The changing face of globalisation

Paul Donovan, Senior global economist, UBS Investment Bank has some interesting observations.

The world economy is more integrated than ever before. Global trade as a share of gross domestic product ( GDP ) has hit a record high in real terms. Transactions zip back and forth across international borders at an unprecedented rate. However, global trade is changing and that is not going to be good for some economies. The global trade in goods has not hit new highs — global trade in goods has stagnated as a share of global GDP. However in an increasingly virtual world we cannot look at trade in goods alone.

Ten years ago buying music meant buying a compact disc — a good and recorded in the data as such. Nowadays my nieces think compact discs are shiny drinks’ mats. No one under the age of 16 can really comprehend buying music in physical form — music is downloaded ( legally or otherwise ). Downloading music from a foreign website is trade, but it is not trade in goods. Buying music has shifted from trade in goods to trade in services.

More and more of our global trade is taking place as virtual trade in services — music, films, computer games and even books and magazines are all bought as services. It is trade in goods and services that has hit record highs. This is not necessarily great news for shipping companies or ports that depend on physical trade. 

Now if I were handing our awards for understatement this would be a serious contender. I see the evidence in my own living room. Being something of a modernist I am not much one for clutter. In a world that demands you go where the jobs are, you travel light and try to keep clutter to minimum. To that end I have very few material possessions and that which cannot go in to car boot can easily be dispensed with. And this is down to technology. Technology is a great de-clutterer.

At one point I might have had shelves full of DVD's, video games, CD's, books, record players, telephones and all the faddish hi-fi kit. Now I have a computer. A basic entry level PC is now capable of doing what a £100k sound studio did in the 1990's. My computer is my creative lab, my TV, VCR, Hi-Fi, workstation and social life to a greater extent.

We have multiple services to choose from. Amazon, Netflix, Youtube etc. Much of which has trailed in the wake of the black market in digital goods. As a kid I would download films and TV because it wasn't available commercially. It took corporate media decades to catch up. But now with the advent of streaming, after massive investment in internet infrastructure, everything we could possible want is only a few clicks away.

Still we find, however, that the real barriers to trade come in the form of moving money, with the ever present threat of fraud, identity theft and money laundering requiring high levels of impossible security and regulation. It then follows that our focus should be on digital services, banking, internet and intellectual property protection. These are far greater obstructions than tariffs. Such can only be addressed on a multilateral basis at the global level.

And as we have noted, to a large extent this referendum debate has been beset by a fixation with tariffs, ignoring the wider regulatory consequences and complexities of Brexit. Both sides are equally guilty. But then there is also another myopia which is the focus on trade in physical goods. Public debate is way behind the times. There are also other developments. Paul Donovan has it that:

"The move from compact disc to download is just the beginning. Technology like robotics and 3D printing will change supply chains. Much of the growth of globalization in the last 20 years came about because it was more cost efficient to shift parts of the production process to economies with low labor rates. This led to ever more links in the global supply chain; components made in one country, constructed in a second country, packaged in a third country, sold in a fourth country. The benefit of low labor rates outweighed the costs of transport and time delays.

Now, robotics and other technological advantages challenge the advantages of low labor rates. In 2016 sports shoes can be printed using a 3D printer. The only global trade required is to import plastic powders — all other links in the global supply chain are erased.

Production can be located close to the consumer, reducing transport costs. Robots replace the previously outsourced low rate labor. The ability to produce on demand reduces waste. This obliterates the long supply chains of modern trade and takes the world back to a more imperial model of trade — import raw materials and do everything else domestically.

Those who benefited from the inexorable march of globalization over the past 20 years should consider what this altered future might mean. Virtual trade and imperial trade will challenge transport companies and those countries that have benefited from increasing trade volumes. Regions that have been the main beneficiaries of the old trade model might need to think about what the future holds. The golden age of global trade may be about to breathe its last gasp.

This breaks the debate wide open. As it happens, a number of producers have gradually come crawling back having realised that the skills base in lesser developed countries simply isn't there. You may only need low skilled workers to operate the machines but you need skilled workers to fix them when they break. And when infrastructure is poor, traffic and port management bad with second rate facilities, we find that off-shoring is increasingly a false economy.

And as Paul Donovan notes, increasing automation takes labour costs right out of the equation. This in part will account for the major upheavals within the shipping industry, presently facing massive oversupply problems. Further to this, it has always been assumed that we could forever go on exploiting foreign workforces, but with UN sustainable development goals built into regulation, we increasingly find there are fewer places for unscrupulous businesses to hide.

In that respect, even cutting edge thinkers on enhancing global trade might well be behind the times. Developing ports and roads may not be the panacea we once thought. Given that there is an imperative to reduce carbon mileage in goods, we will see a regulatory shift to facilitate this new "imperial model". And in some respects, why the hell not? Long supply chains are horrifically inefficient and it is mainly bureaucracy that extends them. That is why we need to focus globally on regulatory harmonisation, to reduce the need for this whack-a-mole cost avoidance.

And so I would dispute the notion that we are seeing the last gasp of globalisation. It is more relevant than ever. It's just that trade has changed and so have consumption habits. The era of mega-container ship filled with cheap Chinese tat, fuelled by the debt bubble, may be over - but global trade is now and forever.

There is of course one exception. Food. Until such a time as we invent matter replication, with an increasing population we are going to have to massively enhance how we produce food. That then makes sustainable agricultural practices absolutely essential. I have previously been sceptical because whenever somebody uses the word "sustainable" it usually means all that green crap that I wouldn't touch with a barge pole. The word belongs to a class of people who lack any self awareness or scepticism - which is always a dangerous thing.

In this we have to balance food security with sustainability while also looking to drag lesser developed countries out of the misery of poverty caused by bad governance. In this Codex standards have a huge role to play. Watch this short video.

In this respect, every nation on earth is going to have to play to their strengths. To nurture their own rural policies to ensure they strike the maximum possible balance between maintaining a healthy ecosystem and sustainable agriculture. And by sustainable I also mean a system where farmers can actually get paid for producing food. That would be a novelty.

In that regard, the Common Agricultural Policy, the dead hand of the one size fits all approach is entirely anti-ethical to the challenges of modernity. It was born of a social engineering agenda in the wake of the last war. It has lingered ever since. The only way to reform it is to destroy it. We can only achieve that if we leave the EU. When farmers are giving up on rearing cattle in favour of planting solar panels at the expense of the bill payer, we know that there is something deeply wrong with our rural policy. Something we cannot address while supplicants of the EU.

While this is something of a ramble through the issues, what is clear is that we are far too wedded to the dogmas of the last century and we are barely past first base in understanding the depth and pace of change. And that's telling. We take time to modernise our thinking. It takes time for ideas to filter through. But when we finally get there, and we will eventually, we will need political institutions and structures capable of responding in a timely fashion. Whatever your political persuasion, that's really not the EU is it?