Investors and business cope with new normal of resurgent nationalism, retreating globalization
By Greg Ip
Italy’s Matteo Salvini, leader of the anti-EU, anti-immigrant League party, is seeking to bring down his own coalition. Photo: luca zennaro/epa/Shutterstock
When assumptions about how the world works are shattered, a global downturn is often the result.
The world learned in the early 1970s that the era of cheap oil was over, in the early 1980s that countries could default, and a decade ago that American mortgages and global banks aren’t safe.
Today, a similar rethink of globalization is under way. From Washington to Buenos Aires, nations’ mutually reinforcing commitment to open markets is disintegrating. In response, investors are rearranging portfolios, businesses are rethinking investments and policy makers are struggling to respond—all of which are pushing the global economy closer to recession.
Investors believe central banks—the last bastion of the technocratic, globalized elite—can use their limited ammunition to stave off recession. Yet central banks may be dragged into the competitive fray.
Nationalism and populism hit the headlines in 2016 when Britons voted to leave the European Union andDonald Trumpwas elected U.S. president. This was, initially, seen as a backlash against technocratic elites’ indifference to cultural and economic anxiety brought on by globalization, free trade and uncontrolled immigration.
In the past month it has become clear that nationalists aren’t simply correcting globalists’ excesses; they aim to supplant them altogether. After two years of fruitless efforts to negotiate an exit from the EU with most commercial relations intact, Britain now has a prime minister,Boris Johnson,prepared to make a clean break by Oct. 31 no matter the economic cost.
Mr. Trump’s early protectionist strikes at traditional allies were contained by countervailing forces at home and abroad. But the collapse of trade talks with China foreshadows a more fundamental unraveling of rules of economic engagement between the world’s economies. Having abandoned for now efforts to write a new rulebook, the U.S. and China have resorted to ad hoc, brute-force tariffs, devaluation and retaliation, which Tuesday’s surprise tariff reprieve simply underscored.
Elsewhere, Italy’s deputy prime minister, Matteo Salvini, leader of the anti-EU, anti-immigrant League party, is seeking to bring down his own coalition in hopes new elections will put him in control of the government. A trade war is brewing between American allies South Korea and Japan over ancient, unhealed wounds. Argentina’s peso and stock market crashed this week when Peronists, whose history of populism and protectionism saddled the country with its current woes, became the favorite to form its next government.
For the past two years, the U.S. and world economies shrugged off nationalism and populism. Protectionism was contained and more than offset by positives such as Mr. Trump’s tax cut and deregulatory drive. It can no longer be ignored: Businesses and investors, unsure of what if any rules will govern international commerce, are retreating from risky investments.
In Britain, Brexit uncertainty has brought business investment to a halt, contributing to—likely temporary—second-quarter economic contraction. Germany, perhaps the most trade-sensitive of the major economies, may be in recession: Its economy contracted in the second quarter, according to figures released Wednesday. Both the U.S. and China have seen exports drop and growth slow. American manufacturing has been hit by the slump in exports and investment.
The stock market’s wobbles have been amplified by companies most exposed to the world economy, according toParag Thatteof Deutsche Bank .The 100 most globally exposed blue-chip companies’ profits are down 3% in the past year, while profits of the most U.S.-focused are up 5.5%, he estimates.
Globalization has suffered temporary setbacks in past decades. This time feels different. The U.S., which led in creating global institutions such as the World Trade Organization, now leads in crippling them. In the latest issue of Foreign Affairs, trade economists Chad Bownand Douglas Irwin note that Mr. Trump’s use of national security to justify tariffs and quotas on steel, aluminum and auto imports broke with 75 years of U.S. practice: “The Trump administration recently stood alongside Russia to argue that merely invoking national security is enough to defeat any WTO challenge to a trade barrier.”
The U.S. has in the past used its economic, military and moral weight to promote economic integration among and tamp down tension between allies. “We would have put our arms around the shoulders of the conflicting parties and said, now come on guys, let’s talk this through,” saysDan Price,who served as an economic diplomat in the Reagan administration and both Bush administrations.
Mr. Trump by contrast has cheered Britain’s split from the EU and done little to contain the flare-up between Japan and South Korea. Says Mr. Price, “Once people think there is no one looking after the collective interest, that there is no moderating force in the room, once you have the U.S. by its example legitimizing unilateralism, it removes the inhibitions from others.”
This hasn’t become a crisis or recession because the leverage and financial interconnections that propagate panic across borders are largely absent while healthy labor markets have buoyed consumers. Unlike in the 1970s and 1980s, interest rates are low, even negative.
But disruptive unilateralism could eventually extend to currencies and monetary policy.
China let the yuan drop after Mr. Trump ratcheted up tariffs. Though justifiable based on economics, investors saw it as a sign that China wasn’t seeking a truce in the trade war, saysBarry Eichengreen,an economic historian at the University of California, Berkeley.
“Trump doesn’t like it when the currencies of countries like China, Korea and Vietnam decline against the dollar. So he is likely to threaten additional tariffs.” And to the extent that trade policy is the primary burden on global confidence now, central banks “can do little more than begin to stanch the bleeding.”
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