Well, well, if it isn’t an approaching surrender in the Brexit talks by the UK disguised as victory. Seems like one comes every year. It’s premature to assume a Brexit deal is getting done, of course: this is Boris Johnson’s erratic government and his eccentric backbenchers we’re talking about, not to mention some EU member states neurotically obsessed with fish who may just, horrible though it is to contemplate, not be bluffing. Still, the chatter is pointing to a fairly obvious potential agreement on the “level playing field” issues. Britain will allow countermeasures in the form of tariffs or other trade restrictions if EU environmental or labour standards end up much stricter than in the UK, and theoretically vice versa.
The plan has dangers, which we described when it was floated six months ago, of perpetual judicial-political conflict. We’ll assume divergence is judged by a WTO-style arbitration panel, since realistically we can’t see the EU getting away with an antidumping-style arrangement where it imposes punitive tariffs based on its own judgment. As it happens, on Wednesday the EU and UK announced a roster of experts to arbitrate the initial Withdrawal Agreement, but that is rather less contentious than the trade deal. The panel members for the latter, if they start authorising tariffs because of carbon taxes or what have you, should prepare for personalised “Enemy Of The People” front pages in the Daily Mail and purple-faced eruptions from the Tory ranks about unaccountable international liberal judicial elites. But better to take that long-term risk than plunge into no-deal now? We’d say so.
Today’s main piece, on a calmer note, is a look back at how globalisation hasn’t imploded in 2020 despite the coronavirus pandemic, and we then return to Brexit for a Tall Tale about how the EU is a touch less evil and manipulative than its foes allege.
The death of globalisation is postponed once again
Twenty-twenty was a year in which globalisation nearly imploded, but actually didn’t. To be quite honest, this is getting a bit repetitive. It was going to collapse a couple of years ago as a result of President Donald Trump’s US-China trade war, and before that in 2009 because of the financial crisis, and for your true Depression-redux hipsters it was the Sars epidemic (the first Sars, that is, back in 2002, a very niche virus).
The second wave of Covid has been vicious for many. But the panic about trade has calmed a lot. In October the WTO’s economists updated their forecast for goods trade and took a big turn towards the optimistic, projecting a 9.2 per cent fall in merchandise trade in 2020 — barely more than a quarter of the 32 per cent collapse that was its pessimistic scenario back in April. Next year it reckons that 9.2 per cent contraction should mainly be undone with a 7.2 per cent increase. It’s unlikely to catch up with lost growth rather than just regain most of the level, but we can live with that.
Services trade has been absolutely hammered — US imports and exports of services are both about a quarter down on where they were in January — but a lot of that is travel and related services and should recover as bans on movement lift. There might be some permanent changes, obviously, Zoom calls displacing the Heathrow-JFK red-eye, but a secular shift in cross-border movement from flesh to pixel isn’t a crisis of globalisation.
Is it all over? Nothing to see? Well, maybe, but there are still some lessons to be learned. For a start, to what do we owe this welcome resilience? Partly, as we may once or twice have said, it turns out that a largely automated capital-intensive trading system can survive a pandemic pretty well. Goods trade has performed much better relative to gross domestic product than during the financial crisis, when it collapsed faster than a Boris Johnson negotiating position.
But also it’s got a lot more to do with macro than trade policy. Apart from a few rather feeble gestures about keeping trade going (weaker than the anti-protectionism pledges during the financial crisis, and we didn’t think much of those either), governments really haven’t built much of a multilateral wall against trade wars. Subtler forms of protectionism have continued to flourish.
It was public spending and monetary loosening that did most to rescue trade by softening the blow to GDP, together with public procurement to ease particular shortages and stimulate the production of a Covid vaccine. The medical protective equipment crisis in the early months, for example, was ended by governments procuring more face masks, not by regulating trade to prevent export restrictions, which they emphatically failed to do.
