Globalisation is often blamed for the world economy's ills. Many commentators attribute rising populism in the West to years of wage stagnation attributed to globalisation. But, in our view, deglobalisation would be costly and disruptive for all regions of the world.
Globalisation's achievements, and the degree to which we rely on them, are underestimated. What would happen to people, companies and financial markets, if modern globalisation was dismantled, as populist politicians in both the US and Europe have threatened?
Such a situation would lower the speed limit at which economies could grow without hitting inflationary roadblocks - shortening and localising economic cycles. From an investment perspective, it could prove the catalyst that halted the 35-year bond market rally, challenging valuations across asset classes.
‘Old' versus ‘new' globalisation
To understand what the consequences of deglobalisation might be for financial markets, it is important to understand what is unique about today's form of globalisation. In distinguishing old globalisation from new, we are indebted to the economist Richard Baldwin's masterly analysis. Under ‘old globalisation', international trade rose considerably but companies' supply chains tended to be geographically attached to their end products. But under new globalisation, a single firm's proposition is first fractionalised (outsourcing often employment rich aspects of a production process to third parties), and then dispersed (where these outsourced stages of production can be bid for by firms around the world).
Recognising this shift, where stages of production are outsourced overseas, emerging economies have lowered tariffs to enable employment to flow to their markets. Technological advances and greater harmonisation of institutions globally, including the rule of law and regulations, have made it more attractive for companies to employ cheaper labour abroad than domestically. And so firms have globalised their supply chains.
At an aggregate economy-wide level, all nations should gain from trade openness, because they can specialise according to their comparative advantage. But the shift to new globalisation has led to developed market workers in stages of production most vulnerable to off-shoring and automation losing bargaining power.
Globalisation has allowed China to lift millions of people out of poverty. China's per capita income increased fivefold between 1990 and 2000, and by the same rate again between 2000 and 2010, moving China into the ranks of middle-income countries. The second group are companies whose profit margins improve because of the efficiency of fractionalising their production processes, and whose markets have grown.
Protectionist policies that make emerging market workers more expensive to developed market firms appear likely in many cases to accelerate the process of automation over the rehiring of developed market manufacturing workers.
Demographic dynamics will influence what choice companies make, depending on whether more protectionism is introduced. China's working population may already have peaked. Yet in other less developed regions, the working age population is expected to continue to rise significantly until at least 2040. Were globalisation to continue unchecked, this growing population represents to companies a set of new workers, and new markets.
Conclusion: A new world (investment) order
Today globalisation is far from complete. Tariff and non-tariff barriers still need to be taken down to enable newly emerging populations to participate in the global trading system. Halting globalisation would fundamentally change the rules of the game for companies, workers and investors alike.
Crucially, the 35-year bond bull market has ridden on the coat tails of new globalisation, with the so-called ‘Great Doubling' of the global labour force playing a key role in creating a disinflationary environment. Globalisation has led to falling neutral real interest rates - as labour costs have fallen - in turn lowering bond yields. This has allowed corporate profit margins to rise and asset prices to boom.
Stock-picking would become harder, as the dynamics we have understood to date would change. In such a scenario, rigorous research and regular engagement with companies operating worldwide would be vital to avoid making mistakes based on an approach to investment that only applied in the past.
About the author
Toby Nangle is Global Co-Head of Asset Allocation and Head of Multi Asset EMEA at Columbia Threadneedle Investments and manages a range of multi-asset portfolios including the Threadneedle Dynamic Real Return and Threadneedle Global Multi Asset Income Funds.
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