The main theme of 2017’s conference in Davos, Switzerland, is globalisation, a theme that has been zealously advocated by developed countries. But today globalisation is under threat, according to reports from Davos 2017, and the defender of globalisation is none other than Chinese President Xi Jinping.
With Brexit in Europe, as well as United States President Donald Trump’s vehement objections to outsourcing by American manufacturers, there has been much recent discussion about the fate of globalisation. For instance, is it going to be reversed in the next few years and will the US and other developed countries retreat behind protectionist walls? Globalisation has benefited the rich and the top layers of society in most countries. In the past few years, and especially after the global financial crisis of 2008, however, much has been written about rising inequalities between and within countries. Recently, Oxfam reported that just eight men from the industrialised world had more wealth than half of the global population, which is equal to more than 3.6 billion people. Rising inequality of incomes between regions in Britain and between the rich and the middle classes, as well as the perception that immigrants are taking away all the new jobs, led to the Brexit referendum in June 2016. It is yet to be seen whether Brexit will solve Britain’s economic and social problems.
Similarly, Trump has said that he will make America great again by creating and bringing back jobs to the US, and he will put a stop to all outsourcing of services, which will particularly hit India. But this is an unrealistic short-term view considering past global trends. As long as costs keep rising, it is economically better for American companies to keep prices down by outsourcing parts of their production (or the entire product) to use the cheaper labour of developing countries. The US garment trade, for example, has flourished by outsourcing to Bangladesh, and many well-known brands are also outsourcing to China and other countries in Asia where wages are lower. Otherwise, consumers would have to pay higher prices for products in the US, and they would likely refuse to do so. American consumer spending would then shrink, which could adversely affect US GDP growth.
Globalisation in the form of trade has taken place for several millennia, even though today it symbolises interconnectedness through information and finance which have been made possible by revolutions in transport and communications technology. Ancient India exported beautiful artefacts and semi-precious stones and textiles to Europe, and cloth and beads to Africa. From the late 1800s to the mid-1900s in France, Indian Kashmiri shawls were all the rage and every society lady possessed one. The trade of these shawls ceased, however, due to the Franco-Prussian War in 1870-71.
Globalisation in the form of migration to the New World took place in the eighteenth and nineteenth centuries on a massive scale. Indeed, the US received 32.6 million Europeans from the nineteenth to the early twentieth century. Further, Indians were taken as indentured labour to Fiji, South America, and Africa.
But real globalisation in the form of free trade was initiated after the Industrial Revolution by the repeal of the Corn Laws in England during the 1840s, when corn was allowed to be imported into Britain to overcome a shortage. Industrialisation allowed the cheap production of household items using economies of scale, while rapid population growth created sustained demand for commodities. Globalisation during this period was also shaped by the rise of imperialism, as the vast populations of India and Africa became ready consumers of European exports. There has been an increase in world trade and finance ever since, though naturally there have been highs and lows.
Global trade in the twentieth century was marked by a higher share of trade in merchandise exports, a growth of trade in services and a rise in production and trade by multinational firms. Globalisation suffered a setback during the Great Depression of the 1930s, when many countries turned toward protectionism. But after World War Two, the US became the champion of free trade and the pace of globalisation picked up after the end of the Cold War. The collapse of the Soviet Union produced evidence for many around the world to favour the adopting of market capitalism over the planned economy. Since 1991, the influence of socialism as an alternative economic system was reduced in India too as it opted for a liberalisation of the economy. India has benefited from this opening up and a wide range of products are now available for consumers to choose from.
In the last two decades, there has been a faster and greater flow of information between countries. In the 1990s the growth of low cost communication networks allowed computer-based work to be moved to low wage locations for many types of jobs, including accounting, software development, and engineering design. The outsourcing of jobs to developing countries benefited India and China. There was a rise in trade and production related Foreign Direct Investment in China, and China has emerged as the world’s biggest producer of consumer goods. It has become the factory of the world. After joining the World Trade Organization in 2001, China became the supplier of cheap but good quality products all over the world, including in India. It became the world’s largest exporter, surpassing Germany. Of particular note, China has flooded the US with cheap imports, which has helped to keep US inflation down. American companies have also established factories in China and goods are transported back home and sold at much higher retail prices, thereby increasing profits for transnational corporations.
