Recent equity market volatility, including last week’s 800-poins fall in the Dow Jones Industrial Average, has many economic drivers. However, another headwind is geopolitical risk with growing concern about the future of globalization itself, which has long characterized much policy orthodoxy.
The latest example of this is the intensification of the ongoing US-China spat between the world’s two largest economies. With further US tariffs looming, China has called this a violation of bilateral and multilateral accords, and threatened more retaliation in what could yet become a fully blown trade war.
The current high level of political risk, by some measures at one of the highest points in the post-Cold War period, underlines the major stress globalization is under. One of the novel features here of the current period of strain is that two of the countries usually known for setting the rules in global affairs — the US and UK — are making the world a more uncertain place from Brexit to the daily pantomime of the Trump White House.
On the horizon in coming weeks is not just the prospect of greater US-China tensions, but also a hard, disorderly no-deal Brexit. The “end game” for the current phase of the UK’s withdrawal from the EU will come to a head in September and October in what could be a spectacular clash between the new government of Boris Johnson, the UK Parliament, Brussels, and the remaining 27 nations of the EU.
However, the issues and political context that brought about Brexit and Donald Trump’s 2016 victory are present in many other countries too. Take the example of the renewed political tensions in Italy, the third largest eurozone economy, which could yet cause the government to collapse in coming weeks amid wider disagreements between Brussels and Rome over issues from immigration to budgetary discipline.
For some significant time to come, the revolt against liberal establishments will continue to shape the political agenda, even if populists do not always win elections. And large-scale immigration of peoples will play key roles in shaping elections, not least in Western democracies.
What makes this latest bout of political angst so worrying for some market participants is that it comes on top of layers of previous turbulence in the global landscape for a decade now or more since at least the 2009-09 international financial crisis. This goes well beyond the rise of anti-establishment populists riding the anti-globalization mood across much of the world.
While globalization is under growing challenge, there are also countervailing forces in play. The biggest uncertainty is over the future of the US-China relationship.
The many challenges now confronting the US-led international order include the recent rise in tensions between India and Pakistan over Kashmir; the fact that Washington’s relations with Russia are at one of the lowest points since the collapse of Soviet communism; the continuing threat from international terrorism; the fact that the Israeli-Palestinian peace process has collapsed again; and continuing instability in nations from Syria to Afghanistan and Libya.
And one of the key trends at work, fueling political tensions, is a significant movement in global power taking place with a shift to key developing countries with key Asian states, especially China, primary beneficiaries so far. While the US remains by far the most powerful country in the world, it is in relative decline at the same time that claims of rising powers for resources are growing, as witnessed by disputes between China and neighboring countries in the South China Sea, for instance.
However, amid the myriad challenges, there are also countervailing developments that could underpin international order and globalization. While big multilateral deals are becoming harder to secure, there has been recent agreement by 11 American and Asia-Pacific nations of the Comprehensive and Progressive Agreement for Trans-Pacific Partnership, which account for 13 percent of global trade, the third largest trade bloc after the North American Free Trade Agreement (NAFTA) and the EU.
Moreover, NAFTA has just been renegotiated in the proposed new US-Mexico-Canada trade deal, and the EU has relatively recently concluded a range of big economic agreements with countries from Canada to Japan.
This economic multilateralism is girded by a dense web of postwar international institutions, especially the UN, which continue to have significant resilience and legitimacy decades after their creation. While these bodies are in need of reform, the fact remains that they have generally enabled international stability and diplomacy, especially with five of the world’s key powers all on the UN Security Council.
Going forward, perhaps the fundamental driver of whether globalization will be rejuvenated, or rolled back, is the direction of the US-China relationship; this could suffer from growing tensions, but it also has potential for fruitful partnerships. Growing bilateral cooperation is most likely with strong partnership on soft issues (such as climate change) enabling effective ways of resolving hard power disputes (such as the South China Sea).
However, growing bilateral rivalry, rather than an increasingly cooperative relationship, is especially likely if Beijing’s economic and military power continues to grow rapidly, and the country embraces an increasingly assertive foreign policy stance toward its neighbors in Asia.
While globalization is therefore under growing challenge, there are also countervailing forces in play. The biggest uncertainty is over the future of the US-China relationship which could be a force for significantly greater global instability, or deeper, collaborative strategic partnership, and help determine whether globalization will be rejuvenated, or rolled back.