Bumpy playing field

De-globalisation: The forces of globalisation have been challenged by new global market barriers in the Great Recession. In 2011, the de-globalisation process even could gather pace if commodity prices continue their surge or if there is another financial crisis.

The globalisation of the last 20 years has been partly due to technology. The Internet and cellphones enabled companies to construct global supply, manufacturing and distribution networks not previously feasible. China, India and other emerging markets became integrated into the global economy, reducing costs for consumers and creating new demand. Since the formation of NAFTA and the World Trade Organisation in 1994 and 1995, regulation has played only a minor role in greasing the process. Conversely, expansive monetary policies – which have reduced risk premiums for emerging market debt and produced pools of risk-seeking equity capital – have been critical.

The technology is not going away, although the cost advantages of global sourcing decline as emerging market wages rise. But the recent crisis has brought a rise in anti-dumping actions and other limited tariff barriers. In addition, the disruptions from continued high global liquidity have led to currency manipulation by China, capital inflow taxes in Brazil and Thailand, and a general reduction in global economic cooperation, with the Free Trade Agreement between the European Union and Korea the notable exception.

The crisis may have passed its moment of greatest intensity. But political pressures in Western countries beset by prolonged high unemployment should continue these trends in 2011, counteracting technology’s encouragement of further globalisation.

There is an additional risk. A new financial crisis, or an inflation surge, could lead to sharply higher real interest rates, reducing the funds available for emerging market investment and raising risk premiums. China and other east Asian countries with high savings rates might have little difficulty in such a scenario, but India, with middling savings rates and an excessive budget deficit, could suffer from scarce capital availability. For the duration of the tight money period, globalisation could grind to a halt, or worse.

Globalisation is mostly economically beneficial, but by no means inevitable. In the next few years it may even reverse.