Meanwhile, American factories in the Midwest have closed down as production has shifted to Mexico and to Asian countries where living standards and wages are both much lower. Workers in these countries are accustomed to longer hours of work with fewer holidays than their American counterparts. Indeed, US companies have found it advantageous that Asian and Chinese labour is willing to work at a fraction of the cost of American labour.
Since the global financial crisis in 2008, globalisation has run into roadblocks. According to the US-based Peterson Institute (Weisman 2016), the era of globalisation was not accompanied by a general commitment to liberalising flows of people, but mainly focused on trade and finance. Since the global financial crisis, the ratios of world trade to output have been flat, making this the longest period of such stagnation since World War Two. The volume of world trade stagnated between 2015 and March 2016, even though the world economy continued to grow. Global trade grew at 1.7% and is likely to slow down further in 2017. Inflows of Foreign Direct Investment (FDI) have remained well below 3.3% of the world output attained in 2007, though stocks continue to rise, albeit slowly relative to output (Wolf 2016).
Cross-border financial capital movement – both inflows and outflows – are growing more slowly and are down significantly in absolute terms from 2009 levels. It is mainly cross-border bank lending and borrowing that have fallen. Regulation has played a part in curtailing cross-border business as it has affected the value of national currencies, but cross-border lending and borrowing through stock and bond markets remains at levels similar to before the financial crisis.
Investment and spending have fallen sharply everywhere since the global financial crisis. For example, investment spending in the US is trade-intensive and relies disproportionately on a relatively small handful of producers like Germany for technologically-sophisticated products. Increased spending on infrastructure by governments will boost investment and growth directly. Hence, growth-promoting policies are needed in the US and Trump wants to spend on infrastructure.
Due to protectionist policies in many parts of the world, trade liberalisation on a multilateral basis has also stalled. The WTO’s Doha Round remains in cold storage. Could this signal a reversal of globalisation? According to Barry Eichengreen (2016), trade has slowed because GDP growth has slowed in many countries, and not vice versa. Indeed, slow world trade growth reflects China’s economic deceleration. Until 2011, China was growing at double-digit rates and exports and imports were growing very fast. China’s GDP growth has slowed in recent years, leading to slower growth of Chinese trade. The other engine of world trade has been supply chains. Trade in parts and components has benefited from falling transport costs, reflecting containerisation and related advances in logistics. But efficiency in shipping is unlikely to improve faster than the efficiency of what is being shipped, thus slowing trade.
Yet Trump denigrates the WTO, says he wishes to eviscerate NAFTA, and wants to build a wall between Mexico and the US. Indeed, the possibility of imposing punitive tariffs on Chinese imports to the US reflects Trump’s disdain for globalisation; but going it alone will not help the US or any other country. Globalisation is bound to continue, even if the US takes more protectionist measures. It may, however, mean that China will take a leadership role in global trade and investment, at least among developing countries, and in Asia particularly. China is already outsourcing many production lines to Vietnam and the Philippines, and wants to enter the Indian market for outsourcing as well. In fact, even India is outsourcing many products.
TPP and RCEP
China is happy that Trump will scrap the biggest treaty of all, the Trans Pacific Partnership Agreement (TPP), which includes the US and 11 countries in the Pacific and East Asia. The TPP would not have made much difference to trade liberalisation in the region per se because the US already has free trade agreements with all 11 members. But it would have led to job losses all around, according to a paper by noted Malaysian economist Jomo Kwami Sundaram (2016). The TPP was to be the mega treaty of the century, but it was to be a treaty that would benefit corporations and not workers. According to one macroeconomic model, if implemented the TPP would have led to job losses of around 800,000 over a decade and almost half a million jobs in the US alone. The TPP is more about regulatory behaviour being imposed on partners’ firms by the big corporations. Many have opposed the TPP in the past, except for Barak Obama, who championed it. The TPP would also have led to dramatic increases in essential pharmaceutical drug prices.
