Fluid situation of global economy: Re-globalization or fragmentation?

Opinion, Khmer Times, 13 April 2023 (Link)

The IMF estimated that global growth will be slowing to below 3 percent in 2023, and even if 2024 might have a better outlook, global growth will remain well below its historic average of 3.8 percent. The World Bank drew even a gloomier picture. It suggested a possible “lost-decade” as economic growth is nearing the “speed limit”. It predicted that global GDP growth could shrink to 2.2 percent annually between now and 2030, a decline of a third from the 3.5 percent average rate from 2000 to 2010.

To curb inflation, many countries keep raising policy interest rates. In February, the US Federal Reserve raised its rate to 4.5–4.75 percent, the European Central Bank to 2.5–3.0 percent, the Bank of England to 4.0 percent, and the Reserve Bank of India to 6.5 percent. In Brazil, the rate goes as high as 13.75 percent, which is one of the highest in the world.

The banking crisis in the US and Switzerland will worsen the stagflation and possibly tip the US and Europe into recession.

Amid this situation, countries are weighting in political and economic policy options and are trying to figure out whether the world is moving towards “re-globalization” or “fragmentation/decoupling”.

“Re-globalization”  is defined as reforming globalization to make it work better, expanding its pool of beneficiaries and better managing its challenges.

On the other hand, “fragmentation/decoupling” is suggesting that countries should decouple from globalization. In explicit cases, some countries are vying for strategic competition or even confrontation through trade wars, technology wars, and tit-for-tat sanctions. The linkages and inter-dependence have been reduced or even cut off.

The direct implication from fragmentation would be what the United Nations Secretary General Antonio Guterres calls the “Great Fracture” in which the world will have “two different sets of trade rules, two dominant currencies, two internets and two conflicting strategies on artificial intelligence.” The costs would be tremendous. World GDP would shrink by 1.5 percent; prices would rise virtually across the board; and the delivery of global public goods would be severely diminished.

Fragmentation seems to be an unstoppable trend. Some countries are restructuring their supply chains towards more regional or more friendly partners. This is what we call “nearshoring” or “friendshoring” .

Energy trade is a good case in point. When Russian coal exports to Europe were reduced, they were balanced by increases from Colombia and South Africa. Exports from South Africa to Europe experienced an almost six-fold increase, while exports from the U.S. have remained broadly stable in 2022 with some were redirected to Europe. Russian exports, which increased overall, have been redirected to China and India, following the EU ban of Russian coal in the third quarter of 2022.

Trade war between the US and China is another example. It’s now five years since then US President Donald Trump imposed tariffs on $60 billion of Chinese goods accusing China of “unfair trade practices”. In December, the Biden administration rejected two WTO rulings that went in China’s favour about the tariffs, arguing that the WTO had no right to rule on issues of national security.

The US is pursuing an “endgame”  with China. Concerns about China’s role in global supply chains and in cross-border commerce and investment is predominant driver of most of U.S. trade policy. The Global Arrangement on Sustainable Steel and Aluminum (GASSA)’s goal of raising market barriers for steel and aluminum is first and foremost a response to China’s steel and aluminum industries.

Likewise, the Indo-Pacific Economic Framework (IPEF) seeks to deepen US economic engagement in the Indo-Pacific as a counterweight to regional economic integration with China, which is being pursued under a number of bilateral and multilateral trade agreements, most notably the Regional Comprehensive Economic Partnership (RCEP).

In warning against geo-economic “fragmentation/decoupling”, the World Trade Organization has suggested that the share of global trade between countries in the two different blocs would fall from 46.0 percent without decoupling to 25.0 per cent with decoupling, a reduction of 21.0 percentage points. On decoupling, the stakes are highest for low-income countries, because they stand to benefit most from the positive spill-overs generated by international trade.

When the US and EU are leading on high stake “fragmentation/decoupling”, Asia is providing real example on how a more deepened economic integration or in this case “re-globalization”, can provide better option for regional growth.

Asia is relatively seen as a bright spot in the bleak global economic landscape. As a major engine of the world economy, Asian economies are accelerating the pace in overall economic recovery in 2023.

According to the annual report of the Boao Forum for Asia, it is estimated that the weighted real GDP growth rate of Asia in 2023 would be 4.5 percent, an increase from 4.2 percent in 2022, making it a standout performer in view of the global economic slowdown.

Deepened financial integration in Asia has made regional economies more resilient against negative impacts from international capital flows. The main source of FDI for Asia remains within the region.

More countries are trying to promote local currency settlement to minimize risks from “fragmentation/decoupling”. As of the end of 2022, there were 26 local currency swap agreements within duration signed by Asian economies.

According to the Asian Development Bank (ADB), growth in developing Asia is forecast at 4.8  percent this year and in 2024, up from 4.2 percent last year. The People’s Republic of China’s (PRC) recovery and healthy domestic demand in India will be the region’s main growth supports this year and next.

Inflation is forecast to moderate this year and next, from 4.4 percent in 2022 to 4.2 percent in 2023 and 3.3 percent in 2024, gradually moving closer to pre-pandemic averages.

The banking turmoil had a limited impact on the banking sector in developing Asia.

Growth in Southeast Asia is normalizing after a sharp rebound last year. The subregion is expected to grow by 4.7 percent in 2023, down from 5.6 percent last year.

For Cambodia, ADB forecasted that its GDP would grow at 5.5 percent and 6.0 percent in 2023 and 2024 respectively. Cambodia has the third highest growth in Southeast Asia after Vietnam (6.5 percent, 6.8 percent), and the Philippines (6.0 percent, 6.2 npercent). Cambodia’s inflation will be 3.0 percent and 4.0 percent in 2023 and 2024—the third lowest in the region after Brunei (2.0 percent, 1.6 percent) and Thailand (2.9 percent, 2.3 percent).

Indeed, the global economy remains in fluid situation, and while there are countries who seek rearrangement based on geopolitical fault lines, there are also countries who are pursuing rearrangement for the mere sake of survival, especially small states and developing economies.

For ASEAN member states (AMS), although they don’t explicitly mention so but “re-globalization” seems to be the preferred choice, if not the only option. Countries do not want to be caught up in choosing one at the expense of another, Pax Sinica or Pax Americana.

They want to link with both according to circumstances, sectors and industries as long as situation allows to secure larger market access, to remain competitive, visible and connected with global supply chain. It is worth to note that seven AMS, except Cambodia, Laos and Myanmar, are members to both the RCEP and IPEF. In a similar vein, the four ASEAN dialogue partners, namely Japan, Australia, New Zealand, the Republic of Korea, who are members of IPEF also do not dismember themselves from RCEP.

To cushion external pressure, AMS may endeavor to promote intra-regional trade while pushing for enhanced connectivity. Digital economy also presents a policy option for ASEAN to weather rising economic tension. ASEAN has a rapid increase in digital consumers. The region’s digital economy is projected to exceed $300 billion by 2025 and $1 trillion by 2030.

Such policy options point towards “re-globalization” rather than “fragmentation”, and thus far there is no specific move from AMS that would suggest an outright “fragmentation” because integration constitutes ASEAN’s strategic goal since its inception.

Acknowledging that shifts are taking place, Singaporean finance minister Lawrence Wong put it rightly that “we are a small country, we have to take the world as it is, and not what we would like it to be…The game plan is really just to get back to basics, be very clear what our interests are, and advance those interests in a credible and principled manner consistently.”