What you need to know about global trade today

A brief history of global trade

OFX have partnered with MoneyWeek, the UK’s best-selling financial magazine, to explore the future of global trade. Here we look at how the modern era of globalisation occurred, and how the current trading landscape is evolving. Download the full report here.

Throughout history, goods and services have flowed across borders, ushering in the emergence of the global economy, with shifts between protectionism and globalisation grouping this history into a number of distinct eras. According to Dr Matthew Partridge in the Future of Global Trade report, here’s how those eras have played out:

The birth of the global economy (1870-1914)

The development of industry through steam machinery, factory manufacturing, transportation and communication meant that there were benefits to having a global marketplace. Having organised capital markets centered around London meant that investors could now invest in companies across the globe. At the time, the gold standard was used to underwrite the value of individual national currencies and ensured stability.

Shot of tall buildings

The end of the first era of globalisation (1914-45)

The outbreak of WWI marked a swift end to the previous era of the global economy and the monetary stability that came with it. While some places, like the US, remained relatively economically healthy (until giving way to the Great Depression), the end of the war left mass devastation and paved the way for widespread economic misery. This downturn ushered in a surge of support for populist and nationalist leaders who moved away from free trade. This led to a growth in tariff barriers to protect domestic industries, and a mass collapse in the volume of trade between 1929 and 1932 alone.

The postwar revival (1945-75)

With the end of WWII leaving many countries convinced of the inefficiencies of protectionism, they became more conscious of working together. This resulted in the creation of various international institutions covering exchange rates and monetary policy (the Bretton Woods Agreement and the International Monetary Fund), economic development (World Bank), and tariff reduction (GATT – The General Agreement on Tariffs and Trade). The following decades saw a revival of world trade while the national currencies were pegged against the US dollar as it was given the status of a world reserve currency.

Note: A pegged exchange rate system is one where a currency’s value is fixed against either the value of another single currency (like USD), a basket of other currencies, or another measure of value like gold.

Cargo ships on the shore with a plane flying overhead

A deepening of globalisation (1975-2015)

A number of factors in this era contributed to an overall wave of financial deregulation, the US’s abandonment of the gold standard in 1971 left a free-floating exchange rate system, and the election of Margaret Thatcher in the UK and Ronald Raegan in the US.

This allowed capital markets to expand and removed many of the existing barriers to cross-border investment that had been established after WWI. This era also saw the replacement of the General Agreement on Tariffs and Trade (GATT) with the World Trade Organisation (WTO) in order to discourage protectionism. The communications revolution also made it easier for people in one country to invest in another, allowing both goods and services to be available for global trade.

The GATT was also replaced by the World Trade Organisation in 1995 in order to further discourage protectionism. Meanwhile, the Chinese government started to allow the market to play a bigger role in its economy, eventually joining the WTO in 2001, which allowed the country to provide cheap goods that have since kept global inflation under control.

Note: A floating exchange rate system is where the currency price is set by the foreign exchange market based on supply and demand relative to other currencies.

Buses on a London street speeding past

Growing backlash against globalisation

While the benefits of globalisation have been apparent throughout history, it’s also coincided with stagnating wages, mass ‘offshoring’ of jobs to cheaper locations and the perception that markets like China aren’t playing by the rules, leading to a lot of backlash. At the same time, the global financial crisis in 2008 has shaken confidence in the global financial system and paved way for issues previously seen as settled to be open for debate once again, with the likes of immigration and the free trade of capital all on the table.

The central banks have also taken on a lot of responsibility for economic management since the global financial crisis in 2008 as a result of politicians delegating the task and the side effect is the rise of ‘currency wars’. So if one central bank cuts rates, it becomes a race to the bottom for pricing more competitive to that of the nation’s global competitors, meaning the way the currency markets move have a huge impact on trade.

Unwinding globalisation is ultimately very tricky

As outlined in the Future of Global Trade Report, Dr Partridge concludes that if trade is to expand further, future agreements need to focus on eliminating non-tariff barriers and standardising regulations – or that which is on the more politically contentious side of the spectrum.

Overall, the threats to the current state of global trade are very real, but the realities of dismantling globalisation as we know it today is enough to dispel even the most cynical.

While the current political state indicates that there will be a more protectionist stance, volatility in the currency markets will likely follow. This volatility impacts the bottom line of businesses and how they manage that will be important in moving forward during this time of uncertainty. Protecting profits and cash flow with currency risk management tools is the way for many global businesses moving forward.

IMPORTANT: The contents of this blog do not constitute financial advice and are provided for general information purposes only without taking into account the investment objectives, financial situation and particular needs of any particular person. OzForex Limited (trading as OFX) and its affiliated entities make no recommendation as to the merits of any financial strategy or product referred to in the blog. OFX makes no warranty, express or implied, concerning the suitability, completeness, quality or exactness of the information and models provided in this blog.