Reference no: EM131703801

How do you feel about this reversal in trend from the past? Is it likely that modern economies will look back toward closer unification again?

(Answer in 200 words according to the article)

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Globalization in Retreat

Whatever Happened to Free Trade?

By Bob Davis and Jon Hilsenrath

Companies and countries are scrambling to adjust to a strange new world created by a decade of economic retrenchment and an upswing in populism

After World War II, the global economy rose on a wave of trade and finance, lifting hundreds of millions of people out of poverty in developing countries and providing rich countries with cheaper goods, lucrative investments and hopes for a more peaceful planet.

That tide is now receding.

Nine years after the financial crisis, global trade is barely growing when compared with overall economic output. Cross-border bank lending is down sharply, as are international capital flows. Immigration in the U.S. and Western Europe faces a deepening public backlash.

Nationalist politicians are on the ascent. On Wednesday, the U.K. formally started proceedings to remove itself from the European Union. In the U.S., President Donald Trump pulled out of a Pacific trade pact on his first working day in the Oval Office, declaring, “Great thing for the American worker, what we just did.”

For traditional economists, globalization is a pathway to prosperity. Rooted in the works of Adam Smith in 1776 and David Ricardo in 1817, the classical canon has embraced the idea that trade is the basis of wealth, because it makes nations more efficient by allowing each to specialize at what its workers do best.

Few of them fully grasped globalization’s downsides in a modern economy. Tying together disparate nations economically also expanded the labor pool globally, pitting workers in wealthy nations against poorly paid ones in developing nations. That greatly boosted the fortunes of the world’s poor, but also created a backlash in the U.S. and Europe. At the same time, freeing financial flows led to debilitating financial excesses that ended in crisis.

“Globalization is in retreat,” Larry Fink, the chief executive of the big investment firm BlackRock Inc., said in a February memo to employees, outlining a new corporate strategy. “We need to be German in Germany, Japanese in Japan and Mexican in Mexico.”

An earlier era of globalization, which stretched from 1870 to 1913, ended when the world descended into war. Rising trade barriers later played a role in the Great Depression of the 1930s. The present era may not turn out as catastrophically, but nations, companies, multilateral institutions and ordinary citizens are already scrambling to adapt to a world with bigger barriers to trade and finance as blowback builds.

Big banks, such as Citigroup and HSBC, have reduced their global footprints. Industrial firms like General Electric are developing strategies for a more localized world. Guardians of globalization, like the World Trade Organization, struggle with challenges from China and other emerging powers. Poor nations are finding it harder to count on exports for economic development. Wealthy nations face less hospitable overseas markets, while their workers grapple with the demands of automated workplaces.

Critics of globalization say a slowdown in cross-border trade and finance will help ease pressure on wages of unskilled workers in wealthy nations, stem the threat of financial bubbles and reduce the influence of multinational companies in developing nations.

“Maybe the U.S. will supply more of its demand by itself,” said Clyde Prestowitz, president of the Economic Strategy Institute in Washington, D.C., who has long urged the U.S. adopt more aggressive trade policies. “That could be a good thing and create jobs.”

During the globalization epoch that started after World War II, trade growth usually far outpaced—and helped drive—overall economic output. Now it is barely keeping up. The slowdown has long outlasted the financial crisis of 2007 to 2009, which helped set it off. Between 2011 and 2015, the value of global merchandise exports contracted 10%, according to the WTO, the largest drop over a four-year period in post-World War II history, driven in part by tumbling commodities prices. Merchandise export growth over a 10-year time frame is also the slowest of this era.

“We have a deflationary mind-set,” Jakob Stausholm, chief financial officer of Maersk, the Danish shipping giant, told investors in February, while reporting a $1.9 billion loss. A few days earlier a court in Seoul declared that Hanjin Shipping Co., the world’s seventh-largest shipper, was heading for liquidation.

Among the hottest trends in the industry last year was the dismantling of giant container ships for scrap metal—862 in all—along the beaching yards of Pakistan, Bangladesh and India.

Annual movement of capital across borders—in the form of stock and bond purchases, foreign direct investment and lending—fell more than two-thirds, to $3.3 trillion in 2015 from $11.9 trillion in 2007, according to McKinsey & Co. Overseas bank lending, particularly from Europe, has been hard hit. The stock of cross-border loans held at banks around the world contracted 21%, from $35.5 trillion in 2008 to $28.2 trillion in the third quarter of 2016, according to the Bank for International Settlements.

The ship-breaking business is booming in Pakistan as surplus container vessels are decommissioned. Photo: PPI/ZUMA Press

Peterson Institute for International Economics trade economist Gary Hufbauer calculates that U.S. output in 2016 was $2 trillion greater than it otherwise would have been thanks to greater trade and financial integration since 1950. Slowing the pace of globalization will actually slow U.S. income gains, he argues.

No less is at stake for a country such as Ethiopia, which has averaged growth rates in excess of 10% for the past decade as part of a push toward industrialization and greater international exposure. The country has little to fall back on if its globalization bet sours.

Hoping to emulate China’s ride on the globalization wave, Ethiopia is building a half-dozen manufacturing zones to produce garments, textiles and shoes for multinational firms, along with railroads and power plants. The construction spree, which keeps the air in Addis Ababa thick with dust, has created rising external debt loads, which jumped from $2.3 billion in 2006 to $20.4 billion in 2015, according to the World Bank.

Ethiopia’s prime minister, Hailemariam Desalegn, says the debt is a price he is willing to pay. “If you want to move in an easy way, then you can’t achieve double-digit growth,” he said in a recent interview. “We have to carefully manage it, but there is a way out also. We have a huge potential in terms of exports.”

The lethargic recovery from the global recession, especially weak demand for capital goods and big investment projects, helps to explain the global trade slowdown.