The changing world order: threats to globalization
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 globalization occurred, and how the current trading landscape is evolving. Download the full report here.
During the post Cold War era, globalization saw a boom in popularity with many of the restrictions imposed after the WWI era stripped, opening up borders to opportunities not previously known. However, the pace of globalization has slowed since the early 2000s. What lies behind this slowdown, and how does it impact the growing number of international businesses today?
Why does globalization appear to be slowing?
It’s no secret that the inclination towards globalization saw a rapid increase since the 1970s but has since slowed compared to its heyday. The Future of Global Trade report quotes the Economist in labeling this phenomenon ‘slowbalization’, but why has this occurred?
There are several reasons:
- The first is the historically low tariffs in relation to the value of trade.
- The second is the impact of the global financial crisis leaving banks more wary about financing trade.
- And finally, the overall trend of trade and supply chains suggests that the pull of cheap labor and multinational investment is waning.
Along with these factors, the role that politics plays in the slowdown of globalization can’t be ignored. According to Bloomberg Economics, about 2.3% of global GDP is tied to trade flows that would be impacted by a greater protectionist stance. The most obvious example of a growth in protectionist measures is that by the US President Donald Trump and the ongoing US-China trade war.
So while the political influence on the backlash against globalization may be more a symptom that the cause, it’s impact can’t be understated.
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So is it going into reverse?
While there is backlash against globalization, it’s certainly not headed to where it was in the 1930s, but instead the legal and political environment in which companies have to operate will become more uncertain. As Robert Azevedo, World Trade Organization (WTO) director put it in an address earlier this year, greater uncertainty ultimately means lower investment and consumption.
What to do during this uncertain time
Another area where politics could have a significant impact is the currency markets. With the greater uncertainty in what may happen with globalization vs protectionism in the future, businesses and investors still need to take what may happen seriously, and protect their business accordingly.
In particular, rumors, headlines and tweets from influential politicians can impact currency markets, and therefore business costs. For example, the historic drop in the pound against the US dollar following the outcome of the Brexit vote, or the high levels of trading in the US dollar and Chinese yuan towards the end of 2018 when businesses were hedging their currency exposure.
There are many ways for businesses to hedge their currency risk. Partnering with a foreign exchange service that can offer tools like Forward Exchange Contracts or Limit Orders to lock in the price you need now, to reduce risk at a later date is one way. Understanding foreign exchange risk and how it impacts the business is also important, so staying up-to-date with the latest market news is also key.