Opinion

James Saft

Living through de-globalization: James Saft

October 23, 2012

Oct 23 (Reuters) – What was that you were saying about
globalization being inexorable?

A quick look at a series of under-appreciated recent stories
- a Sino-Japanese territorial spat’s real economic consequences
and a drop in both global trade and cross-border lending – shows
a world becoming less tightly integrated and a lot more
economically unpredictable.

The idea that the world will continue to become more
economically integrated, with an ever more complex global supply
chain and increasingly international corporations and banks,
lies at the heart of most mainstream economic thinking.

On this reading the undoubted power of globalization to
create more trade, wealth and profit – albeit unevenly
distributed – means that, over time governments and peoples will
come to exert less influence over their national economies,
giving up some power in exchange for higher growth.

That may continue to be true over the long term, but the
short term is looking quite a bit bumpier.

Japan posted some truly awful trade figures on Monday,
revealing a fall of 10.3 percent in exports in the year to
September. At root was a massive fall in exports to China,
driven in large part by tensions over a group of disputed
islands which sparked anti-Japanese protests in China, attacks
on businesses thought to be Japanese and even on cars made by
Japanese companies.

Japanese exports to China fell by 14.1 percent, accelerating
a fall of 9.9 percent in August. While Japanese imports of
Chinese goods increased by 3.8 percent, exports of cars to China
fell 45 percent and motorcycles 31 percent. Chinese tourist
traffic to Japan also fell, according to the Bank of Japan,
doubtless for the same reason.

As the dispute only caught fire on Sept. 11 when Japan moved
to nationalize the islands, known as Senkaku in Japanese and
Diaoyu in Chinese, the October data will be even worse.

To be sure, the poor data is in part about weakness in the
economy of China, which, islands aside, is still wanting less
industrial equipment, but it is also a salient reminder of the
fragility of the preconditions for increasing economic
integration.

And it’s not just Asia. The global economy may be in the
midst of a rare outright decline in trade, driven by weakness in
the euro zone and elsewhere, but abetted in subtle ways by
changing post-crisis attitudes about risk, income and wealth.
Global trade contracted for the second month in a row in July,
according to the CPB Netherlands Bureau of Policy Analysis, and
decreased in five of the first seven months of the year.

Coming so quickly on the huge 12 percent decline in global
trade in 2009, this is a sign both of the poor health of the
global economy, with troubles from Europe radiating outwards,
but also of a growing tendency for governments to try to cut
their risks from sovereign credit problems elsewhere.

LOAN DATA KEY

There are perhaps two key lessons about banking that
national policy-makers and regulators have learned in the past
five years, and both are arguably creating conditions less
friendly to global financing and global trade.

First, it is easy for a country to be brought low by its
banking system, even if the bad loans were made mostly overseas.
See Iceland for an example of how a swollen banking system
created state liabilities larger than the electorate was willing
to bear.

Second, even if your banks are lending to highly rated
borrowers, like, oh, say, Italy or France, if that sovereign
becomes distressed so may your banking system.

While it is impossible to see clearly from outside, the data
indicates that banks in general, likely pushed by their
regulators, are becoming less friendly to overseas finance,
including trade finance. This is giving national authorities
more control over their banking systems, a key form of
de-globalization, but is crimping trade and integration at the
same time.

New data from the Bank for International Settlements showed
a sharp contraction in cross-border lending in the second
quarter, which fell by 1.9 percent, driven in part by banks
seeking to get out of loans to borrowers in troubled euro zone
countries. Global interbank lending fell even more sharply, by
$609 billion, or 3 percent, in what was the fifth-biggest
quarterly contraction on record.

You can make a case that when, or rather if, the euro zone
gets its institutional house in order interbank and cross-border
lending will resume its upward march, driving and enabling
further globalization as it does.

That may be true but it will be a long time before bank
regulators, much less bank risk managers, take as relaxed a view
of lending overseas, even if it is loans made to a foreign
branch of the same bank.

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