International trade is slowing. What does this mean for globalization?

The World Trade Organization predicts a slight recovery in international trade for 2017 and 2018, albeit with many uncertainties.

Historically, the volume of world merchandise trade has tended to grow between 1.5 times to twice as fast as world GDP. But since 2012, trade has only been growing at a rate equal to or below that of GDP. In 2016, 20 of the world’s largest shipping companies sold $120 billion, compared to $200 billion in 2012. The downturn of the Chinese economy and other emerging economies, as well as the contraction of investment in the US during recent years, may explain part of this deceleration - but not all of it. Other technological and political factors could indicate a long-term anti-globalization trend. This would create a world very different to the one we know.

Firstly, technological development is bringing production and manufacturing closer to the final destination of goods - the end user. The most obvious example is energy. We have new technologies for extracting oil. We are making progress in renewable energy to tackle climate change. As technology improves in these areas, the dependence of US and European energy consumers on third-party countries decreases. As a result, so does the need to transport millions of barrels of oil (55% of world trade in 1970) and tons of coal.

Thanks to new shale extraction techniques, the US - the world’s leading energy consumer - is becoming energy independent in oil and natural gas. This has a large impact on world trade and geopolitics. Given its growing energy independence, the US may reduce its onerous role as guarantor of maritime security. A large part of its interest in this role, which it has played since 1945, has been to ensure the transport of fossil fuels to the West.

Even more relevant, though still in its infancy, is the impact of robotic development on international trade. As the Fourth Industrial Revolution and its process of extreme automation spreads through our factories, and as robots become more efficient and affordable, practices such as offshoring manufacturing to places with cheap labour will most likely decline. Why relocate a factory to Vietnam or Poland if it can stay in California or Stuttgart with reliable robots that are more accurate, can work 24/7, and are less demanding than human workers? Millions of employees in the East may lose their jobs over the next few decades, substituted by robots in the West.

Advances in 3D printers may soon make it possible to substitute large factories with much smaller ones, closer to the consumer, where the manufacturing process is simplified thanks to the reproduction of models. Other radical changes in artificial intelligence and nanotechnology will come. New materials could be manufactured near the consumer, in order to substitute natural materials that need to be transported from distant mines and deposits. These changes will become more apparent over the next decade and will also influence the contracting process of trade. With less international trade and less maritime security, the price of maritime transport may spiral upwards.

Nevertheless, political reasons are an influencing factor, as evidenced by the latest European and US elections and Brexit. There are important sectors of the Western population that feel that abandoned by globalization.

The process of accelerated globalization, which began with China’s entry into the WTO on December 11, 2001, has been extremely positive for humanity as a whole. This model of globalization consists of offshoring manufacturing to countries based on cost efficiency variances, primarily labour costs. It lifted billions of people out of poverty in Asia, Latin America and Africa, and it allowed developing countries to grow significantly.

During the last 17 years, China increased its GDP from $1.2 trillion to $11 trillion, a sign of historically unprecedented growth for a country of this size. A similar phenomenon occurred in India, Vietnam and others. This model of globalization has also supported the growth of large multinational companies that have been able to offshore production processes and increase directors’ and shareholders’ income, as well as those of their employees and suppliers (including SMEs).

Furthermore, it has been excellent for consumers, enabling everyone to access an endless number of products at competitive prices. However, these benefits are not noted in the industrial communities of the American Midwest, in the mining and metallurgical areas of Liverpool and Manchester, and in formerly industrialized, rural areas of France. The people of these communities, duly indoctrinated, are starting to form the backbone of western democracies. They are afraid of a world of which they are losing grasp. These people call for tariffs and protectionism. Whether we like it or not, leaders of any political persuasion must make them happy by imposing stricter rules on trade (fair trade) by enforcing tariffs or abandoning certain trade agreements, even if some of us think this will not bring back the jobs as promised.

International trade of goods based on offshore manufacturing will obviously continue to exist, but it will tend to decline below world GDP growth. International organizations that were created after the Second World War will have to focus on the new challenges a different kind of globalization brings. These will require coordinated responses to other issues, such as climate change, migration, major financial crises, investment protection and cybersecurity.