Debt, Protectionism, and Policy Mayhem. Are There Solutions in a Globalized World?

Over the past fifty years Globalization has dramatically changed the global economy and shaped the way in which world markets operate. Globalization has spurred excessive amounts of economic growth and has had various positive impacts on international economies. Over past few years, there has been a major worldwide backlash against globalization and the previously unforeseen consequences of this process.

Globalization brought millions out of poverty, as seen throughout china, and improved the standard of living of people all around the globe and is why developing nations have developed so quickly. Globalization has also led to an increase in exports and foreign direct investment into many countries which has resulted in the transfer of knowledge, skills, and technology. Efficiency and productivity have risen on account of increased competition caused by globalization. The migration of workers has created diverse workforces which have particularly increased productivity in industries in which success mainly depends upon specific knowledge such as computing, healthcare, and finance. Migration has essentially established a mobile workforce which in a case such as Britain between 2001 and 2011 added US$34 billion to public finances. Unfortunately, despite these positive outcomes, globalization has had negative repercussions that have rippled across world economy and affected many nations.

Globalization over the past twenty years has operated on a much finer resolution and therefore doesn’t just introduce severe international competition amongst certain products but also within the manufacturing stage of production and jobs within these industries. This has led to many negative consequences such as the movement of manufacturing jobs in the United States to more industrializing nations such as Mexico and China. According to the economist six million manufacturing jobs were lost in the United States between 1999 and 2011. This also has dramatic impacts on the work force, despite current low unemployment rates, the past ten years has seen a major shift in the job market, particularly with low – skilled jobs which has seen a huge fall in job security, while higher wage inequality has also become a significant factor within various industries, especially to workers without a college degree.

Furthermore, globalization has allowed for the quick spread of debt capital which has devastating effects on the global economy as portray by the global financial crisis. Due to lax bank regulations in America, the housing bubble was created leading to its collapse, sending crippling shockwaves to economies all around the world. It has also resulted in the loss of culture and identity as migration, a significant factor of globalization, is seen as a threat by many natives in countries such as Britain and the United States. This has led to the rise and election of populist politicians such as Donald Trump and encouraged actions such a Brexit, which all seek to restrict free trade, endorse protectionism and turn back globalization.

There are various techniques which have been suggested to fight the downsides of globalization, including many politicians current plan to please the mind of the people and implement high tariffs, anti – dumping measures, subsidies, import quotas and administrative and physical barriers. As stated by experts at the various Washington D.C. based thinktanks, “Nationalism is a powerful feeling,” and therefore, “Protectionism is an easier sell.” Unfortunately this is not the most efficient or effective way of reducing the negative consequences.

One of the best ways to reduce the effect of globalization and the severe impact it has had on a country’s workforce would be to enact active labor market polices. These include higher creation of job centers, training schemes and employment subsidies or implementation of systems such as wage insurance, which would ease the transition between finding new types of work. Polices such as these could help the workforce evolve and meet the demand for higher – skilled jobs within developed countries such as the United States. OECD countries have committed 0.6% of the GDP per year to such strategies, but currently the United States spends approximately 0.1% of GDP in development and establishment of such policies. Currently 20^th and 21^st Century employment/training arrangements for the most part, are ill-suited to Globalization.

Alongside these strategies, it would also be in a country’s best interest to invest more the education of the population. When analyzing the risk of workers dropping out of the workforce it can be seen that the level of workforce participation by individual males aged 25 -54 with a high school level of education or less dropped, to 82.5% in 2015, down from 96% in 1965. In contrast, individual males between ages 25 - 54 with a bachelor’s degree or higher also fell between 1965 to 2015 but only by approximately 3.5%, falling from 97.5% to 94%. This is a significant contrast and shows that higher degree of attention needs to be focused on educating the United States and other developed countries’ populations, when attempting to reduce the effect of globalization.

Furthermore, due to the rise of various multinationals and large corporations that dominate certain industries the level of dynamism in the economy has fallen dramatically. Due to increase in big businesses fewer firms are being created and fewer startups are emerging. Additionally, big firms enact wat is referred to as “shoot – out” acquisitions which are aimed at buying and absorbing a startup that in future could become a competitor. By doing this companies continue to solidify their grip on the industry.  This is problematic as due to the fact that startups have a higher turnover of labor and in large established firms positions are usually set and last for much longer periods of time. This results in less job openings sand opportunities for new workers, further contributing to unemployment rand dropout rates seen in the workforce. Despite increased competition being a hard concept to convince working individuals of, as they already possess high fears and anxiety over job security, the outcomes of these strategies are highly beneficial. Thus, government reforms need to be aimed at increasing competition polices in aim of increasing the dynamism of the markets such to create more employment opportunities and subsequently labor and market productivity.

