A personal view from Ian Stewart, Deloitte’s Chief Economist in the UK. To subscribe and/or view previous editions just google ‘Deloitte Monday Briefing’
Globalisation has been one of the defining features of the modern era. It has been marked by the movement of goods, services, ideas, capital and people through a plethora of cross-border networks.
Networks are the largely hidden plumbing of the global economy. Agreements between states govern trade, most notably in the form of the World Trade Organization (WTO) or in regional deals such as the EU single market. International agreements regulate migration, trade, air travel, the rules of the internet and much else. Communication networks such as the internet and digital platforms are vital to the flow of information and data. The global payments network facilitates the movement of capital which is the bedrock of the international trading and financial system. Multinationals and supply chains are, themselves, complex networks.
The more extensive a network the greater the potential to create value. China’s accession to the WTO in 2001 brought it into the global trading system. Joining boosted Chinese growth and collapsed the cost of imports for western consumers. The value to users and investors of digital networks rests on scale. Facebook’s $500bn valuation reflects the fact that it has a staggering 2.5bn users, equivalent to roughly one-third of the world’s population.
Globalisation, and the networks that fuel it, have always had their critics, often on the political left. Now Western anxieties about de-industrialisation, migration, the rise of China and the power of digital networks have swelled their ranks.
Globalisation is facing new scrutiny and global networks have become more politicised. Some go further, arguing that networks are being weaponised as nations seek to exploit interdependence to coerce others. This, in turn, encourages nations, in the words of a recent MIT journal article, to “reshape networks so as to minimise their vulnerabilities or increase the vulnerabilities of others”.
The US accuses China of flouting trade rules through industrial-scale theft of intellectual property and by backing state-owned enterprises. Concerns have grown about China’s burgeoning capacity in advanced technologies and its foreign policy intentions. The US administration wants to restrict the supply of US technology components to Chinese companies. President Trump wants US businesses to scale back their Chinese supply chains.
The West may see institutions such as the International Monetary Fund (IMF) or the World Bank as being neutral but they were shaped by Western values and nations. For Russia, Iran and others facing sanctions, the international payments and banking systems look anything but neutral. As emerging economies have grown they are seeking influence in shaping networks commensurate with their economic scale.
Thus America’s use of the dollar clearing system – which facilitates cross-border transactions in dollars – to enforce sanctions has encouraged some countries to reduce their dependence on the dollar. (America’s control of dollar transactions, and of US subsidiaries of foreign businesses, gives it significant power.) Russia has pursued a ‘de-dollarisation’ programme to reduce the number of transactions in dollars. It has also created a domestic card payment system, Mir, designed to help it cope in the event of being cut from the international payments system. China is developing yuan-denominated commodity futures as an alternative to the dominant dollar market.
US-China trade tensions have mutated from a disagreement about a handful of goods to a full-blown trade war and now a contest encompassing China’s currency and technology.
China’s Belt and Road Initiative provides loans and support for infrastructure in emerging markets in a programme that the US sees as extending China’s influence and power. The US has been equally sceptical about the Chinese-led Asian Infrastructure Investment Bank which has 74 member states and finances Asian infrastructure projects.
The growing power of technology networks including Google and Facebook has prompted its own backlash. Europe and China are responding with support for domestic tech champions and are doubling down on regulatory scrutiny of US companies. Russia has passed a “sovereign internet law” requiring all internet traffic to pass through a government body. The US wants to stop Huawei from providing equipment to build new 5G networks and has encouraged its allies to follow its example. In a bid to shrink one of the key networks of globalisation Mr Trump has urged US companies to move supply chains out of China.
We have come a long way from the heyday of globalisation at the turn of this century. Yet looking back we may come to think of this period of booming global trade, political stability and expanding international networks as an aberration.
On a longer view incumbent powers inevitably face challengers; networks have often been contested.
Leading powers have always dominated international networks. Thus a global financial and trading order largely run by Britain in the nineteenth century gave way to a US-led system in the twentieth century.
The post-war international order, built on the dollar, the Marshall Plan and institutions such as the IMF, was the creation of America and its allies. For 40 years it faced off against the Soviet Union and Communist China. The demise of the former, and the market reforms of the latter, seemed to usher in a liberal global order, a new era of consensus and globalisation.
Such a notion seems fanciful today. Globalisation, and the networks that sustain it, face new pressures. Some networks will prosper, some will fragment and new, challenger networks will emerge. Emerging economies will play a larger role in established networks; and they will create their own networks, as has already happened with China’s creation of the Asian Infrastructure Investment Bank and its Belt and Road Initiative.
Global networks are changing. They are becoming more contested and more politicised. For their users it spells a more complex, uncertain environment.
PS: Last week UK chancellor Sajid Javid announced plans to raise the main minimum wage rate to two-thirds of median earnings by April 2024, and extend it to all workers aged 21 and above. This would raise it from £8.21 today to £10.50, which would be among the highest in the world. The Labour Party is committed to raising the minimum wage to £10 as soon as possible. Both Labour and the Conservatives seem committed to over-riding the Low Pay Commission, the independent body charged with advising on increases in the minimum wage. Rapid rises in the UK’s minimum wage in recent years have had little discernible effect on employment. Raising the rate above £10 would significantly increase the number of employees covered, raising the risk that it could start to impact jobs.
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