Globalisation has been a dominant feature of the socio-economic developments of recent decades. Now, it has been showing signs of de-escalation.
For some time now, the view that the unfettered promotion of globalisation works to the overall benefit of all economic agents has been challenged by some analysts and politicians, ignoring its significant contribution to the shift of a large part of the world’s population – mainly in China and India – from poverty to middle class. Globalisation is criticised for contributing to economic development and diffusion of technology while, in parallel, intensifying inequality within countries, contributing to job losses in critical sectors and fuelling the rise of extremist politics.
Already, there are clearly observable trends and a significant number of nations, citing reasons for stimulating industry and protecting domestic production and jobs, are attempting to limit their dependence on international markets, especially in what they consider to be strategic areas of advanced technology.
These tendencies have been strengthened due to the re-election of Donald Trump in the US, as well as the rise to power of other politicians in other countries with similar nationalist agendas and have significant socio-economic ramifications. Based on the prevailing economic theory, the trend of deglobalisation, through the imposition of tariffs and the adoption of drastic restrictions on trade, affects the global economy negatively. The adverse side effects include the allocation of resources based on political decisions, rather than the quality and cost of the goods produced, and the subsequent increase in inflation, which forces central banks to keep interest rates high and inhibits growth.
These developments are already reflected in the international markets. The initial euphoria that accompanied Trump’s re-election, due to the expected reduction of corporate taxes and the policy of deregulation, shows signs of receding, while the climate of uncertainty is intensifying, and the long-term financing costs of individual countries are on an upward path. At the same time, there are fears that oil prices will continue to rise, thus feeding inflation. Moreover, we observe a tendency towards strengthening of the dollar, an unpleasant development for Trump’s policy but also for the world economy, in particular the emerging economies which may be confronted with destabilising capital outflows.
In the EU, which is expected to be particularly affected due to its open trade character, there is an intensifying discussion about the appropriate response. The recommendations include the implementation of an interventionist policy to actively support the affected strategic sectors, and the achievement of a greater degree of independence and autonomy, through the diversification of EU’s export markets.
Further, it is proposed to seek negotiations with the Trump administration, aiming for practical and equitable ways to enhance trade between the US and the EU, based on avoiding the imposition of trade restrictions. If negotiations fail, the EU must be able to impose offsetting duties against the US to safeguard its own interests.
The EU has every interest to avoid the adoption of restrictive policies and to promote the strengthening of international trade and the preservation of the role of the International Trade Organisation. The climate, however, is not particularly favourable, neither domestically nor internationally.
Andreas Charalambous and Omiros Pissarides are economists and the opinions they express are their own
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