Despite the best efforts of Trump and Boris Johnson, the future of globalisation is secure as long as the US and China stay on track

The G7 summit proved again that the days of the elite club leading the world are over – the future belongs to China and emerging economies
A recent softening of stances proves a knockout punch to globalisation is unlikely from either the US or British leader, but surviving the trade war will be key

Bob Savic

Published: 3:00am, 29 Aug 2019

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This year’s G7 annual gathering of developed economies in Biarritz, France, yielded very little in the way of solutions for a sagging and troubled global economy, and the various social and environmental challenges facing globalisation.

The ineffectiveness of this select group in influencing the course of world development is doubtless due to a variety of profound changes, both global in nature and country-specific. But, the main underlying reason for their inability to effect change is essentially due to their relatively declining role in world economic growth.

Currently, the G7 accounts for only half of global output in nominal exchange rate terms, and under a third according to purchasing power parity or “PPP” – an economic gauge which measures a country’s real internal consumption power.

The G7’s contribution to world economic growth is even less. For 2018-19, China accounted for 27 per cent of this growth, according to Bloomberg research. India came second with 13 per cent, just ahead of the US at 12 per cent.

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Other G7 members made much less of an impact. Germany and Japan recorded around 2 per cent contribution to world GDP, while Britain, France, Italy and Canada each barely managed above a 1 per cent share.

As the economic significance of this elite club of nations diminishes, it seems largely inevitable that their political influence will mirror that decline. Long gone are the heady days of the 1980s, when Ronald Reagan and Margaret Thatcher projected power as the architects of modern-day globalisation.

Now, Donald Trump and Boris Johnson have become the leading proponents of deglobalisation and fragmentation of a global order their creative predecessors had painstakingly built.

Not only are Trump and Johnson splintering off from their traditional Western allies, their visions of the world are markedly different. While Trump champions economic nationalism, in the form of his “America First” slogan, Johnson espouses an internationalist “Global Britain”, in his post-Brexit panacea.

In such a confused world of mixed messages and ideas, it’s hardly comforting to know that Trump’s recent, but not unexpected, tit-for-tat intensification of the trade war with China, and Johnson’s ongoing stern threat of a no-deal Brexit, arise around a time of year (September-October) often synonymous with devastating financial crises: the US stock market crashes of 1929 and 1987, and the 2008 global financial crisis.

The current global economic backdrop doesn’t exactly help ameliorate what financial traders sometimes refer to as the “October effect”. Plummeting inflation expectations around the world are already prompting many major central banks to pursue aggressive monetary expansion and perhaps a return to significant quantitative easing.

Most worryingly, manufacturing the world over is in a deep slump, with major industrial powerhouses including China, Germany, Japan and the US experiencing significant downturns. There is even tentative evidence that the decline in manufacturing production and associated export trade is now spilling over into economies driven more by domestic demand and services, such as Britain, which experienced its first growth contraction in seven years.

Meanwhile, given most governments’ limited options on exercising significant monetary stimulus in an already heavily indebted world, it’s no surprise that negative government bond yields have made a major comeback in the past three years.

A trader watches the indices on the floor of the New York Stock Exchange on August 14, when the Dow Jones Industrial Average sank 800 points after the bond market flashed a warning sign about a possible recession for the first time since 2007. Photo: AP

This time, investor flight into the safety of sovereign debt could be even more alarming. The value of government debt in negative yielding territory has hit a record high of US$17 trillion, as yields continue their unabated decline globally in an unprecedented flight into so-called safe-haven assets.

So far, trade frictions between the US and China, and between the US and its other trading partners, have not spilled over into cross-border capital movements. That’s not surprising, since the global movement of capital, in which China is a giant player, is the fundamental platform on which globalisation is grounded.

Hence, Washington has been careful not to take a broad swipe at capital flows. Instead, it has targeted restrictions on capital movements justified by specific concerns such as national security – sanctions on China’s Huawei Technologies being the most high-profile case in point.

China calls Trump’s trade war escalation a ‘strategic mistake’

Indeed, concerns over capital markets may well explain Trump’s tweet, shortly after the close of the G7 meeting, praising Chinese President Xi Jinping for wanting “calm resolution” in the trade talks and willingness to “state the facts so accurately”.

However, there was no indication that Trump would reverse or defer any of his recent tariff increases. Rather, he was probably more concerned with comforting the jittery US capital markets, as all the major stock indices saw huge sell-offs in the wake of his impulsive retaliatory tariff announcements late last week.

Separately, Johnson has also shown signs of adopting a pragmatic economic approach on the prospects of a no-deal Brexit, conveying clear concern at the G7 over the worsening global trade environment, signalling perhaps that his vision of a “Global Britain” may have to wait beyond the much-touted October 31 Brexit deadline.

Therefore, while globalisation may face a couple of blows to the head in the coming months, there won’t be any knockout punch initiated by either Trump or Johnson.

As long as the global economy’s two major players – the US and China – manage any economic fallout from their trade war and other burning challenges to globalisation through effectively synchronous monetary easing and expansionary fiscal measures, globalisation will continue to evolve.

The key difference with past decades, however, will be that global economic growth will clearly become more dependent on the contributions of China and other major emerging market economies – a phenomenon which the structurally slowing economies of the US and other G7 members can only benefit from in the years to come.

Bob Savic is a senior research fellow at the Global Policy Institute, London

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