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Davos Globalization Defenders Fight to Show 2014 Not 1914

January 16, 2014

Snow-covered Buildings in Davos

Snow-covered buildings are seen from the Jakobshorn cable car as it travels up the mountain above the town of Davos on Jan. 13, 2014. Photographer: Gianluca Colla/Bloomberg

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Davos, the spiritual home of globalization, is having to defend its vision.

As the Swiss ski resort prepares to host its next who’s who of decision-makers on Jan. 22-25, the World Economic Forum’s abiding belief that “improving the state of the world” is compatible with closer integration has taken a beating.

The financial crisis that struck in 2008 raised questions about whether globalization was more of a threat than a boon, Bloomberg Businessweek reports in its Jan. 20 issue. Even as recession recedes, its ravages are visible and countries are more inclined to protect trade and their financial markets than become vulnerable again. Charles Collyns, who was assistant U.S. Treasury secretary for international finance, puts it bluntly, saying “globalization has stalled.”

“What we’re moving toward is a system which on paper is open, but beneath the surface is increasingly distorted by all kinds of subsidies and buy-local provisions,” said Simon Evenett, professor of international trade at the University of St. Gallen in Switzerland.

Prior to the turmoil, global trade was growing twice as fast as economic output, said Bhanu Baweja, who heads emerging-market cross-asset strategy at UBS AG in London.

Plummeting Trade

Trade plummeted in the crisis and is only now regaining momentum. Cross-border capital flows are 60 percent of what they were, according to the McKinsey Global Institute. That’s not the kind of statistic the WEF’s organizers will be broadcasting.

“The people in Davos are looking forward, not backward,” said Robert Greenhill, a former executive and consultant from Canada who is now chief business officer of the forum.

Still, the stresses of the wider world are sure to find their way into the forum’s meeting halls, with “The Reshaping of Globalization” among the panels on the opening day.

Special Report: 2014 World Economic Forum in Davos, Switzerland

Joachim Fels, Morgan Stanley’s chief international economist, warned that 2014 could be a repeat of 1914, which brought an abrupt end to the first golden era of globalization.

“I do worry about a creeping trend towards a de-globalization of economic activity and capital flows,” Fels wrote in a report last year to clients.

Global Friction

Talk of currency war is in the air, while China and Japan are skirmishing in the East China Sea. In the U.S., trade is taking some blame for the hot-button issue of the year: inequality. Emerging markets such as Brazil and Turkey swooned over the Federal Reserve’s plans to cut back bond purchases. Banks say regulators are balkanizing finance by requiring each local affiliate to have the capital to stand on its own.

Leaks about surveillance by the U.S. National Security Agency have caused hard feelings among allies and rivals alike, with the spying scandal hurting U.S. suppliers of cloud computing as countries opt to keep data based at home.

Without violating trade rules, countries have found ways to close borders. Australia now bans overseas storage of electronic health records. Argentina requires foreign luxury automakers to offset their imports of cars with exports of local products, such as Malbec wine, all in the name of “trade balancing.”

Some companies are reacting by going home. Actavis Plc, the second-largest generic drugmaker, plans to end its operations in China because doing business there “wasn’t worth the aggravation, the frustration, or the concern,” Chief Executive Officer Paul Bisaro said this week.

Investment controls and antitrust rules are sometimes “intimidating people from doing cross-border deals because of risks today that didn’t exist before,” said Thomas Vinje, chairman of the global antitrust practice in the Brussels office of law firm Clifford Chance.

Hard Sell

Progress on the free movement of people is also being stymied as jobless ranks remain swollen.

A lobbying coalition that included General Electric Co. and Google Inc. failed to get Congress to ease immigration limits last year even though American companies argue they can’t find enough technology workers. Financial hubs such as Singapore and the U.K. are making it harder for companies to hire foreigners following domestic protests.

“Policies to promote more immigration into the advanced economies are going to be a hard sell until unemployment rates drop,” according to the “Depth Index of Globalization 2013,” a 276-page study by IESE, the graduate business school of the University of Navarra in Spain.

The view from Davos, though, is that all is not lost. Trade talks are the most important countertrend.

With little notice from protesters, negotiators are making progress toward the Trans-Pacific Partnership on one side of the world and the Transatlantic Trade and Investment Partnership on the other, as well as a fledgling U.S.-China investment treaty.

Positive Policy

Agreement on trade-streamlining measures was reached at the World Trade Organization’s ministerial meeting in Bali on Dec. 7. A study by consulting firm Bain presented at Davos last year concluded that eliminating discriminatory regulations and other barriers to global supply chains could boost world gross domestic product six times as much as ending all tariffs.

“I think 2013 was the most positive year for U.S. trade policy in at least 20 years and maybe even in the entire postwar period,” said Fred Bergsten, a founder and senior fellow of the Peterson Institute for International Economics.

The Pacific and Atlantic trade deals, if completed and ratified, “would amount to the largest trade liberalization, from a negotiating process, in the history of mankind,” said Bergsten, 72, who has been working on trade since 1968 when he joined President Richard Nixon’s administration as Henry Kissinger’s economics deputy.

Bicycle Theory

The importance of the negotiations is underlined by Bergsten’s bicycle theory, which says that if trade talks aren’t moving forward, they tip over like a wobbly bike.

Negotiators recognize that and are fighting to keep the bicycle moving, said Bergsten. “We have to fight off a relapse into protectionism,” he said.

On the whole, globalization has paid off big for the developing world, helping lift hundreds of millions of Chinese, Indians and others out of poverty.

Trade and investment between developing nations are on the rise, and emerging countries are investing in rich ones. Mergers and acquisitions in which Brazil, Russia, India, and China invested in Western Europe and North America grew 22 percent from 2010 to 2013, even as transactions in the other direction shrank 36 percent, according to data compiled by Bloomberg.

The year has so far seen one big cross-border deal: Suntory Holdings Ltd., the Japanese brewer and distiller, this week agreed to buy Beam Inc. of the U.S. for $16 billion to gain brands such as Maker’s Mark whiskey and create the third-largest premium spirits company in the world.

Mixed Blessing

As Davos panelists discuss ways to protect worker rights, stop deforestation, curb global warming, and root out corruption, the return to stronger economic growth in the U.S., Europe, and Japan is a mixed blessing for globalization.

If prosperity boosts countries’ receptivity to more trade in goods and services, it’s positive, said former Mexican President Ernesto Zedillo, a Davos regular who is director of the Yale Center for the Study of Globalization.

It’s bad, he said, if it leads to “complacency” about the need to fix budgets and address the root causes of the financial crisis. The big thinkers in Switzerland will be trying, once again, to get the good of globalization without the bad.

To contact the reporters on this story: Peter Coy in New York at pcoy3@bloomberg.net; Matthew Campbell in London at mcampbell39@bloomberg.net; Simon Kennedy in London at skennedy4@bloomberg.net

To contact the editor responsible for this story: John Fraher at jfraher@bloomberg.net


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