De-globalisation ?

Summary:

On 28 April 2020, the Rafael del Pino Foundation organised an online dialogue entitled "Deglobalisation?" in which Mauro F. Guillén, Professor of International Business Management at the Wharton School, and Emilio Ontiveros, Professor of Business Economics at the Autonomous University of Madrid, took part. Emilio Ontiveros began the dialogue by commenting that the dynamics of globalisation had experienced an interruption, a serious threat, when four years ago, with the arrival of Donald Trump to the presidency, the United States adopted a series of decisions that called into question the international economic system that had facilitated the flows of trade, people and information. A system that the United States helped build and to which it was committed. What has happened with the pandemic may alter that dynamic. The first manifestation of this crisis was a disruption in the global value chains that are the paradigm of the new globalisation, and which are still disrupted today. The automotive sector is being a tributary of that supply disruption. Therefore, we are going to see a slowdown in the vectors of globalisation, not so much in goods as in direct investment flows. Governments have also created tax incentives for the repatriation of direct investment. Now, dependencies on production processes in Asia, including in China, are going to be reviewed. There is going to be more careful globalisation, and companies' internationalisation decisions are going to be more careful to avoid situations like the ones we have seen. Mauro F. Guillén added that these trends had been going on for a long time and this crisis has accelerated them, for example, trade protectionism and populism. As far as companies sourcing globally from abroad are concerned, this is a change that was already visible two years ago as a consequence of the trade wars. Companies were shortening their supply chains, they were diversifying the origins of the products they were buying. The big loser in this is China, while the winners are Thailand, Vietnam, Mexico and Eastern Europe. Now, multinationals have seen the light of day and are already working to reconfigure their value chains to make them more resilient to such shocks. We also saw this in 2011 with the tsunami in Japan. This will have two effects, firstly a change in corporate strategies, but also a reduction in efficiency and an increase in costs and possibly prices for a wide range of products and services for the end consumer. We will have to accept this in exchange for greater protection against these episodes of widespread disruption in value chains, which we cannot afford. Businesses will move away from just-in-time chains towards secure chains. This is something that governments should not regulate, except in very strategic sectors, such as medical equipment. Ontiveros commented that one of the consequences of this less globalisation, of less integration of production processes, is that there will be higher costs and, therefore, higher consumer prices. But the scope of this is smaller because inflation rates are at historic lows. In fact, we are flirting with deflation in a blatant manner. The other reason why the scope is limited is the deflationary impact of technology. The pandemic is going to increase digital literacy across the board, households, businesses, especially the increase in the technological propensity of businesses themselves, including micro-businesses that without leaving home are trying to locate foreign markets. What is more worrying is what a return to the articulation of national blocs or, simply, regional alliances or agreements would mean. This is the main threat. This extension of trade agreements does not end up being good for the consumer because free mobility of factors and data is good. The dynamic of introspection implies bad pedagogy, a return to a sort of cold war with China, with blocs, which implies commercial, technological and intellectual property tensions. At this time, it is necessary to revisit Bretton Woods, to reclaim Keynes' ecumenism of true multilateralisation. On this last point, Guillén recalled that Keynes was very aware of the lesson of the Great Depression, which was largely due to the protectionist wave. This is something we have to resist at all costs. One of the most damaging things is that people think that economic globalisation is against their interests, in the form of a fall in the long-term welfare of the population. As regards state intervention in strategic sectors, Ontiveros warned that this is a new and worrying element, which is now emerging with more intensity than in the previous crisis. It is not only about companies that the government may consider strategic; now it is also about giving authorisations for foreign direct investment to take controlling stakes in companies. We are also seeing more subtle mechanisms, such as helping not only SMEs to restructure their liabilities, but also large companies. It is business that is calling for this convenient tutelage of the state to help it out of the crisis. It is not so much an ideological choice, but a demand from the companies themselves. We should be aware of these temptations. Behind these strategies there is also an attempt to reduce the competitive environment and the free market. The market should be defended in its broadest sense, that is, let the ugly die, as Los Sirex sang, and that the competitive terrain is the international arena. Guillén warned that one thing is trying to get out of a crisis and another is the new economic normality that we will have afterwards. Therefore, to all of the above we should add the dimension of ideas. Here we have populism with quite negative consequences, but we also have dirigisme, the idea that a government that has a managed economy, like China's, is going to do better. There is also the idea of mercantilism, of how free trade is structured. The current situation is dangerous because it is fertile ground for populist, mercantilist and dirigiste arguments. If there were less inequality, the attraction of populists and so on would be less. But this crisis is going to accelerate inequality, it is going to increase the technology gap and it is going to increase many other kinds of inequality. For example, there are going to be sectors that are going to do very well and others that are going to be very badly