The TPP, according to some economists (Ghosh 2016), requires more stringent enforcement of intellectual property rights, as well as the reduction of exemptions (such as allowing compulsory licensing only in the case of emergencies). Moreover, the TPP should prevent parallel imports, extend exclusive rights to test data, and make IPR provisions more detailed and prescriptive. Under the existing treaty, patent linkages would make it more difficult for many generic drugs to enter markets. This would make even life-saving drugs more expensive and would strengthen pharmaceutical monopolies on cancer, heart disease, and HIV/AIDS drugs.
If the TPP went through, it would have increased the power of corporations relative to states and could have prevented states from engaging in countercyclical measures to boost domestic demand; macroeconomic stimulus packages that focus on boosting production would be prohibited by such an agreement. The TPP would also have enabled corporations to litigate against governments perceived to be flouting these provisions because of their own policy goals. China may well assume the leadership of TPP if invited to do so in a new form, faced with the US backing out.
Another important regional trade agreement is the Regional Comprehensive Economic Partnership (RCEP), which comprises 16 Asia-Pacific countries including India, China, Japan, South Korea, Australia, New Zealand, and 10 members of the Association of Southeast Asian Nations (ASEAN). The RCEP may create the largest regional trading bloc in the world, and aims to cover trade in goods and services, investment, competition, and intellectual property. It also aims at countering protectionism. Overall, the RCEP agreement would cover 3.4 billion people with a total GDP of $17 trillion, or approximately 40% of the world’s trade.
Members of the RCEP, including India, are worried that China may dump its excess capacity in many goods – including steel and other highly subsidised items – on the agreement’s partners, thereby harming local industries and distorting trade in the process. The negotiation process, which began three years ago, is unlikely to be concluded in 2017. As a leading services supplier, India is seeking greater market access in services. Further, India is defensive about eliminating all tariffs and opening up trade in goods, especially to China.
Not only is trade growing slowly and thus not generating enough jobs, advances in technology are also causing job losses. Western businesses are pushing towards automation, digitalisation, robotics, and 3D printing, all of which will undermine low-wage countries’ biggest comparative advantage. These trends are all responsible for the return of jobs in America. For example, in state-of-the-art plants, a bicycle can be produced with just 12 employees per shift. The same operation in China would need 60 people. Thus, automation is helping jobs return to countries that developed the technology, that is, advanced economy countries. But ‘reshoring’ is bad news for developing countries that transformed themselves for export-led manufacturing growth; they may be seeing a reversal. Training workers in high-tech manufacturing may be the order of the day in the future. For that to happen, there has to be a big push towards higher education and technical training, which is lacking in many developing countries, including India.
The Rise of Regionalism
The growth of regionalism and the increase in regional trade is a clear possibility, with India and China playing a pivotal role in increasing trade and investment in the ASEAN and South Asian regions. China already has huge investments in Africa and Latin America. Regionalism can even help the US sell goods in China and other parts of the world.
China’s Alibaba, one of the world’s largest internet companies, is now offering an olive branch to Donald Trump in the face of a tariff hike, which will upset Chinese businesses. Jack Ma, the Alibaba chairman, has offered to sell small- and medium-sized US companies’ products on its portal for Chinese consumers. There may indeed be great demand for American dairy and fruit products because the Chinese have been suffering from problems of adulterated and poor quality food. There may be many other American goods that Alibaba can sell that could create jobs in America. If high tariffs – an increase of 25% – were imposed on Chinese goods, on the other hand, this would most likely lead to retaliation.
India is blessed by its size and natural resources, which translates into a large domestic market and a growing, prosperous middle class. Globalisation has no doubt increased growth and added variety to most Indians’ everyday life and consumption patterns, but there are many who have not been supporters of globalisation, for example, in the past, the Bombay Club. But now, important industrialists like Mukesh Ambani and Ratan Tata concede that globalisation has enhanced competitiveness and has led to improvements in the quality of their products. India is also undertaking foreign investments in other countries. Outgoing FDI is important for many Indian companies. Many Indians have found jobs abroad; Non-Resident Indian (RI) remittances to India are significant and are the highest of all countries in the south Asian region. Yet it is universally accepted that globalisation has led to sharp inequalities in incomes; the rich are getting richer and the poor are getting poorer in India just as they are elsewhere.
