Politico | February 23, 2017
As connections deepen between emerging nations, will America be left out of the loop?
President Donald Trump promises huge wins for the United States in the global trade arena, claiming he will use America’s market size and buying power to write better deals. It’s a worldview that assumes America’s economic might gives it almost unlimited leverage – and that the rest of the world will need to play ball if it wants access to American customers and finance.
That may once have been true. But a closer look at just how global trade has been re-aligning suggests that it’s likely to keep growing with or without us – and increasingly, it’s without us. Globalization is alive and well, regardless of whether the trade routes run through the US. And if an “America First” White House does start to retrench and retreat, there’s a good chance the biggest loser will be America itself.
An example already in the public eye is Obama’s signature international economic effort, the Trans-Pacific Partnership (TPP). With the previous administration unable to push it through Congress and Trump ditching it in one of his first executive orders, most of the other signatories are moving ahead anyway in a “TPP minus one” format. Even more significantly, more than a dozen Asian countries have rekindled their efforts towards advancing an alternative megadeal – the Regional Comprehensive Economic Partnership (RCEP) – which differs from TPP in one crucial way: At the center lies not the US, but our economic arch-rival China.
If RCEP goes forward, it will integrate Asian markets in a way that American firms will have an even harder time penetrating. Indigenous Asian firms will quickly move up the value chain, and start occupying spots that American companies are used to having for themselves. This is why America’s biggest companies aren’t so keen to play ball with Trump’s attempts to erect barriers that would keep manufacturing, pharmaceuticals and other sectors at home. Not only would “border adjustment taxes” raise the cost of their imports, but without TPP’s push to further open markets, multinationals’ declining profits abroad means less capital to invest in competing for high-growth markets where the majority of their revenues come from.
As Americans, it’s easy to assume that global trade still depends on America as the consumer of last resort. But that’s no longer true. In fact, the majority of trade in emerging-market nations is with each other, not with the U.S. In 1990, emerging economies sent 65% of their exports to developed nations like the US and Europe, and only 35% to other developing countries. Today, that figure is nearly reversed. This rising cross-emerging market trade is a multi-decade trend that many Western economists neglect. China’s annual trade with Africa is nearing $400 billion per year—more than US-Africa trade--and with Latin America is nearly $200 billion, about the same as trade between Latin America and Europe. Emerging markets won’t decouple from advanced economies, but as they connect more in all directions, they’re becoming less reliant on them.
It’s fashionable among globalization skeptics to point out that global trade growth is decelerating relative to global GDP growth. But given how fast Asian economies are growing in consumption and services, this is not surprising. By most estimates, consumption in China now represents two-thirds of China’s output and contributes 75 percent of its growth. But China also continues an investment binge in infrastructure and real estate, which are keeping commodities imports steady against most economists’ predictions. Also remember that as they grow, wealthier societies tend to import more, borrow more, spend more and travel more—soAsia’s rising middle class will likely be a driver of continued international trade even as its companies decrease their dependence on the West.
Which brings us to the largest coordinated investment program in world history: the construction of “One Belt, One Road”—a China-driven infrastructure project to weave many new sturdy Silk Roads across the Eurasian landmass. For the past quarter century since the Soviet collapse, Europe has been steadily rehabilitating its former Warsaw Pact and Soviet republic neighbors with modern infrastructure, while China has begun to do the same with the dozen countries on its western periphery in Central Asia, turning most of the “Stans” into supply chain colonies and passageways to the Near East and Europe. In the next quarter-century, they will meet in the middle, fusing the Eurasian supercontinent into an integrated commercial zone encompassing over two-thirds of the world population.
But we don’t need to wait until then to see the potential: Already Europe’s trade with Asia--including China, Japan, India, ASEAN and Australia--exceeds transatlantic trade, at more than $1 trillion per year, and that’s before most of these high-speed railways, pipelines and other corridors are even built. No wonder European governments (and their construction companies) were tripping over themselves to join the Chinese-sponsored Asian Infrastructure Investment Bank despite American objections. Germany’s record trade surpluses aren’t going to be absorbed in the sluggish Eurozone, nor by protectionist America. For all of today’s uncertainty, therefore, this undercurrent is clear: Europe and Asia are brushing aside America's unpredictability and getting on with the business of building a new world order. So are the nations of the southern hemisphere.
This is not “balancing behaviour” to counteract the economic hegemony of the US; the world is not aligning against America. It still uses the American financial system where necessary and American technology when convenient. But there is a law of history far more powerful than (American) geopolitical primacy: supply and demand. The new trade and financial linkages across all regions of the world signal the birth of a more distributed global economy with numerous major regional anchors including the US. All major economies have benefited massively from exploiting comparative advantages with each other, and even limited regionalization of supply chains won’t undo this positive interdependence.
Contrary to Trump’s assumptions, this more distributed globalization is a huge opportunity for moribund Western economies. America is a debtor nation, but Japan and Germany (along with China) are the world’s largest creditor nations, generating profits from reviving global lending and trade finance. Emerging markets’ faster growth rates and weaker currencies have inspired some of the world’s largest pension funds from Canada to Norway to expand their portfolio allocation to Asia, Latin America and Africa. The Norwegian pension fund recently announced a big switch from a bond to equity focus, meaning investing more in multinationals with emerging market exposure. The long money is still betting on globalization. Rather than try to stop it, America should get on the right side of history.
American competitiveness isn’t enhanced by isolating itself. American companies rightly favored the TPP and other trade agreements because they’ve long since outgrown even their huge domestic market. Without substantial margins abroad, they cannot invest at home. Trump’s punitive measures are self-defeating because they hinder America from competing in a world of growing opportunity. Not only should America redouble efforts towards opening markets for American goods, services and investment, but we must be equally aggressive in reforming our own tax, infrastructure, technology, immigration and education policies so that investing at home becomes more attractive. Globalization can still be win-win. Most of the rest of the world sees it that way, and so too should America.