Monday, 25 June 2018

Living through de-globalisation

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What was that you were saying about globalisation being inexorable? A quick look at a series of under-appreciated recent stories – a Sino-Japanese territorial spat’s real economic consequences and a drop in both global trade and cross-border lending – shows a world becoming less tightly integrated and a lot more economically unpredictable.

James Saft, Reuters Columnist

The idea that the world will continue to become more economically integrated, with an ever more complex global supply chain and increasingly international corporations and banks, lies at the heart of most mainstream economic thinking.

On this reading the undoubted power of globalisation to create more trade, wealth and profit - albeit unevenly distributed - means that, over time governments and peoples will come to exert less influence over their national economies, giving up some power in exchange for higher growth.

That may continue to be true over the long term, but the short term is looking quite a bit bumpier.

Japan posted some truly awful trade figures on Monday, revealing a fall of 10.3% in exports in the year to September. At root was a massive fall in exports to China, driven in large part by tensions over a group of disputed islands which sparked anti-Japanese protests in China, attacks on businesses thought to be Japanese and even on cars made by Japanese companies.

Japanese exports to China fell by 14.1%, accelerating a fall of 9.9% in August. While Japanese imports of Chinese goods increased by 3.8%, exports of cars to China fell 45% and motorcycles 31%. Chinese tourist traffic to Japan also fell, according to the Bank of Japan, doubtless for the same reason.

As the dispute only caught fire on Sept.11 when Japan moved to nationalise the islands, known as Senkaku in Japanese and Diaoyu in Chinese, the October data will be even worse.

To be sure, the poor data is in part about weakness in the economy of China, which, islands aside, is still wanting less industrial equipment, but it is also a salient reminder of the fragility of the preconditions for increasing economic integration.

And it’s not just Asia. The global economy may be in the midst of a rare outright decline in trade, driven by weakness in the euro zone and elsewhere, but abetted in subtle ways by changing post-crisis attitudes about risk, income and wealth. Global trade contracted for the second month in a row in July, according to the CPB Netherlands Bureau of Policy Analysis, and decreased in five of the first seven months of the year.

Coming so quickly on the huge 12% decline in global trade in 2009, this is a sign both of the poor health of the global economy, with troubles from Europe radiating outward, but also of a growing tendency for governments to try to cut their risks from sovereign credit problems elsewhere.

Loan data key

There are perhaps two key lessons about banking that national policy-makers and regulators have learned in the past five years, and both are arguably creating conditions less friendly to global financing and global trade.

First, it is easy for a country to be brought low by its banking system, even if the bad loans were made mostly overseas. See Iceland for an example of how a swollen banking system created state liabilities larger than the electorate was willing to bear.

Second, even if your banks are lending to highly rated borrowers, like, oh, say, Italy or France, if that sovereign becomes distressed so may your banking system.

While it is impossible to see clearly from outside, the data indicates that banks in general, likely pushed by their regulators, are becoming less friendly to overseas finance, including trade finance. This is giving national authorities more control over their banking systems, a key form of de-globalisation, but is crimping trade and integration at the same time.

New data from the Bank for International Settlements showed a sharp contraction in cross-border lending in the second quarter, which fell by 1.9%, driven in part by banks seeking to get out of loans to borrowers in troubled euro zone countries. Global interbank lending fell even more sharply, by $609bn, or 3%, in what was the fifth-biggest quarterly contraction on record.

You can make a case that when, or rather if, the eurozone gets its institutional house in order interbank and cross-border lending will resume its upward march, driving and enabling further globalisation as it does.

That may be true but it will be a long time before bank regulators, much less bank risk managers, take as relaxed a view of lending overseas, even if it is loans made to a foreign branch of the same bank.

Global economic integration runs on finance, on trust and on harmony. There are indicators that all three will be in shorter supply.

(At the time of publication James Saft did not own any direct investments in securities mentioned in this article. He may be an owner indirectly as an investor in a fund. You can email him at

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