Global finance ministers and central bankers are descending on Washington this week with a central concern in mind: fear that the modern age of globalization is hitting a wall.
Last year’s $646 billion in foreign direct investment in rich economies represents a 40% drop from the peak before the financial crisis. International lending, as measured by cross-border banking claims at the Bank for International Settlements, is down nearly $2.6 trillion, or 9%, over the past two years.
International trade this year will grow at the slowest pace since 2007, according to the World Trade Organization, which has slashed its forecast for growth in global trade volumes to 1.7% in 2016 from a previous estimate in April of 2.8%. Imports among the world’s 20 largest economies have fallen as a share of their gross domestic product for four consecutive years, and growth in demand for shipping containers fell to 4% this year after four decades of double-digit expansion.
As financial officials gather in the U.S. capital this week at semiannual meetings of the International Monetary Fund and the World Bank, there is widespread concern that this global malaise could worsen if nations intentionally turn inward.
Too many politicians are backing trade barriers in a misguided effort to boost national growth in the short term, said Roberto Azevedo, director general of the World Trade Organization. “The medicine that is being often prescribed is protectionism, and that is exactly the kind of medicine that is going to hurt the patient, not help him,” he said.
The head of the IMF, Christine Lagarde, also expressed concern over rising protectionism around the world, including in the U.S. “Curbing free trade would be stalling an engine that has brought unprecedented welfare gains around the world over many decades,” she said.
The slower-than-expected economic activity is feeding a cycle of banks pulling back from international risk, companies hesitant to invest in new production, and governments issuing regulations — often linked to national security — favoring domestic producers.
“Now that we’re in this 2% [growth] range in the U.S. and less than that in other countries, people are clinging more to the past and thinking more how to protect versus embracing the future,” said David Abney, chief executive of United Parcel Service Inc.
Emerging markets are adding new “localization” rules that compel big companies to invest and create jobs in a particular jurisdiction, and in the process to scale down operations in home markets.
Rich countries, meanwhile, are fighting over international taxation and abandoning deals that would lower tariffs or set agreed-upon commercial rules of the road, a stark reversal from the path of trade liberalization that has prevailed since World War II.
With divisive elections coming up in the U.S. and major European countries, officials in some of the most highly developed economies have sharpened their rhetoric on international trade, taxes and regulation. European Union officials last month gave up hope on finishing negotiations on the sweeping Trans-atlantic Trade and Investment Partnership before President Barack Obama leaves office.
Meanwhile, tough sanctions stemming from geopolitical conflicts have sharply reduced trade with Russia and other countries. Less visible national-security restrictions have arguably packed an even bigger punch in China and the U.S. as those governments prevent corporate access to sensitive industries such as the telecom sector.
Led by the U.S., the group of the 20 major global economies imposed 644 discriminatory trade measures on other countries in 2015, according to Global Trade Alert, an independent trade-monitoring group. Examples include a host of U.S. tariffs on allegedly dumped or subsidized steel imports from China, many of which are becoming permanent.
Part of the problem is that China, hit with slowing growth, has further delayed planned reforms that would open up markets, instead persisting with policies favoring domestic industries. More than three-quarters of U.S. companies surveyed by the American Chamber of Commerce this year said they felt less welcome in China than a year earlier.
ASOS PLC, a U.K. online clothing retailer, for example, retreated from an expansion into China in April. Its Shanghai warehouse, opened in 2014, was supposed to give the global e-commerce firm a logistics hub to serve Asia and meet the expected strong demand from Chinese consumers.
There were early signs, though, that ASOS would struggle to get a foothold in the market. But soon after the warehouse opened, Chief Executive Nick Beighton told analysts that Beijing’s regulations on testing goods were more stringent than the EU’s, which he said was “a surprise to us.” Package labeling was far more onerous than the company originally thought too.
In April, the firm closed the warehouse, abandoned its Mandarin-language website and recorded a $13 million loss, citing complex regulations among the several factors for closing up shop. The company decided to redeploy capital meant for China on building up its European and U.S. operations.
The reduced trade volume is shifting the landscapes for banks such as HSBC Holdings PLC, which has exited 16 mostly smaller countries in recent years but still operates in markets responsible for 85% to 90% of global trade. With assets concentrated around China and the U.K., the bank is exposed both to Beijing’s economic rebalancing and the expected British exit from the EU, which could cut some of its U.K. clients out of European supply chains.
“When there’s uncertainty — if you’re not just selling toothbrushes or something — there’s the danger that you get cut out of longer-term contacts, because there’s an uncertainty as to what the arrangements might be in due course,” HSBC Chairman Douglas Flint said.
Just as the U.S. trade talks with Europe fell afoul of a wave of populist political sentiment on both continents, Mr. Obama’s 12-nation trade agreement — the Trans-Pacific Partnership — now appears to stand little chance of winning congressional support this year.