The same is true of the other bits of globalisation. The first few months of the pandemic saw the biggest outflows of portfolio capital from emerging markets on record, part of a general flight to quality. Again, loose fiscal and monetary policy in both advanced and emerging markets came to the rescue, and markets stabilised. Possibly a bit more worrying is the fall in migrant remittances — bigger than official aid or foreign direct investment flows — which the World Bank reckons will next year be 14 per cent lower than in 2019. But then you’d expect the movement of migrant workers to recover more slowly than goods containers and high-frequency air travel, and it’s not a calamitous drop.
So fine, hooray for the world’s central banks and the finance ministries, some of them. Assuming the vaccine gets distributed en masse and there isn’t a premature shift to removing macro stimulus next year, the biggest immediate threats to globalisation should continue to dissipate.
And then all we have to worry about is the fracturing of global commerce in goods, services, data, capital, people and ideas from the US-China geostrategic conflict, the protectionist moves afoot in many countries to reshore production, the moribund state of multilateral rulemaking and the intense pressure that climate change will put on global models of growth and trade. We’ll come back to those next year. For now: phew.
UK goods exports have lagged behind peer countries this year in both the EU and other significant markets across the world, according to Financial Times research that highlights the scale of the challenge facing Britain as it seeks post-Brexit trade deals. The UK is recording falling market shares in goods exports in many key destinations, according to the analysis. During the six months to October, for example, Italy became a larger exporter of goods to the US than Britain for the first time since records began in 1980.
Tall Tales of Trade
Back to Brexit. The “wah-wah not FAIR” stuff from Brexiters criticising the level playing field rules holds that the EU is trying to dictate regulations to a trading partner in an unprecedented way. (Unprecedented apart from Switzerland, Norway, Iceland, Ukraine etc, but we digress.) The US doesn’t do that to Canada and Mexico, so why does the EU to the UK? Not FAIR. However, as pointed out by Jonathan Portes, myth-buster extraordinaire on trade and immigration, the US-Canada-Mexico deal (USMCA) actually involves Washington using rules of origin to micromanage hourly wage rates in its neighbours. (Check this out for heavy-handed bureaucracy: minute detail on inspections, required documentation, everything.) Even France hasn’t tried to do that to Britain.
In fact, even with further-flung trade partners, the US is sometimes more neurotic and prescriptive than is the EU, partly because Washington feels it is losing the global regulatory battle to Brussels. The UK can do a deal with the EU and follow whichever food hygiene rules it likes domestically, if it accepts the border frictions. By contrast, Washington’s chemical-washed obsession with dictating sanitary regulations in its trading partners is legendary. The rules on labour and environmental standards in the level playing field talks are a pretty small subset of the regulations that determine trade. If the Brexiters are really going to block a deal on these grounds, it’s either because they’re too ignorant to grasp the issues or cynical enough to pretend they haven’t.
A surge of stockpiling by UK companies before the end of the Brexit transition period on January 1 has triggered road congestion and costly delays in northern France and southern England as lorries queue for cross-Channel ferries and the tunnel on one of the world’s busiest freight routes. The sharp rise in truck traffic to the UK across the Channel — exacerbated by the impact of the Covid-19 pandemic on international freight flows — reflects a drive by UK businesses to stockpile imported products and raw materials in case of border delays caused by the new trade regime.
This week marks the fifth anniversary of the China-Australia free trade deal, a diplomatic triumph that has boosted trade by A$100bn a year. But no one is celebrating in Canberra amid a breakdown in bilateral relations.
“Australian foreign policy with respect to China has been weaponised, and it’s largely because I feel the security, intelligence and defence establishment has taken over the management on Australia’s foreign policy over the past six years,” said Geoff Raby, a former Australian ambassador to China.
The Federal Reserve has said it will keep buying at least $120bn of debt per month until “substantial further progress has been made” in the recovery, strengthening its support for the US economy amid a surging coronavirus outbreak. The guidance from the Federal Open Market Committee came at the end of a two-day meeting during which Fed officials upgraded their economic projections but maintained predictions that they would keep interest rates close to zero until at least the end of 2023.
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