Has globalisation reached its high-water mark?

Protectionist forces are growing stronger as there is an unprecedented decline in world trade

Every time there is a G20 Summit, participating nations will with ritual gravity put their names to a communiqué declaring the sanctity of free trade and evils of protectionism. Then they return home and practise the opposite. Modern protectionism rarely comes in the brazen form characterised by the notorious Smoot-Hawley Tariff Act of 1930, which imposed draconian taxes on imports to the US and arguably deepened the Great Depression.

Rather it makes its appearance in subtler, backdoor forms that tend to escape World Trade Organisation definitions and sanctions – subsidies to local industries, restrictions, unduly onerous standards, bans on health and safety grounds, and so on. Yet they can be no less potent in their beggar-thy-neighbour effects.

When Peugeot was bailed out by the French government, a condition of the state aid was that the company close its Czech production line. According to Global Trade Alert’s Simon Evenett, such forms of protectionism have been growing like topsy since the onset of the financial crisis.

Despite all the optimism around American attempts to forge free-trade agreements with Asia and Europe, progress is depressingly slow. The global, multilateral free-trade agenda has meanwhile been mired in apparently irreconcilable differences for more than a decade.

It would nevertheless be wrong to regard these protectionist pressures as a prime cause of what is now an extraordinarily unusual slowdown in global trade growth.

In fact, they are much more likely to be a response to it. When export growth becomes harder to achieve, countries naturally turn in on themselves, find ways of supporting domestic demand, and if they can, disadvantaging foreign goods and services.

It’s been called “peak globalisation”, and it is a good term for what is now not just a fashionable theory but an observable phenomenon. June saw a little bit of an uptick in global trade, but the trend is unambiguously down. In the second quarter of this year, the volume of global trade fell 0.5 per cent, following a fall of 1.5 per cent in the first quarter, according to new data. This is the first such fall since the collapse of Lehman’s.

It may be that June’s bounce presages the beginning of an anaemic recovery, yet scarcely anyone believes that international trade is about to return to pre-crisis levels of growth. In the boom years of globalisation, crossborder trade grew twice as quickly as world output as a whole, and was widely seen as a key driver of rising living standards.

Yet since the financial crisis, trade has consistently lagged output, and now seems to point to an outright recession. Whatever else the postcrisis $11.3 trillion of central bank money printing may have achieved, it has not succeeded in reviving the upward march in free movement of goods and services.

The positive view of this reversal is that it is more an indication of benign, and in some respects quite welcome, structural changes than another cyclical catastrophe. Much of the precrisis boom was driven by the Asian development story, which sucked in huge quantities of raw materials and dumped container loads of finished goods on western markets. The internationalisation of supply chain management together with the cost efficiencies of containerisation turbocharged the process.

China was taught a hard lesson by the post-Lehman collapse in trade. Its determination since then to shift from a less investment/export dependent form of development to one more based on domestic consumption has changed the nature of the game. The export component in Chinese output has shrunk significantly.

Many Western companies have similarly chosen to meet the challenge of growing environmental and geo- political risk by swapping offshoring for onshoring. What’s more, economies will naturally become more service-based as they grow and mature, with the tradable goods sector becoming less important, something we have long been familiar with here in the UK. This may now be happening on a global scale.

The fall-off in international trade is matched only by the increase in crossborder labour migration, now in nominal terms at unprecedented levels. One form of globalisation appears to be giving way to what may be an even more politically toxic version of the same thing.

In any case, the jury is out on whether the hiatus in growth is the result of “peak globalisation” or the even more trendy theory among those of a Left-wing persuasion of “secular stagnation”, the idea that free-market capitalism has sunk into a semipermanent state of torpor that demands extreme levels of fiscal stimulus and government intervention.

I’m with the optimists. Yet those of us who still believe in free trade as the most effective route to prosperity and to boot the best antidote yet invented to human conflict have quite a fight on our hands defending it from the forces of reaction.