"...the wish for improved relations with France was primarily but a fresh manifestation of the general tendency of British Governments to take advantage of every opportunity to approach more closely to the ideal condition of living in honourable peace with all other States." (The Eyre Crowe Memorandum, 1907)

Sunday, 10 August 2014

The Economic Consequences of the McPeace

The great Anne Applebaum argued in the Washington Post on Friday that Russia’s embargoes on Western products were the first stage of the end of globalisation and the final disproof of the theory that countries with McDonalds don't fight each other (the "McPeace" theory).   Anne knows more about Russia and Eastern Europe than I can ever hope to, and on that ground  I wouldn’t take her on.  But she set me thinking.  On her broader point on globalisation, I don’t think she’s quite right, but (as you’d expect)she's wrong in an interesting way.

Anne is certainly right to argue that the successive waves of sanctions mean that:

“a large country…has decided it prefers a territorial war with one of its neighbours to full membership in the international economic system”.

given that there is little doubt that Western financial sanctions are going to make it much more difficult for Russian banks and other countries to play as equals across (at least) Western markets.

Is it right to extrapolate from that, though, that:

“This week globalisation suddenly began to unravel a lot faster than anybody imagined”. 

and, more, that, this was a shock, because:

“globalisation offered a reassuring promise of irreversibility … we have taken for granted the assumption that globalisation is a new stage in world history, not a passing phase”. 

In fact, I doubt many international economists really think that.  It is, after all, almost obligatory to refer ominously to Norman Angell’s “The Grand Illusion” in any serious discussion of globalisation. And it is possible after all for any country to opt out of anything if it really wants to.   

Still, reversible or not, is this in fact the beginning of the triumph of politics over international economic integration?  I don’t think so.

First, what’s been striking since the Great Crash of 2008 is the continuity of economic integration, even though many countries will have been tempted to put up politically-driven barriers to trade and investment.  There’s been a bit of that, as the WTO has documented, but on the whole it’s not been significant, even in zones of relative tension like East Asia.  The only country that seems to have had a serious go is Argentina, marginal to the system and with its own brand of dysfunctional domestic politics driving it. 

Second, where countries have used trade measures, they’ve done so more to make a point rather than to cut themselves off seriously from global markets.  The EU and China’s trade niggling with each other over the last few years has aimed mainly to demonstrate to each other, and to domestic opinion, that they can’t be pushed around.  Russian sanctions on Western food products are a notch up from that, but probably only a notch, and anyway these products are a small part of most Western economies and often not very freely traded in the first place, thanks to the excellence of agriculture policy-making over the years.  (Russia is after all hardly the only country to have decided, as Anne’s article puts it, “it can accept higher food prices in the name of national honour”.)  Western sanctions are more serious, but would of course be rapidly reversed if Russian policy ever changed significantly. 

Third, Russia is only imperfectly globalised anyway.  True, Russia’s energy is traded on global markets, and Russian banks are significant participants in global capital markets.  But otherwise Russia is barely connected to the supply chains that drive industrial production nowadays, or to the flows of services that go with them – the global value chains that fuel prosperity.  Indeed that lack of connection is one reason why a business like McDonalds finds it hard to operate in Russia as it would elsewhere.  Russia can afford to cut itself off for a bit because the connections are quite weak anyway. 

So, no, I don’t think this is the beginning of the end.  But could it ever happen?  Could globalisation reverse out? 

Obviously it could.  Political conflict could bring the whole thing crashing down as in 1914.  But a more likely scenario over the next decade or two is that political tensions between the big regional players encourage globalisation to stay regional.  Most value chains are still regional not global, in three great economic regions centred on the US, Germany, and China.  The connections between them are relatively weak and many African and Latin American countries are not connected to any.  There are definitely scenarios where none of these connections ever get made, with foreign policy and domestic political pressures causing global integration to stall.  That could easily be a world of persistent  political tension between the blocs and maybe, one day, low-level conflict in the border areas.

That’s why inter-bloc initiatives like TTIP, TPP, and the EU/China and EU/Japan trade negotiations matter so much.  However slow, imperfect, and frustrating, they are ways of putting in the high-level economic wiring between regions that will make it harder to turn the lights out in years to come.  We should all be getting behind them.  They need to succeed.  If they don’t, then, yes, we could one day be in that world of regional blocs, with the balance of power determining relations.  Sound familiar?

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