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Friday, 24 March 2017

What will happen when globalisation retreats?

Nationalism is on the rise worldwide. We know Why (ie, Fear) and we know Who (eg, Turkey, Russia, UK, USA, and Philippines). The impact (How, What) of surging Nationalism on globalisation was covered in a recent article in The Economist.

Globalisation is about the free flow of people, goods/services, capital and information (ie, What). To a large extent, these 4 represent the economic input (eg, capital, labour, land, and entrepreneurship / management) and output (eg, goods, information, services) factors. Restricting these free flows (eg, America First) will restrict and hurt economic input & output.

A recent example on the What: "Nissan demands Brexit compensation deal before making UK investment. The plant in Sunderland produces about a third of the UK’s car output and is heavily dependent on exports to the single market". Carlos Ghosn: “If there are tax barriers being established on cars, you have to have a commitment for carmakers who export to Europe that there is some kind of compensation.” (Independent).

A country-first approach only makes sense on a superficial level. It does not take into account that products are assembled by using raw materials, intermediate goods (eg, engines), and auxiliary materials. Each of these production inputs is usually part of an international supply and value chain. Import barriers are likely to cause price inflation which will hurt the final customer, being the voter in elections.

The relationship between low inflation, deflation, supply and value chain, including outsourcing, is a theme in Chris Farrell's book Deflation: What Happens When Prices Fall. "The main drivers of deflation are global competition, outsourcing, and the emergence of our Wal-Mart style economy, all of which provide the competition that drives down the prices of goods and services and increases our standard of living." (source)

The How usually aims at unwanted (i) people and (ii) products/services. Sometimes its focus is on (iii) restricting (outgoing) capital flows a.k.a. capital controls (eg, China). Sometimes its focus is on (iv) restricting information through censorship (eg, China, North Korea). 

Examples of the How are: (1) the British exit from the European single market (Brexit), (2) import barriers such as Trump's 20% border taxTrump's Mexican border wallTrump's travel bans

On the short to medium term, a retreat from globalisation and a surge in Nationalism will cause price inflation (eg, UK) due to (1) a currency depreciation (eg, UK), (2) additional taxation (eg, border tax, import tariffs), and (3) a decrease in competition (eg, less suppliers).

On the long-term, a retreat from globalisation and a surge in Nationalism is likely to boost conflicts between nations due to the individual country-first approach (eg, The Economist). Larger countries will try to expand and dominate smaller countries; sometimes by military force.

Everybody Wants to Rule the World (1985) by Tears for Fears