affected, with groups of workers more affected than others. In the end there is a battle for economic ideas and we are caught at a time when it is very easy to make these kinds of arguments. This situation is worrying. The evidence, according to Ontiveros, shows that there are different ways of capitalising on the dynamics of globalisation. There are economies that have done very well in terms of GDP per capita and others that have not. The evidence also shows that globalisation cannot be left alone, that the defence of free trade is compatible with corrections such as training for work, or the principle of equal opportunities. What is true is that in economies such as the United States, or some European economies, globalisation has indeed gone hand in hand with an increase in inequality. Where this has not been the case is where there has been a compensation mechanism through, fundamentally, the tax system, for example, in Asia or Northern Europe, where labour formation has allowed for the matching of productivity gains, and where this tax policy has been implemented. It would be a mistake to fall into the papanatism of saying that globalisation alone guarantees welfare. That is why there have to be compensatory mechanisms that guarantee the principle of equal opportunities. In this sense, Guillén commented that this crisis once again highlights the importance of the state having instruments to correct certain dynamics that are not appropriate, which does not mean allowing itself to be led by dirigisme. This crisis tells us that we need states and markets, states with the capacity to act, to train people. We continue to see that there are economies that also manage to minimise the effects of crises and emerge from them in very favourable conditions. On another issue, Guillén pointed out that in the world we have a great battle between the middle classes. We now have emerging middle classes, alongside the middle classes in Europe, the United States and Japan. These emerging middle classes have developed with different dynamics than those of the advanced countries, they may be very different in size, and they still do not have the standard of living of Europe or the United States. This is another very important piece of globalisation at the moment. These middle classes, old and emerging, account for most of the world's consumption. They operate at two different speeds, they originate at two different times and they do not have similar objectives at the moment. That is what leads to the current situation and that is what populism is exploiting. There is a very complex economic, psychological, and sociological game at play here. We have a three-speed world: advanced economies; China, India and the rest of Southeast Asia and, on the other hand, the commodity exporting economies of Latin America and sub-Saharan Africa. Ontiveros recalled the IMF's economic forecasts in relation to the coronavirus crisis. According to them, nominal GDP is expected to contract the most in advanced economies. The emerging economies, meanwhile, are going to grow, but very little, in the order of 21GDP3Q by 31GDP3Q, which is a problem for them. In GDP per capita, the absence of corrective mechanisms in emerging economies is making inequality more pronounced. In emerging economies, GDP per capita growth is lower. But excessive inequality does not pay, just as excessive egalitarianism is an obstacle. Tolerating systematic exclusion generates disturbances, for example, in financial systems. Exclusion leads to behaviour in financial terms that disrupts financial stability. The day after we have to be worried about the reconstruction and the calm that the bond markets are going to enter, because we have never seen such a high level of public and private indebtedness as the current one. Ontiveros, therefore, fears the day when the ECB says it will stop buying corporate bonds at the current pace. What happens if central banks' balance sheets start to fill up with junk bonds? These bonds are issued by companies whose solvency is in question, for example US energy companies. This generates a feeling of insecurity in the financial system, in credit flows, in stability, in the bond that goes into the savings portfolio. The world is not going to become more secure financially either. Moreover, demographic change will mean that a significant part of the population in advanced economies will be over 65, with the changes in consumption, savings, housing, etc. that this entails. Spain does not have a particularly delicate situation in terms of private debt. It is more delicate in China or the United States. But Spain does in terms of public debt. Moreover, the sensitivity of the Spanish economy to what happens in Italy is very high, both in public debt and in the financial system. And Italy has gone from being a very pro-European country to a Eurosceptic one. With regard to demographics, Guillén said that in the societies that are most affected by the current crisis, there will be a greater drop in the birth rate and probably also a drop in the arrival of immigrants, which will also reduce the birth rate. This will be an acceleration of the already existing trend, even if couples only postpone having their baby. The mere delay in having children also slows population growth and accelerates the imbalance between age groups. In relation to central banks, Guillén commented that in the US there are rumours that, given the high levels of indebtedness, the Federal Reserve is going to accept higher inflation rates once the crisis is over, up to 31GDP3T or 3.51GDP3T to help get out of this indebtedness situation. Ontiveros qualified that, with demand contracting, it is very difficult for inflationary pressures to occur. That discussion about inflation was interesting when there was full employment, when we had signs that demand was heating up in the US. This is not the case in Europe. The ECB could do with inflation in order to start normalising monetary policy. What we are going to see for a long time is a monetary policy that is closer to the clinical picture of secular stagnation, to a Japanese-style picture where there is no inflation because there is no demand, because the level of public debt is very high and because the demographic structure is very much dominated by the elderly. The only difference with the Japanese is that they are savers and buy their country's public