Migration has also been a important element of globalization which has led to large amounts of strain put on developed countries public systems. For example, according to an article by the New York Times in January expressed the severe pressure border towns are facing with such huge inflows of illegal immigrants. In one shelter 250 migrants share two bathrooms and one shower while another 400 are squeeze into a church alongside a soup kitchen which is sleeping hundreds in hallways, a pantry and a parking lot. One strategy is to do what Denmark has done and link local government revenues to the number of incomers, such to reduce the strains on schools, hospitals and housing. Although not all border towns would be affected, this strategy will alleviate some pressures and proven to work in a country such as Denmark which sees more than 10% of their population, compared to the United States’ 13.3%, to be immigrants, and 84% of welfare in Denmark being given to “nonwestern immigrants”.

Another widely disputed issue to the rapid flow of debt capital. A great example portraying the true fickleness of capital flows is effects which have led to the current state of the Euro and various suffering economies in Europe. When the euro was first established countries such as Portugal, Greece, Ireland and Italy all took advantage of private short term capital from other countries in the EU enjoying low borrowing costs and ample credit. When crisis hit credit began to freeze and thus had to be replaced with large bailout loans from the European Central Bank thus heavily straining ties between countries such as Greece and Germany. Thus, one possibility would be to attempt to filter capital flows. One example of this would be the Tobin tax, which is an entry tax placed on capital inflows, proportionate the size of capital inflow, and levied at the time of currency exchange. Brazil attempted this back in 2009 and when they imposed an entry tax on portfolio investments in aim of preventing the appreciation of their currency the real. It was deemed to have little effect until mid – 2011 when, along with a tax on the notional value of derivatives, it was estimated that a 10% drop in the value of the real was on account of the tax intervention. One of the criticisms of this strategy is that Tobin tax diverts capital flows to other emerging markets rather than deter them, but with higher international cooperation, which could lessen the impact of diversion, this technique could potentially be effective in monitoring capital flows.

Globalization has brought about various wonders in growth and development but has equally resulted in numerous unexpected consequences. Moving forward, governments will have to adhere to realities of globalization and implement effective strategies in order to stimulate long term recovery and growth.

    

Trade War Opens the Door for Emerging Markets

In the first two weeks of June the Trump Administration imposed a 25% tariff on steel imports and 10% on aluminum imports from Canada, Mexico, and the European Union, while slamming China with a 25% tariff on US$50 billion worth of Chinese products. These actions have sparked international uproar and retaliation from the affected countries. Within the past week the European Union have announced “rebalancing” tariffs on approximately US$3.2 billion worth of US products including steel, bourbon, peanut butter, corn, cranberries, and orange juice. China has also announced a 25% tariff of their own, worth a total of US$50 billion on 659 US products including soybeans, corn, wheat, pork, rice, and electric cars. Earlier in June Mexico didn’t stand down either announcing tariffs ranging between 15% and 25% targeting agricultural products including apples, potatoes, bourbon and pork, valued at a total of US$3 billion. Canada has also joined the party alongside Mexico imposing tariffs on steel, aluminum, maple syrup and more, worth a total of US$12.8 billion. Finally, while Russia has announced plans to retaliate, India has aligned with other nations on June 21^st announcing tariffs on 29 US products including apples, almonds, walnuts and steel worth approximately US$235 million. All these tariffs will have significant global impact as the prices of US products and imports will rise, potentially creating opportunities for emerging economies to fill the export gap in various markets.

                The soybean industry in one of the most exposed to upheaval, as tariffs impacts and regional droughts are creating major supply gaps within the industry. The United States accounts for 34% of the world’s soybean production while Brazil accounts for 30% and Argentina approximately 18%.

This has potentially led to a prime opportunity for Brazil, India, and other small players to increase production and take more market share. Together the USA, Brazil and Argentina account for 82% of world soybean production. Argentina might have been a player looking to increase soybean exports but has been recently plagued by damaging weather conditions. Unfortunately, major droughts in Argentina caused by a trough of low air pressure off the southeast coast of Brazil  have resulted in non – tropical climates which have inevitably brought drought. Some Argentinean farmers have seen yields cut in half while the nation has experienced a fall in soy production by 31% in 2017/2018.  Argentina has resorted to importing soybeans this season, seeing its highest imports from the US in twenty years, while also turning to nieghbor Paraguay. Thus, Argentinean prospects to increase soybean exports to gain market share are unlikely in the short term, as the nation firsts addresses domestic shortages. China is also a key player in the soybean industry, accounting for 60% of the world’s soybean consumption. Amid tensions with the US, the Chinese government has shifted its policy to encouraging a significant increase in domestic soybean production, but given the current scenario this might not be enough. While China consumes 60%, the country only produces 4% of the world’s soybeans, meaning it can only meet Chinee consumer demand for 7 weeks using domestic supply and are therefore forced to rely heavily on imported soybeans. Of the soybeans imported by China the USA accounts for 44% of imports and Brazil 45%. In April, before the tariff retaliations, US Soybeans imported to China were approximately US$403 whereas Brazilian soybeans were about US$414 per tonne. Forecasters predict that China’s 25% tariff on US soybeans could potentially increase US soybean costs to more than US$100 per tonne. Meanwhile, Brazilian soybean shipments to China will only be between US$15 and US$20 per tonne, making the possible overall cost of Brazilian soybeans, still approximately US$80 cheaper per tonne. These circumstances could heavily cripple the American market while firmly boosting Brazilian competitiveness. Therefore, Chinese tariffs and competitive Brazilian soybean prices sets Brazil in an ideal position to take advantage of the output gap, and potentially gain more market share.  

