Globalization is now under threat. Expanding global trade outpaced and buoyed a growing global economy in the decades leading up to the global financial crisis in 2007 and 2008. The advanced industrial world, led by the United States and Europe, created and sustained that system in the past but the slow recovery in industrial economies since the global financial crisis has seen them preoccupied with domestic challenges and show signs of turning their back on globalization. Eastasiaforum.org reported.
Populist anti-trade and anti-immigration sentiments seem to be capturing the North Atlantic. Brexit was a major turning point for the United Kingdom and Europe. Europe’s internal challenges are unresolved, and the election of Donald Trump has already seen the United States effectively kill the twelve-member Trans-Pacific Partnership that was signed, sealed and waiting to be delivered, according to Bloomberg.
After bouncing back from the sharp decline during the global financial crisis, world trade grew by less than 3% in 2012 and 2013, compared to the pre-crisis average of 7%.
Chinese trade growth has slowed dramatically from 22.6% a year in the decade since WTO accession in 2001 to around 6% in 2014 and still going slow. Global services trade has held up better than goods trade but for China and the rest of the world, the growth in trade is now slower than growth in GDP. Some slowdown is to be expected for China as it transitions from an investment and export-led growth model to one focused on services and consumption.
About three quarters of the structural slowdown in trade is due to the stagnation of global economic growth and low investment. The rest is due to rising protectionism, the maturation of global value chains and China sourcing more intermediate goods domestically.
Asian Leadership
But economic development in a hostile external environment will make a difficult job much harder. A great deal is at stake given much of South and Southeast Asia is yet to attain the middle or high incomes of some of their Asian neighbors and there is still much poverty to eradicate. But it is also the more prosperous Asian economies in East Asia that need an open international economy to sustain the march towards higher incomes.
Developing and developed Asia needs a well-functioning and open global economy and given Asia is still growing faster than the rest of the world it now has a peculiar responsibility to protect that global system. Asian economies need to lead the push-back against protectionism, whether they are ready or not.
Asia can champion unilateral reforms. The reforms that need to be undertaken now for many countries are the more difficult behind the border and institutional reforms, not just removing border barriers. These are the types of reforms that are only achievable by building domestic coalitions for change instead of forced change through external agreements.
International agreements can help reinforce these reforms but they are deeply dependent on winning domestic support. Asian economies can focus on implementing these domestic reforms unilaterally or in concert with willing partners in the region—it is in their own interest. A more dynamic and open Asian economy will be a strong fillip to the global economic system.
Many of these reforms can help create a more conducive investment environment. With investment stagnating in advanced economies, but also on the wane more broadly, there is urgency in mobilizing infrastructure investment to serve the development needs in Asia.
The global economy that acted as a tailwind for Asia in the past has turned to a headwind. Asia’s overriding interest today is to help anchor the global trading system and economy and reverse the headwinds of anti-globalization.