debt. The financial precariousness in which we are going to find ourselves in a few years' time is worrying because of the sensitivity of balances to circumstances that alter public and private solvency. There is concern about the possible downward credit review of private companies, for example, those in the automobile sector, or the Spanish and European banking sector, which is trading well below book value, because these sectors are vulnerable to any alteration in these financial balances. The highest private indebtedness over the last four years is due to companies in industrial sectors where demand has fallen the most. It is not in technology companies, but in the old plan economy. There is going to be a huge inequality there. Central banks are the great heroes of the previous crisis and of this crisis. But that cannot be indefinite. Without real recovery, there is a limit to monetary oxygen. As for the international economic order, Ontiveros warned against innovative pirouettes in areas such as ensuring a multilateral order. We have institutions that, although some of them were created a long time ago, have shown their worth, updating their mission to the reality, such as the IMF, the World Bank, the WTO, ... We should not make a policy of collapsing them, but adapt them to reality. The partners of these organisations today are all the countries of the world. Let us improve them. Revising Bretton Woods means shoring up the basic pillars we have. The OECD is putting before the citizens elements of judgement to see the degree of rigour with which states operate, the degree of fair play, the degree of tolerance towards inadmissible cases. A global world demands that sovereignty be ceded to these institutions. This is not the time to create new institutions, but to strengthen them. Guillén added that we need more collaboration, more coordination, more exchange of information. We don't have to reinvent these institutions, but rebalance them. The elephant in the room is the United States. If the world's leading economy is led by a president who sees everything in bilateral terms, without seeing the imbalance he can cause in the world, there is no solution to the problem. The November elections raise doubts about whether the Republicans have the ability to maintain their majority in the Senate. The Democrats can weaken that Republican majority. That would mean a different horizon six months from now in this situation of lack of coordination, of information sharing. This is the first thing that must be unblocked before we can consider reforming these institutions. We are in a moment of transition in the context of the balance of power in the world that will last for many years. The hope, for Ontiveros, lies in the emergence of a more multipolar discourse when the G-20 was revitalised, when the 2008 crisis was taken in hand. The IMF has been quicker to reflect the changes than these informal institutions. If political power is going to continue to derive from the economic size, the concentration of global GDP, international investment, technological capacity, etc., that China and the United States are going to have, then that is going to be very difficult to match. I think we are going to see a new entente between the United States and China if Trump leaves the White House, without a world that legitimises the systematic confrontation between two great powers. The Trump team's electioneering alibi is the need to have an enemy on the side. That is not necessary. Europe has been an example since the end of the Second World War. The mechanisms of representation in these institutions need to be reviewed. The very dynamics of international insertion mean that there are going to be three very important actors: The United States, which is by no means in decline; China; India; and, perhaps at some point, if we correct the situation, the European Union. For Guillén, the Cold War terminology makes no sense in this context. The China-US relationship is an economic relationship of integration, but also a financial and educational one. It is a different situation. The world cannot function if the US-China relationship is one of tension. The United States, China, the European Union, the United Kingdom, Japan, India and the United Kingdom would have to sit at the table where the important decisions about the architecture of the world are made. The rest have absolutely no role to play. The UK and Japan are key because of the technological and financial role they still play. Beyond them, for practical reasons, for technological and financial importance, that is the group that we need to collaborate and help us in this transition. Having an enemy is not important when you are also fully integrated with your enemy. Nor do we have low-intensity global conflicts that serve as a proxy for great power conflict. We must at all costs avoid using Cold War terminology. In technology, there is a lot of talk about the rivalry between the United States and China. But that field is still dominated by the United States, Japan and Europe. China is still far behind in this field. China is feared for its potential, but it is still very much dominated by those three. The situation is changing and China will be a more important player, but this technological rivalry is a bit exaggerated.

The Rafael del Pino Foundation is not responsible for the comments, opinions or statements made by the people who participate in its activities and which are expressed as a result of their inalienable right to freedom of expression and under their sole responsibility. The contents included in the summary of this conference are the result of the debates held at the meeting held for this purpose at the Foundation and are the responsibility of their authors.

The Rafael del Pino Foundation is not responsible for any comments, opinions or statements made by third parties. In this respect, the FRP is not obliged to monitor the views expressed by such third parties who participate in its activities and which are expressed as a result of their inalienable right to freedom of expression and under their own responsibility. The contents included in the summary of this conference are the result of the discussions that took place during the conference organised for this purpose at the Foundation and are the sole responsibility of its authors.

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