David M. Smick, a global macroeconomic adviser, is founder and editor of the International Economy magazine and author of “The World Is Curved: Hidden Dangers to the Global Economy.”
Here’s a prediction: The political party that controls the White House after January could, four years later, be out of power for a generation. The economic challenges are that daunting.
I’m not talking just about the fiscal cliff or America’s “budgetary crystal meth” habit, as financier Bill Gross recently described Washington’s inability to contain today’s exploding debt.
The risk stems from something more fundamental: The globalization model of the past 30 years is cracking up. And there appears to be no new model to replace it.
Since April, an ugly economic world has turned uglier. The annual growth rate of total global exports has collapsed. Exports were a crucial engine in powering the U.S. economy out of the worst of the recession in the second half of 2009 and remain important for growth.
Lately, even China and India, which were thought able to decouple from the weakness of the industrialized world, have fallen victim to the seizing up of global trade. The World Trade Organization is slashing its estimates for trade growth. The U.N. Conference on Trade and Development reports that economic growth is weakening worldwide.
Meanwhile, the Doha Trade Round is on life support. The world is at the edge of a currency war with at least 12 countries beyond China manipulating their currencies against the dollar for trade advantage. China is experiencing trade deficits and has slapped tariffs on American-made automobiles in response to U.S. duties on Chinese tires. Leto Research analyst Criton Zoakos argues that rapid Chinese wage inflation and new software-based cost-cutting manufacturing technologies in the United States are helping make the globalization model “obsolete.”
Financial liberalization, including the free flow of capital, is also under worldwide assault. Banks are rapidly becoming more nationalistic. This trend is heightened by regulatory barriers implemented in the wake of the global financial crisis and the subsequent euro-zone crisis. It is now more difficult for investment capital to move across borders.
The euro zone is at the heart of this deglobalization trend. European banks have traditionally been the source of roughly 80 percent of trade financing in emerging markets. Now these severely undercapitalized banks are forced to bring that capital home, and it is not clear that U.S., Japanese or Chinese banks are in a position to fill the gap. Capital scarcity combined with the need for banks to retain more capital are inhibiting global trade financing and ratcheting the deglobalization trend into higher gear. The U.S. economy can limp along under these conditions, but achieving the level of robust growth needed for full employment will be difficult. The rise of geopolitical tensions from globalization’s collapse will increase U.S. investor nervousness, contributing to a debilitating risk-averse environment.
It is difficult to underestimate the degree to which this flawed, sometimes frightening, good we call globalization has been the proverbial goose that laid the golden eggs. As a result, the public has unrealistic expectations about how much the economy can deliver in a post-globalization world.