One of the challenges Brazil faces may be the extent to which its could increase production, but data from the rainforest monitoring organization Imazon has shown a huge increase and acceleration in between February and April 2018. These efforts are most likely in aim of clearing land for more farms and infrastructure to support the Brazilian agricultural industry. While this may be in favor of economic growth, these actions could have detrimental development and environmental consequences, as the Amazon rainforest is at a current deforestation rate of 17%. This is quickly nearing the predicted climate tipping point of 20% - 25% which could see catastrophic alterations in global climate patterns. Meanwhile, there are also other countries making small bids to increase their own market share within the soybean industry. Paraguay, the world’s 6^th largest producer of soybeans, accounting for approximately 3% of world production in 2016, overtakes Argentina for the first time this year as it looks to expand its influence and become a more regional player within the market. Furthermore, India has also approached China in its attempt to fill the global output gap after discussion at the fifth India – China Strategic Economic dialogue earlier this year. Chairman Rajiv Kuar of India told the Chairman of China’s National Development and Reform Commission, He Lifeng, that, “you import a lot of agricultural products, up to USD 20 billion or more…I was noticing that there are some tariffs you imposed on farmers' from Iowa and Ohio. Maybe India can substitute for soybean and sugar, if we could access those exports with all the due quality considerations to our farmers. That is very useful.”

By and large, given the market circumstances and the immense impact of global trade tensions and sanctions, smaller producers will become more active, but Brazil is in an optimal position to capitalize and substantially expand its soybean industry, agricultural sector and international trade ties which will ultimately leading to strengthening of its economy.

                In other markets, prospects are opening as well, as in the corn industry the EU could possibly be looking to Ukraine to fill the output gap. Ukraine is currently world’s 6^th largest producer of corn and Europe’s third largest supplier, and German agriculture research specialist, Wienke von Schenk, believes Ukraine could boost its position, as the EU looks to its markets amongst new tariffs. The past year has also seen the EU, the world’s 3^rd largest consumer of corn, turn to South African markets to satisfy their demand for the grain. Given the excess of 2017’s harvest size, excess supply led to lower prices, allowing the EU to import more South African corn than it in the past six years combined.

                Mexico is also revamping its corn sources as it is turning to Brazil for its corn imports. Mexico is the world’s 5^th largest consumer of corn and has already ordered 300,000 tonnes of corn from Brazil in 2018. This is a very small fraction of the 12.75 million tonnes Mexico imported from the US in 2017, but its five times more than the country imported from Brazil last year, and the capacity to expand remains strong. Even Alejandro Vazquez, head of Aserca, an agency in the Agriculture Ministry that promotes Mexican products, stated that Mexico should have searched for US alternatives many years ago, and that “Mexico was in a comfort zone….We didn’t need to go and seek these opportunities that we’re finding now.”

Russia is in a position to cash in on wheat exports, as tariffs hit the US and Chinese output drops an estimated 20% due to poor weather conditions over the past year. Russia is currently the world’s 3^rd largest producer of wheat (60 million tonnes), with China at number one (126 million tonnes) and the United States at number five (55 million tonnes). In further Russian favor, Indonesia, the world’s tenth largest consumer of wheat, has ramped up its imports of Russian wheat over the past year. Given the current conditions, the door is open for Russia while India, the world’s second largest producer of wheat, is looking for a slice of the pie as the sub – continent nation recently revised its forecast for 2018/2019 to 98 million tonnes, 3 million tonnes higher than originally expected.

Finally, the tariffs on US steel are starting to take effect as earlier this week, Harley – Davidson announced its withdrawal of some of its US based manufacturing. After experiencing a 6% fall in share price on Monday 25^th of June, Harley – Davidson said that it is going to increase production at its overseas facilities in India, Brazil, and Thailand. The company released a statement saying that the decision, “is not the company’s preference, but represents the only sustainable option to make its motorcycles accessible to customers,” in the EU and other overseas markets.

Summing up, Chinese tariffs on US soybeans have presented multiple opportunities within the industry for Brazil to fill an excessive output gap, while India attempts to capitalize by supplying China and smaller players such as Paraguay seek to increase their regional influence in the industry. The EU tariffs on US corn could possibly see the EU rely more heavily on Ukrainian exports while also venturing into overseas markets such as South Africa. The Chinese tariffs on wheat has seen Russia attempt to increase global wheat exports, whilst India has also ramped up production. Finally, Mexican, Canadian, EU and Indian tariffs on steel, are starting to take their toll as Harley – Davidson was one of the first companies to shift more manufacturing operations overseas to economies such as Thailand, India and Brazil.

Overall, the current tariffs, sanctions and market conditions are creating a situation in which the global supply market is vulnerable to change. If emerging markets prepare themselves and seize the opportunities at hand, they could be the unexpected benefactors of ongoing international trade disputes.