Globalisation – Nothing new under the sun

Globalisation

There is nothing new about geopolitics. Geography – both physical and human – has influenced politics and international relations for centuries, even millennia. But the nature of geopolitical risk has changed over time.

During the Cold War, geopolitical risks for Western governments and the corporate world were focused on Moscow’s motivations and behaviour, the possibility of expropriation of assets by unfriendly regimes, or a flare-up in the Middle East leading to a spike in oil prices. In the modern era, that range has expanded to include climate change, global terrorism, migration flows on an unprecedented scale, and populism. Russia is increasingly assertive, just as the United States is becoming more unpredictable, and China more outward-facing. Little wonder, perhaps, that Nato Secretary General Jens Stoltenberg has declared the state of the world “more dangerous” than for a generation. It certainly feels more complex.

Looking much further back, to the 1820s, Japan, China, India and the rest of East Asia accounted for around over half of global GDP and around 60% of the world’s industrial production (IP). By 1875, their share of global IP had dropped below 20%, while the UK accounted for more than a third of the world’s manufactured exports. The dramatic shifts in economic power that accompanied this first wave of globalisation were driven by industrial innovation and the collapse of transportation costs, triggering the first industrial revolution.

The geopolitical risks that we currently face are arguably founded in a second wave of globalisation, driven in part by a collapse in communication costs and digital innovation.

The geopolitical risks that we currently face are arguably founded in a second wave of globalisation, driven in part by a collapse in communication costs and digital innovation. The fall of the Berlin Wall and the rise of China have also played their part, with the steady liberalisation of the global trading system. These developments have opened up product and labour markets. They have also slashed the cost of moving and sharing information, creating possibilities for offshoring and for the management of long and complex supply chains.

Bank of England Governor Mark Carney has pointed out that this process has doubled the effective global labour force, while more than one billion people have been lifted out of poverty and global living standards have increased sharply. But the benefits of free trade are spread unequally across individuals and regions, and over time. New technology has also made differences in national and global income and wealth relativities more visible, underpinning trends in migration, protectionism and populism.

Financial markets have remained fairly sanguine in recent years, despite these developments. This is not that unusual: since the Second World War, the S&P 500 has fallen on average by 3.5% in response to shocks, ranging from the Cuban Missile Crisis to the 2014 Crimean conflict, and has typically regained its pre-shock level within an average of five days. Market participants may simply be “looking through” short-term events, focusing instead on economic fundamentals and institutional frameworks.

This is all well and good for, but economic conditions will not remain permanently benign. Central banks have less (or less well-tested) firepower going into the next crisis. International institutions – the G7, G20, World Trade Organisation, Nato – are all under strain. Energy shocks may transmit in a less damaging way than they did in the 1970s and 1980s, given the world’s reduced dependence on oil. However, other potential transmission mechanisms – interruptions to trade routes, supply chains and the digital economy – have taken their place.

Because these geopolitical trends are all more than a figment of the global financial crisis, none is likely to disappear any time soon. We can expect to see a continued “tilt” towards China, and Asia more broadly; populist pressures leading to increased protectionism and fiscal loosening; increasing global “visibility”, thanks to developments in the digital economy; and the links between economics and national security coming under scrutiny, leading to the shortening of technological and other supply chains.

Additional complexity and digital visibility call for well-grounded research and strong local knowledge and partnerships. Thinking local, while having global capabilities, reduces the risks from stretched supply chains, regulatory and reputational damage. So these risks also create opportunities – ones from which active investors with strong local relationships are well-placed to benefit.

 


The article above was previously published on Aberdeen Standard Investments’ ‘Thinking Aloud’ blog on 18th July 2018