According to the New World Wealth report (2016), India is the second-most unequal country globally, with millionaires controlling 54% of its wealth. With a net worth of $5,600 billion, it is among the 10 richest countries in the world in terms of private wealth. According to another source, Credit Suisse, the richest 5% own 68.6%, while the top 10% control 76.3%. The data also shows that the richest 1% owned 36.8% of the country’s wealth in 2000, while the share of the top 10% was 65.9%; by 2015 the top 1% owned more than 50%.
To reduce inequality, the social safety net to protect the poor and the vulnerable has to be strengthened, though there are multiple social security schemes for the poor. Plugging leakages will reduce the number of poor and will allow them to rise to the middle classes. Public investment has to rise in healthcare and education, as well as for infrastructure. This is all the more needed because private investment has been falling in recent years. Reforms that are inclusive of the poor are also required. Further, progressive taxation as well as more people in the tax net are necessary, both of which can lead to increased revenue for public works and a more egalitarian society. If poverty is reduced drastically in India, the demand factor resulting from the country’s large economy will also help the regeneration of global trade in goods and services in the future.
Since attracting FDI seems to be a focal point, it can be targeted to industries that are labour intensive. This may lead to job creation for the unskilled. Otherwise, with nearly 1 million people joining the labour force every month, only services and the informal sector will be available to these workers.
India’s manufacturing sector is small (16% of GDP) compared to China’s, and the government aims to increase it to 25% of GDP. Only more jobs in the manufacturing sector can solve the problem, and higher productivity will lead to an increase in its share. India accounts for only 2% of global trade and its exports can grow if the direction of trade changes. India can look towards Africa, South Asia, and Latin America as export destinations because there will always be demand for labour-intensive cheap consumer goods, electronics, chemicals, machinery, and pharmaceuticals; India can fill the gap that China is likely to vacate.
The failure to create more jobs in highly-populated countries may force many workers to migrate to developed countries. Such migration, however, may create more tensions in Europe and lead to the rise of right-wing parties, and perhaps even their coming to power. Even if Trump succeeds in reshoring jobs back to the US (especially from Mexico), it will not be easy to resist an increased flow of Mexican immigrants into the US.
On the whole, globalisation is likely to continue in a different and perhaps more beneficial form. China and India can play important roles even if the US wishes to behave in a more protectionist manner and retreats behind tariffs and protectionist walls; this would certainly move the world further towards an Asian Century.
Senior fellow with the Observer Research Foundation (ORF), New Delhi
Eichengreen, Barry (2016, November 16). Does Trump’s Election Spell Globalization’s end? The Guardian. Available online at: https://www.theguardian.com/business/2016/nov/17/does-trumps-election-spell-end-for-globalisation
Capaldo, Jeronim, Alex Izurieta and Jomo Kwami Sundaram (2016). Trading Down: Unemployment, Inequality and Other Risks of the Trans-Pacific Partnership Agreement. Global Development and Environment Institute. Working Paper 16-01
Ghosh, Jayati (2016, September 6). The End of US-led Globalization. International Development Economics Associates (IDEAS). Available online at: http://www.networkideas.org/news-analysis/2016/09/the-end-of-us-led-economic-globalisation/
UNCTAD (2016, October). Robots and Industrialization in Developing Countries. Policy Brief No. 50.
Weisman, Steven (2016). The Great Trade-off: Confronting Moral Conflicts in the Era of Globalization. Washington DC: The Peterson Institute for International Economics. ISBN: 9780881326956.
Wolf, Martin (2016, September). Global Trade Alert. Financial Times.
World Wealth Report (2016). Capgemini Financial Services. Available online at: https://www.worldwealthreport.com/
 Reshoring has occurred but it has not had the expected effects in terms of reindustrialisation. The use of robots has had minimal impact in terms of job creation, confined mainly to high skilled activities (UNCTAD 2016).