Global Insecurity

Free Trade in Retreat

  • Why it matters

    Why it matters

    • Germany’s export-driven economy will be hit hard by trade barriers and a move away from globalization.
    •  
  • Facts

    Facts

    • Euler Hermes has calculated that there have been 1,800 new trade barriers erected since the beginning of 2014.
    • The International Monetary Fund has described this year’s global growth of around 3 percent as “moderate” at best.
    • The volume of world trade is only set to grow this year by 1.7 percent, according the World Trade Organization.
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    Audio

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Demonstration gegen TTIP
Doom and gloom for globalization? Source: DPA

The coming year will be dominated by trade protectionism, nationalism and state intervention in industrial policy, according to a forecast by management consultancy Control Risks seen by Handelsblatt.

Charles Hecker, in charge of global analysis at the consultancy, said Western democracies are in danger of failing to emphasize the advantages of globalization to their citizens.

Two major free trade agreements, the Trans-Pacific Partnership and the Trans-Atlantic Trade and Investment Partnership, or TTIP, which are meant to bind the United States more closely with Asia and Europe, are likely to be the first casualties.

“It looks bad,” Mr. Hecker said. “Globalization has reached a limit.”

He warned that Western democracies are under pressure from populist groups all over the world. “Populism as practiced by Trump is the biggest political risk in the coming year,” he said.

In this topsy turvy world it is not the United States, the long-time champion of free trade, but communist China which could become the leading advocate of globalization and open borders.

Mr. Hecker added that while “Europe will be put to the test, it will muddle through.”

He forecasts that leader of the far-right Front National, Marine Le Pen, will lose the presidential election and that Angela Merkel will remain chancellor after next year’s elections. “The decisive axis for the E.U. between France and Germany will be preserved,” he said.

Many senior financiers share his view.

Ron van het Hof, boss of credit insurance Euler Hermes in Hamburg, said that “the U.S. elections bring many new uncertainties,” adding that “in some cases business and companies are positively paralyzed. Wait and see seems to be the motto.”

Euler Hermes has calculated that there have been 1,800 new trade barriers erected since the beginning of 2014. “The barriers put the brakes on global exports, and that could prove to be a risk for some German exporters,“ Mr. van het Hof said.

He is particularly concerned by what he sees in the United States: “There is hardly any chance for free trade agreements like TTIP with Trump in charge. And there could well be new taxes or norms to make free trade even more difficult. Increased financing risks also cannot be excluded. None of that is good news for companies exporting a lot to the United States.”

The growing political risks threaten to become a real obstacle to investment – and at a time when the global economy is weak anyway. The International Monetary Fund has described this year’s global growth of around 3 percent as “moderate“ at best. The volume of world trade is only set to grow this year by 1.7 percent, according the World Trade Organization. Its boss Roberto Azevedo blamed sluggish growth on uncertainty and increasing protectionism, and warned that “this is not the time to be inward-looking.”

Little wonder the business sector is sounding the alarm. Senior executives from companies in the the G20 leading industrial and emerging markets signed an open letter to their respective heads of government saying, “We call for governments to oppose protectionist measures like barriers to trade and investment.”

Signatories include Deutsche Bank boss John Cryan and BASF chairman Kurt Bock.

Germany has the presidency of the G20 and will host a summit of group leaders next summer in Hamburg. In their letter, the executives emphasized that the “challenges of globalization cannot be resolved inside national borders.”

Michael Hüther, head of the Institute of the German Economy in Cologne, said the drive towards protectionism is coming from two sources.

 

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“First, the growing fallacy that long-term prosperity can be secured by isolationism. Second, it is also a question of whether globalization can be sustainably successful on the basis of freedom or state control,” he said.

In this topsy-turvy world, it is not the United States, the long-time champion of free trade, but communist China which could become the leading advocate of globalization and open borders.

Chinese President Xi Jinping used the APEC summit in Lima, Peru at the end of November to introduce his own free trade agreement as an alternative to TPP.

We live in a time where power is shifting: “Globalization is a normative project, no longer progressing – or increasingly less so – according to the rules of Western democracy,”  Mr. Hüther said. “China is in favor of a strategy of state intervention in industrial policy.”

The Chinese president is planning a visit to the World Economic Forum mid-January in Davos, Switzerland, in the same week Donald Trump takes charge of the White House. Xi Jinping on the world stage and Mr. Trump “home alone“ – the symbolism can hardly be a coincidence.

 

Torsten Riecke is Handelsblatt’s international correspondent. Stephan Scheuer is Handelsblatt’s China correspondent, based in Beijing. To contact the authors: riecke@handelsblatt.com and scheuer@handelsblatt.com.

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