Globalisation has peaked

The world’s first great era of globalisation took place after the US emerged from civil war in 1865, from when the US and the more-dominant UK imposed capitalist principles on the world. The pair’s dominance of transatlantic finance was built on free trade, the unhindered flow of capital, the exploitation of the UK’s colonies and the fledging rise of mass consumption.

The internationalisation of trade and finance out of “The City” in London would never have occurred without concurrent leaps in transport, manufacturing and communications such as the laying of the first telegraph cable across the Atlantic in 1866 and the invention of the phone.

The second great modern epoch of globalisation has taken place over the past three decades. The true globalisation of finance, trade, economics, politics and even culture has been so ferocious and of such magnitude that global forces have swamped the national state, which had proved stronger in the first era at preserving national identity and control over the means of production. This era, too, was Anglo-American led, though, this time the US dominated from Wall Street and Washington. The epoch was tied to advances in technology that enabled instant and cheaper communications. In this era, globalisation became synonymous with global financial markets, where capital of vague ownership is directed to wherever it can earn the highest return commensurate with risk.

Both eras of globalisation, which can be defined as an increase in the flow of trade, investment, people and ideas around the world, led to massive change. Living standards leapt – the World Bank estimates the number of people living in extreme poverty halved between 1990 and 2011 to around one billion people, or 14.5% of the world’s population.[1]Countries became more interdependent. International law and global bodies, movements, conventions and even sporting events were created. Companies morphed into multinationals then became global enterprises.

The first era of globalisation ended with World War 1. Historians could well decide that the second epoch fizzled out this decade. For the phenomenon appears to have peaked for now. Sanctions are inhibiting international trade growth, which expanded at a slower pace than global GDP in the year to August this year.[2] Countries from Brazil to Iceland are restricting capital flows to protect their economies. More investment is staying in developed countries because wages rises are so reducing the competitive advantage of the emerging world that companies are “reshoring” rather than offshoring production. A popular backlash has stirred in developed countries against economic migration. The global financial crisis has discredited the ideology behind globalisation, especially the liberal democratic political model it promoted, while the internet’s ability to fracture consensus politics is boosting political barriers to globalisation. The fraying of the internet in some parts of the world is inhibiting the flow of ideas around the globe.

Foreign investment and international trade will still go on, of course, so globalisation is not dead. Nearly half of foreign investment goes to emerging countries while the growth of countries such as Brazil, China and India will boost trade over time. Sought-after trade agreements between Europe and the US and across Asia Pacific, if clinched, would signify the biggest liberalisation in global trade in more than a generation, even if a global agreement on trade would be better for the world economy. Global investors will still be ruthless and pitiless when assessing investment options. The computer, the internet and the digital world won’t be uninvented. Social media is a global rather than local phenomenon as is English, which allow the spread of ideas. But these points are all moot in a way for globalisation has triggered a political backlash that has put it in retreat.

Identity trumps ideology

If there was one action of recent times that signalled the climax of globalisation it was the imposition this year of economic sanctions against Russia to punish Moscow for its support of separatists in Ukraine and its annexation of Crimea. For these sanctions following the fighting over Ukraine exploded one of the great justifications of globalisation. This was the notion that the greater prosperity resulting from greater interdependence among countries would prevent wars. This optimism was encapsulated in Thomas Friedman’s sort-of tongue-in-cheek “Golden Arches theory of conflict prevention” of 1996.[3] This Panglossian “theory” claimed that countries that were integrated enough into the global system to have attracted McDonald’s restaurants have such mutual interests that they would never go to war against each other. It was as though self-interest, spheres of influence, the will to dominate, chauvinistic nationalism and ancient enmities and fears were concepts from the Middle Ages.

Russia’s apparent indifference to western sanctions and its willingness to retaliate show otherwise; that the politics of national self interest and honour can easily trump the political cost of withdrawing from mutually advantageous trade. China displayed the same contempt to doing business with Japan during recent sparring on the China Seas and could easily end up in a similar feud with the US as their interests are bound to clash. In response to these actions, demands for self-sufficiency are stirring within countries or regions that are vulnerable to foreign powers, as much of Europe is, say, when it comes to Russia’s natural gas. Defence, after all, is one of the most basic arguments for protecting domestic production, as Australians heard in September this year during a debate about buying submarines from Japan.

While conflicts are creating schisms in the global status quo, a bigger challenge to globalisation is the political backlash it has engendered over its three-decade advancement. Massive change means huge disruptions that have winners and losers. Foremost among these side effects is rising inequality and the consequent shift in political power away from the masses to those with money. Many people within wealthy countries feel left behind, even if they are materially ahead, while poorer countries are no longer catching up as easily with richer ones. These and other faults of globalisation were magnified to such an extent by the global financial crisis that the free-market ideology behind the concept has been discredited as a way to generate long-term prosperity. The collapse of faith in free markets and its associated political system of liberal democracy is giving rise to populist and authoritarian politics.

The resultant rise of the politics of identity, which mingles protest against the elites with populism, jingoism and aggressive nationalism, is destabilising governing in much of the world. Identity politics, as opposed to the politics of ideology, appears to be advancing in key countries as demagogues exploit economic insecurity. In Europe, especially, nationalist parties have become a force as skilled populists exploit the disappointment in the elite who strove to unite Europe on a promise of greater prosperity. Extremist parties from the left and right are winning voters by pledging to re-nationalise industries, quit the euro, shut out foreign bond speculators and block cheap foreign (Chinese) imports. The rise of insurgent parties makes it difficult to achieve the integration Europe needs to surmount its crisis. The recent solid performance of the anti-euro, right-wing Alternative for Germany party in three state elections, for example, makes it harder for German Chancellor Angela Merkel to steer a centre course, ease the austerity straightjacket on neighbours or approve quantitative easing by the European Central Bank.

