What is the future of globalisation?

August 2017

The European Commission's (EC's) May 2017 Reflection Paper on Harnessing Globalisation articulates the concern of many commentators following the UK's Brexit vote, Donald Trump's election and the increasing support for populist and Eurosceptic political movements such as Italy's Five Star Movement. Others see increasing protectionism as threatening the trading environment achieved over the last two decades. But is globalisation genuinely on the retreat? Is recent regulatory change exclusively pointing to greater protectionism? Could technological change - the key driver behind the rise of the digital multinational - mean globalisation continues to offer opportunities for SMEs?

Globalisation - on the retreat?

Leading global institutions appear increasingly concerned that globalisation is under threat. The World Trade Organisation's (WTO's) Report on G20 Trade Measures of June 2016 showed G20 economies introducing protectionist measures faster than at any time since the 2008 financial crisis.

Commenting on the WTO's updated report of November 2016, Director-General Roberto Azevêdo said, "The continued introduction of trade-restrictive measures is a real and persistent concern. Tangible evidence of G20 progress in eliminating existing measures remains elusive."

EU Trade Commissioner Cecilia Malmström, in a speech on 26 June 2017, claimed European exporters had reported a 10% increase in the number of trade barriers they encountered in 2016, "We clearly see that the scourge of protectionism is on the rise. It affects European firms and their workers. It is worrying that G20 countries are maintaining the highest number of trade barriers."

While President Trump decided in June 2017 not to withdraw from the North America Free Trade Agreement (NAFTA), it may have been the USA's withdrawal from the Trans-Pacific Partnership in February 2017 that prompted Trade Commissioner Malmström to describe the June 2017 EU - Japan Free Trade Agreement as, "A strong message to the United States that free trade is important and that you shouldn't be too inward looking".

Globalisation - the EC response

In May 2017, the EC published its own response to what it perceives to be public anxiety about globalisation. The core argument of its Reflection Paper on Harnessing Globalisation appears to be that, while recognising its benefits, the EU needs to take a more central role in shaping globalisation to avoid the worst excesses of protectionism and laissez-faire politics:

"...if the EU has greatly benefitted from globalisation, it has also brought many challenges... globalisation has helped lift hundreds of millions of people out of poverty and enabled poorer countries to catch up... But these benefits are not automatic nor are they evenly distributed among our citizens... However, the solution lies neither in protectionism nor in laissez-faire politics. The evidence presented in the Reflection Paper shows clearly that globalisation can be beneficial where it is properly harnessed... The EU must ensure a better distribution of the benefits of globalisation by working together with Member States and regions as well as with international partners and other stakeholders. We should seize together the opportunity to shape globalisation in line with our own values and interests."

But is the EC correct in assuming that today's global environment is going one way?Is it correct to assume that the forces of globalisation can be managed by regulation alone?While welcome, the EC's response does appear to ignore other technological and regulatory changes that could mitigate the worst impact of globalisation.

A one-way street to greater protectionism?

Adopted on 22 February 2017, the WTO Trade Facilitation Agreement (TFA) promises ground-breaking simplification of international import and export procedures, customs formalities and transit requirements, to an extent that has prompted the EU itself to describe it as, "...the most significant multilateral trade deal concluded since the establishment of the World Trade Organisation (WTO) in 1995". Reduced bureaucracy will, the EC argues, make it easier for SMES to participate in global value chains.

Digitalisation and the rise of the micro-multinational

Against this background, the EC's Reflection Paper on Harnessing Globalisation, in arguing for greater top-down regulation, appears contradictory.

The EC's introduction of new VAT place of supply rules in 2015 led to many microbusinesses - below national VAT thresholds and hitherto exempt from registration - having to register for the EU's one-stop VAT MOSS mechanism. The response from these businesses made clear the extent to which they are now trading electronically across borders, a view endorsed by industry analysts who see cross-border e-commerce as increasingly driving global retail growth.

While barriers remain, particularly in the EU and USA, today's increasingly digital world creates readily accessible markets for SMEs with a degree of autonomy of which established multinationals can only dream. This is clearly the case for Italy's manufacturing Industry, which experienced a new growth impetus from the opening of foreign markets through online trading. For these, globalisation is an opportunity, not a threat: any attempt at top-down regulation by the EC could present real risks here.

Globalisation - more good than bad - at least for SMEs?

The UK's Brexit vote and the 2016 election of Donald Trump are cited as symptoms of how large populations - in Europe and the US - have not benefitted from the globalisation of the last 20 years. The EC is entirely right to address this, but a top-down approach risks ignoring the needs of those SMEs taking advantage of the digital revolution to grow their businesses across borders. Italy is a good example: despite the lack of long-overdue reforms in the state administration and justice system, the opportunities generated by globalisation have kept Italy afloat and a retreat from globalisation could jeopardize this precarious situation.

Author: Ferdinando De Feo

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