Global trade ≠ globalisation

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Edward Price is principal at Ergo, a consulting firm, and teaches at New York University’s Center for Global Affairs.

Globalisation has failed. Now we have on-shoring, re-shoring, near-shoring, ally-shoring and friend-shoring. And once these projects are complete, newly-formed mega autarkies can get on with World War Three. 

Right?

Well, not according to new research from the IMF. Instead, it appears trade remains at the heart of global economics. Here’s Serhan Cevik’s paper Long Live Globalization:

. . . There is no sign of structural retreat, but only occasional oscillations caused by cyclical factors and global supply chain disruptions experienced during the COVID-19 pandemic. But since then international trade as a share of GDP has rebounded strongly, despite the fears of discriminatory geoeconomic fragmentation and protectionism.

In other words, forget all this fancy new trade policy. Trade is robust. Here’s the data:

What the IMF is really arguing for is the persistence of gravity models: 

. . . The volume of international trade is related to economic size. Distance between the countries, on the other hand, is negatively associated with bilateral trade flows, representing an obstacle for international trade as expected. The greater the distance between the two countries, the smaller the flow of bilateral trade across these countries, due to higher trade costs.

OK. But what are we to make of populism, protectionism, tariff wars, and Biden’s new export controls? All hot air? The IMF again: 

Globalization has been pronounced dead many times before, but none of those predictions has come to pass. Global integration has long evolved in waves — and recent developments triggered by the pandemic and geopolitical tremors are not necessarily an exception. The widely-used indicators of globalization, such as international trade and capital flows, have rebounded strongly, despite the fears of discriminatory fragmentation and protectionism.

Economic policy is saying one thing. Economic data, another. Trade is robust, and more robust than antitrade policies. And that just annoys protectionists.

Maybe the key to this riddle is distinguishing means from ends. The Nixon Shock ended the original Bretton Woods settlement, introducing fiat currency. But it was designed to maintain the purpose of Bretton Woods: international dollarisation. Nixon changed the means, not the ends. Similarly, Basel III. Post-crisis regulation clamped down on domestic banks, but left international capital mobility well alone. Banking regulators did not want to disrupt the dollar standard. 

Is today’s trade policy benevolent? Will it protect globalisation, even as it appears disruptive to the same? 

Perhaps the real issue is how bad geopolitical risk will be. The IMF paper suggests that, right now, it ain’t so bad. Geopolitical risk was certainly a lot higher in the 1940s than it is today

Still, the real trouble with geopolitical risk is uncertainty. Everything’s fine until it isn’t. You can study container lines all you like. Maersk has a timetable for visiting Taiwan. Does Xi Jinping? 

Nothing about political economy is easy. The Impossible Trinity teaches us that simultaneous internal and external balance are elusive. Harvard’s Dani Rodrik also does a nice side line in gnarly trilemmas. Perhaps new American trade policy will do something to resolve these tensions.

Or perhaps not. Onshoring, rather than protecting liberal economics, may well turn on a dime and become nationalist. Nor will extrapolating the future from economic history work. World War Two was preceded by trade fragmentation. World War One was preceded by quite the opposite. 

This IMF paper will soothe Ricardian occultists. It shouldn’t. Neither trade, nor trade policy, will decide our worldly fate.