The Canadian- EU trade deal and the end of globalization
The EU and Canada signed a free trade deal called the Comprehensive Economic and Trade Agreement (CETA) on Sunday. The deal was almost derailed last week by objections from the French-speaking Belgians in Wallonia – an area that occupies 55 percent of the country’s landmass and accounts for 30 percent of its population.
The problems this exposed reveal the difficulties of securing new global trade agreements. For example the Trans Pacific Partnership (TPP) deal between Asia and the U.S. was agreed to earlier this year but still needs to be ratified by the assemblies of all the signatory states. And both candidates in the U.S. presidential election are now opposed to its ratification. Furthermore, the Trans-Atlantic Trade and Investment Partnership (TTIP) deal between Europe and the U.S. remains on hold with no agreement in sight.
CETA is supposed to increase Canadian-EU trade by 20 percent, and boost the economy of the EU by €12bn a year and that of Canada by C$12bn. But the benefits of such global trade deals generally turn out to be less satisfactory than imagined, especially for the weaker partners.
Moreover, CETA was only signed because the most controversial parts of CETA have been put on ice, namely the reduction of tariffs on Canadian farm produce that threatens Wallonia’s farmers. So-called investment disputes courts will enable corporations to sue governments for any action that threatens their profits. However, it may still take another two years before the full ratification by the 28 EU member states is complete.
These regional trade bloc deals have replaced all encompassing world deals through the World Trade Organization (WTO), because global deals have failed time after time since the global financial crash. The reason is clear – world trade growth has slowed to a halt. When the cake gets larger, those cutting it up are happy to reach an agreement to share, but when the cake gets smaller, people want to hold onto what they already have. That’s the situation now. The Long Depression produced low real GDP growth rates and there was no inflation in commodity prices – so the cake shrunk.
The WTO slashed its global trade growth forecasts for this year by more than a third. It expects just 1.7 percent growth in trade volume for 2016, down from their previous estimate of 2.8 percent. It also expects slower 2017 trade growth – a rise of 1.8-3.1 percent rather than the 3.6 percent it estimated in April.
Since the end of the Great Recession in 2009, instead of world trade growth outstripping world real GDP growth, the reverse is the case. After 1945, world trade grew 1.5 times faster than GDP and twice as fast when “globalization” picked up in the 1990s. The WTO estimates that future trade will only grow 80% as fast as the global economy. This is the first reversal of globalization since 2001 and the second since 1982.
However, even these WTO’s forecasts are optimistic. The Netherlands Bureau for Economic Policy Analysis (CPB) found that through August 2016, world trade volume was flat. And if we examine the record of world trade growth since the Great Recession, annual average growth in volume has been only 2 percent, compared to 5.6 percent before 2008.
The U.S. is no exception to this trend. The total value of American imports and exports fell by more than $200 billion last year. And in the first nine months of 2016, trade slumped by an additional $470 billion. This is the first time since World War II that trade with other nations fell during a period of economic growth.
All this worries strategic investors and governments in major economies. “Curbing free trade would be stalling an engine that has brought unprecedented welfare gains around the world over many decades,” Christine Lagarde, IMF managing director, wrote in a recent call for nations to renew their commitment to trade.
All this makes the prospect that Britain will secure a good trade deal in Brexit negotiations with the EU over the next two years look dismal. In addition, the idea that U.K. exporters will gain a larger market share after a 20 percent devaluation of the pound will prove false. Indeed, after the Great Recession in 2008, there was a 25 percent depreciation in sterling, and U.K. exporters simply increased their market share. Then, as the currency rose in 2013, the export share fell back even further.
The reason was two-fold. British export companies preferred to get higher profits and therefore they held export prices up as sterling fell. But devaluation meant rising import prices and many of the inputs for British exports (like cars) are imported. So higher import prices failed to lower export prices.
World trade has stopped growing and regional trade agreements are in jeopardy. So it seems that the process of globalization is coming to an end.
Heiko Khoo is a columnist with China.org.cn. For more information please visit:
Michael Roberts is a London based Marxist economist and who works in London’s financial services industry. He published the “The Great Recession” in 2008 and “Essays on Inequality” in 2014.
Opinion articles reflect the views of their authors, not necessarily those of China.org.cn.