should not be construed as
recommendations, but as an illustration of broader themes. Forward-looking
statements are not guarantees of future results. They involve risks,
uncertainties and assumptions; there can be no assurance that actual results
will not differ materially from expectations.