World trade has fallen by its largest amount since the financial crisis of 2008. The crash itself produced a significant shrinking of global trade – the sharpest since the Great Depression. At the time it was possible to believe that this was a temporary wobble. Ongoing technological change, from containerisation of freight transport to today’s ubiquitous digital communications, would lock the economy into a path of deeper and deeper “globalisation”, with international flows of goods, services and money overwhelming states and transforming societies.
The rapid recovery in global trade in the first years after the crash kindled a hope that the forward march of globalisation would continue. This now looks excessively optimistic.
Over the three decades prior to the crash, global trade grew faster than the global economy. But dwarfing even this rise in trade was the extraordinary growth in cross-border financial flows, which ballooned from $500bn (£329bn) in 1980 to a peak of $11.8tn in 2007. Far outstripping the expansion of the world economy or global trade, the internationalisation of finance represented the cutting edge of globalisation – critically dependent on computing power and telecommunications.
Peak globalisation
Since 2011, however, world trade has grown significantly less rapidly than global GDP, and has now begun to shrink even as the global economy grows. World financial flows are down 60% since the pre-crash peak. International capital flows today are equivalent to 1.6% of global GDP, down from 16% of GDP in 2007. The “home bias” of investments has hugely increased. And capital flows into and out of the UK fell by 82% from 2007 to 2011.
Has globalisation peaked? Two fundamental factors suggest it may have. First, the financial crisis itself revealed the systemic weaknesses inherent in an over-extended financial system. Major financial institutions, banks chief among them, are now significantly more wary about reaching beyond their home bases. In the event of a future crisis, they will require strong, supportive states ready to back them up. This has drawn banks and states closer together, with weak states and weak banks propping each other up, as in the eurozone’s “sovereign-bank nexus” (the strong links between government debt and banks).
Second, states themselves are acting strategically. Globalisation was associated with a belief in the supreme merits of government inaction on the economy, but governments are increasingly strategic economic actors.
China is attempting an immense shift away from its decades-old role as low-cost exporter to the world, expanding both its domestic market, and seeking to create a new, regional trading block around the new Silk Road. The collapse of its stock market, naturally, necessitated a huge (if deeply flawed) government intervention. Protectionism is on the rise, whilst yuan devaluation has raised the spectre of “currency wars”. The German state, meanwhile, is an assiduous defender of its own interests as a manufacturing exporter.
The UK’s trade problem
The UK, too, is acting strategically. But it has been down a very particular path. With its record-breaking current account deficit – the gap between exports and imports, plus earnings from abroad minus payments to abroad – the UK is dependent on the willingness of the rest of the world to finance its domestic expenditure.
During the high period of globalisation this was not difficult. Financial flows grew across the globe. Some of those global investors were happy to buy assets from, and make loans to, those in the UK. The UK’s external debt, as a result, is amongst the highest in the world, balanced out by its ownership of assets abroad. But the presence of those flows meant that the current account did not act as a serious constraint on domestic economic activity.
Post-2008, that happy situation no longer exists. The deficit with the rest of the world still requires financing. But that makes maintaining a global financial hub, in an era of weakened financial flows, a painfully expensive necessity. Austerity is the consequence of the decision to support that hub, as George Osborne admitted in his recent House of Lords select committee hearing. By keeping domestic government expenditure low today, the government can hope for “fiscal space” to deal with crises tomorrow. Meanwhile, Osborne is back in China, attempting to drum up additional financial flows of investment into the UK.
This support for financial services is the strategic choice the rest of us are forced into. It means a permanent exposure to financial shocks elsewhere, a weakened domestic economy dependent on debt creation, and the steady disintegration of the welfare state through austerity.
Though they can play a part, the solution to the external deficit will not lie through exports. Devaluation of the pound since 2008 barely dented this deficit. Exports are dominated by a tiny handful of firms, with the top 5% of UK manufacturing exporters accounting for 69% of all manufacturing exports. This is a very slender base on which to build, and, even then, attempting to sell into an increasingly competitive and potentially declining global market is hardly an encouraging prospect.
Worse yet, the rising deficit itself is now being driven, in part, by the rising demands for payments that the UK’s vast external debt requires. This flow of funding is liable to stop at some point, provoking an old-fashioned sterling crisis.
Better, instead, to intervene directly in the domestic economy. Import dependency would be weakened through the promotion of domestic energy production, exploiting an obvious UK advantage in renewables. It would mean working to build effective, functioning regional economies through large-scale infrastructure investment, state-led as needed. Above all, to match changing times, the economic thinking that has dominated UK policy for three decades must also now shift.
