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Global macro & geopolitics from a small economy perspective

A busy week for globalisation

David Skilling
21 May 2017

Globalisation is not dead, but it is definitely changing. And from Asia to Europe and the US, this past week has highlighted that the transition to a genuinely multipolar set of arrangements is gathering pace.

This process has been underway for some time, of course, and partly reflects fundamentals. As Asia rises, it is unsurprising that it will increasingly shape the rules of the game. And there is an increasingly regional shape to the global economy (a lesson that the UK has chosen to overlook). But the adoption of a more inward-looking ‘America First’ stance is accelerating the transition to a multipolar world with overlapping, potentially competing groupings.

Consider the Belt and Road Forum meetings hosted by President Xi in Beijing last weekend. Representatives from about 60 governments attended, although notably not India or Japan, including 29 heads of state (from Russia and Indonesia to Argentina and Greece). China made financing commitments of over $100b in what Xi called the ‘project of the century’. If realised, this initiative will reshape much of Eurasia and beyond – placing China at the centre of a new economic network.

There is much room for scepticism as to the speed and scale of the initiative; it remains ill-defined and funding these projects will be difficult given the various capital controls that China has imposed (and the available foreign reserves). But taking the long view, China is moving with powerful dynamics at its back.

Along with other China-championed initiatives such as the AIIB, this is part of China’s effort of position itself as the new leader of globalisation. President Xi’s speech at Davos in January warned on protectionism and made the case that China was a supporter of an open system. These statements are very welcome, but they should not be over-interpreted. China is not building a liberal, rules-based system. China wants to open new markets and new investment opportunities, but has not been nearly as energetic in opening its domestic market to foreign trade and investment.

The Belt and Road initiative is inevitably a mixture of economics and geopolitics, and will be run to advance China’s strategic interests. This behaviour has been seen in ASEAN where China has used a mixture of sticks and carrots to peel ASEAN members off. And China is a master of ‘boycott diplomacy’, most recently reducing Chinese tourism to South Korea after US missiles were stationed there. Even the Belt and Road meetings provided an example: Singapore’s Prime Minister was reportedly not invited, despite Singapore being a supporter of the initiative, because of strained bilateral ties. Countries will need to tread carefully to capture economic value while managing the political risks. Even so, challenges aside, this outward-looking initiative is net positive for trade and investment.

And fortunately, it is not the only game in town. On Wednesday, New Zealand Prime Minister Bill English met with Japanese Prime Minister Shinzo Abe to discuss TPP, among other things. Mr Abe stated that Japan was committed to the early implementation of TPP. There is a way to go, but a ‘TPP minus’ deal is looking much more likely than several months ago.

After the unilateral withdrawal of the US from the TPP in January, Japan has become the lynchpin in the outlook for a high quality, rules-based system in the Asia Pacific. Although there were initial doubts about the willingness of Japan to participate in a TPP without the US, Japan has been providing serious leadership. And the expressions of commitment from several of the other ‘TPP minus’ countries to concluding a deal – to which others could attach over time, including the US (or China) – is encouraging for supporters of an open, global system.

Of course, for Japan, this is only partly about economics – a TPP without the US is of much less value for Japan. A key motivation is to shape the strategic context, and to provide a solid alternative to China-dominated trading blocs in Asia in the absence of a strong US presence. A TPP would also provide strategic options for like-minded countries, from Australia and New Zealand to Singapore, that would otherwise have little alternative but to rely on the Belt and Road Initiative, RCEP, and so on. So these developments provide some confidence in the outlook for the liberal, rules-based system.

And in Europe, newly-elected President Macron met with Angela Merkel in Berlin. There is greater energy around strengthening Europe and the Eurozone so that it can act as a coherent unit. The EU is also advancing high-quality trade agreements. In Asia, FTA negotiations are being commenced or progressed with countries from Japan and India to New Zealand (and initial conversations are underway with China on an investment agreement). And this week, the European Court of Justice ruled on the EU/Singapore FTA and clarified which issues had to be approved by individual member states. This provides a basis for new deals to move forward, within the constraints of domestic politics.

Overall, this week has been a relatively good one for globalisation. But the US remains a negative. At last weekend’s meeting of G7 Finance Ministers in Italy, Treasury Secretary Mnuchin remained reluctant to reject protectionism: compromise wording was again used that did not provide support for free trade. And a formal process has now been started in Washington to renegotiate NAFTA.

So quite distinct approaches to managing globalisation are emerging. These regional ‘poles’ are not mutually exclusive; indeed, many European countries are actively supporting the Belt and Road Initiative (as are many TPP countries, with the notable exception of Japan). It is good to see widespread efforts to promote economic integration. And a degree of competition and diversity of approach is not necessarily a bad thing.

But the historical record shows that managing the mixture of economic and geopolitical considerations in these multipolar arrangements will be deeply challenging. There is much work to be done to manage these risks and to maintain support for an open global system.

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