Of particular note in Europe is the political backlash against the free flow of people within the EU. The EU’s open borders were always a long-term political risk so the unwinding of this key tenet of globalisation is no surprise in one sense. But while it might be expected that fringe parties in depressed bailed-out southern countries such as Greece would turn on immigrants, the backlash is extending to prosperous northern countries. Angst is building in countries such as France, Germany, the Netherlands and the UK about the inability of governments to limit immigration from other EU members, as populists exploit the resentment that their nationals feel towards these newcomers over their eligibility for welfare payments and their ability to grab jobs from locals. In a referendum in February this year in Switzerland, which is not part of the EU but is entwined into the 28-member bloc, Swiss voters approved immigration quotas against fellow Europeans even though the country’s elite opposed the measure. In the EU elections in April, the xenophobic UK Independence Party and France’s National Front came first in their countries, while similar fringe parties in other countries scored their best-ever votes. In September, in progressive Sweden, the neo-Nazi and anti-immigration Sweden Democrats party came third in national elections with 13% of the vote, the same month that France’s National Front won its first-ever seats in upper house elections.

While nationalist parties are well short of holding office in the EU part of Europe, those in power elsewhere are less shy about pushing a jingoism that clashes with globalisation. China’s ideologically devoid rulers are stoking nationalism to divert the masses from the country’s economic crisis. Japan’s government is appealing to nationalism as a way to counter China’s greater muscle. Hungary, Turkey and, obviously, Russia are other countries where rulers are uniting people against abstract forces and other grievances based on identity rather than an ideology. One destabilising byproduct of national identity politics is that it tends to fan secessionist movements, especially when nationalities absorbed into countries such as the Scots, China’s Tibetans and Uighurs, the Italians of Tyrol, the Basques along the Franco-Spanish border or the Catalonians in Spain have such distinctive cultural, social, ethnic and political identities.

The politics of identity have gained hold because there appear to be few ideological alternatives to the discredited free-market liberal democratic system since communism and socialism collapsed as viable options. The other reason is that the relative military decline of the US and UK since the Iraq war of 2003 and their relative economic decline since the global financial crisis of 2008 have damaged the credibility of globalism’s biggest advocates. After all, the recent era of globalisation was born of the Thatcherism and Reaganism that took hold in the UK and US respectively from the late 1970s.

The irony of the internet

Globalism would never have happened without technological advancement culminating in the invention of internet and such like. Innovations from better container ships to instantaneous communications helped trade and investment flourish and capital swish around the world in a flash. No less important was the advocacy of globalisation by a respected elite, who were able to present their message across a globalising media, via new Bloomberg and Reuters screens or the greater worldwide reach of US and UK publications and broadcasters. These forces, too, are peaking.

The biggest blow to advancements in technology that would enhance globalisation may well have come from the revelations this year from Edward Snowden that the US government spies on allies. These disclosures prompted victim governments such as Brazil to impose country-level restrictions on servers regarding data protection, which in essence fragments the fundamental design underpinning the web. US internet-based powerhouses are facing a legal, bureaucratic and popular backlash in Europe for seemingly acquiescing to Washington’s surveillance and, it must be admitted, just for being too successful. Google, for instance, is under investigation in Europe due to competitor complaints that it exploits the dominance of its Android mobile operating system. Uber faces a ban in Germany because taxi companies said it was ignoring rules on other taxi services. Amazon confronts legal hurdles in France to deliver free books after French bookshops complained. In Europe, the court-backed “right to be forgotten” now forces the Googles of the world to comply with requests to remove links to old information. The ease with which hackers appear to operate is prompting greater government scrutiny of the web that can only add to the cost and ease of, say, Apple operating its iCloud service. Autocratic countries such as China and Russia are taking control of local digital platforms and developing local-use-only technology because they are, well, oppressive. Many trends point to global communications being less integrated than they were.

Technology, by and large, is a neutral force; it can do good or otherwise. Ultimately technology helped drive globalisation because a consensus emerged among the elite that argued the case for free-market reforms. In Australia, for instance, some of the biggest decisions that globalised the economy (floating the Australian dollar in 1983 and reducing protection during the 1980s) were taken by the Left side of politics with the agreement of the Right. The internet unwittingly now works against the emergence of an elite consensus in two ways.

The first is that people holding extreme opinions can find like-minded thinkers more easily. Thus they can more readily form the mass needed to kick up a noise to fracture political consensus on abstract issues such as economic reform. The other is the slow collapse of the print media, which via its front pages sets the agenda for electronic media. The change in habit from reading newspapers, and possible disappearance of many of them before too long, to viewing news online, where stories change in order all the time, diffuses the power of the media to help form a consensus for abstract ideas or reforms (among other consequences).

In a way globalisation overreached and is being pulled back so its consequences can be digested. Its retreat will probably go too far. Economies are likely to stagnate without the impetus to reform. A more certain forecast is that nationalistic populists will prove charlatans if they gain power. It’s almost predictable that in coming decades there will another spurt of globalisation, in reaction to the backlash against globalisation now.

by Michael Collins, Investment Commentator at Fidelity

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Financial information: comes from Bloomberg unless stated otherwise.

Important information: References to specific securities should not be taken as recommendations.