The Credit Suisse Research Institute today publishes its report “Getting over Globalization”, which outlines how the global economy is moving into a more multipolar form, the stability of which depends on appropriate rules and institutions being established early on. While highlighting several risks such as a rise in protectionism, currency wars and geopolitical conflicts, the report concludes that rather than halting globalization altogether, there are steps that can be taken towards a more balanced outcome.

Urs Rohner, Chairman of Credit Suisse, comments: “Globalization has been the most powerful economic force throughout the past decades. In  2016, we observed changes to globalization as we have come to know it. Especially from the point of view of international businesses, the changing pace of global trade and political regionalization will be challenging.”

Michael O’Sullivan, Chief Investment Officer International Wealth Management at Credit Suisse and lead author of the report, explains the background to the research: “The Credit Suisse Globalization Clock highlights faltering globalization and a world still moored to a multipolar setting. Accepting the ‘road to multipolarity’ is a more realistic perspective in our view, and certainly a scenario that is preferable to an ‘end of globalization’ outcome.”

The report “Getting over Globalization”, published by the Credit Suisse Research Institute (CSRI) is available for download at www.credit-suisse.com/researchinstitute.

The new study updates CSRI’s report about the future of globalization published in late 2015, analyzing three scenarios: ‘globalization continues’, ‘a multipolar world emerges at economic, political and social levels’ and, more dramatically, ‘globalization comes to an end’. (See appendix for table of scenarios.)

Using innovative analysis tools such as the Credit Suisse Globalization Clock, the report aims to measure and quantify globalization as well as multipolarity with its many facets. On the political stage, several events – the Brexit vote, the outcome of the US presidential election, the end of the Trans Pacific Partnership process – signaled that the year 2016 may be remembered as the period when globalization ran out of steam. The CSRI report expands upon several of these issues, including inequality and migration as the two prime threats to globalization that appear to be driving voter behavior in developed countries.

Ten things to watch for in 2017

If 2016 is the year that ‘broke’ globalization, then 2017 will see the makings of a more multipolar world, and a threat of a break-down in trade. CSRI flags ten issues to watch in this context:

• The health of trade: With the Trans Pacific Partnership (TPP) between the US, Japan and a group of Asian countries, and the Transatlantic Trade and Investment Partnership (TTIP) between the US and the EU now looking like they will not be ratified, and trade obstructionist measures growing, the pace and health of trade is perhaps the key variable to watch.
• Debt: Zero and negative rates meant that the world could ignore debt, and in many cases take on more of it. But rates are now rising, and this may put pressure on certain companies and countries. The Bank for International Settlements rightly warns that world debt levels are now higher than they were in 2007.
• Immigration: Immigration is perhaps the hottest political topic in Europe, and was a key reason why many in the UK voted for Brexit. The EU needs a plan to deal with immigration in the sense that all of its members buy into this and that it ceases to become a controversial political issue.
• When is the next recession? In the last seven years, markets have arguably priced in about four recessions. With debt levels in China very stretched and corporate margins low, and the US recovery beginning to perk up, the next natural recession cannot be too far away.
• ‘Strangelove scenario’ – military confrontation by accident or design: The South China Sea is frequently mentioned by commentators as a theatre for large power confrontation, but with Syria’s war becoming ever more complex, there are other areas that could spark a military conflict.
• Stealth attacks or cyber war: Cyber attacks on companies are more common place now, but for obvious reasons less is heard about attacks on states by other states. It may simply be a matter of time before one of these goes badly wrong, or elicits a robust response.
• Central banking accident: A policy move could cause a central bank to lose credibility – imagine for example the Bank of Japan trying too hard to push inflation upwards, and the yen then rallying.
• People tire of consumerism: Consumerism has been a hallmark of globalization, notably now in many emerging markets. However, difficult labor market conditions in some countries (in 2015 consumers in Russia, South Africa and Turkey were pessimistic or less optimistic on their income outlook), growing wealth inequalities and indeed a shrinking middle class may dull the lure of aspirational lifestyles and the acquisition of material well-being.
• Multipolar jurisdictions harden: Some states may feel that, in the comfort of their status as a geopolitical or economic power, they can afford to ignore international law. Thus, different regions increasingly adopt their own ‘way of doing things’ to the detriment of trade and potentially human rights.
• Climate event: Climate change is an integral part of globalization both in terms of the effect that globalization has had on the climate and also in terms of the remedies (regulatory and technological) that have evolved to try to reverse this. 2016 was the hottest year on record and a repeat of this will strain many farms, food supply chains and could provoke humanitarian crises.

Globalization, stalling at high altitude 

CSRI’s measure for tracking globalization – made up of flows of trade, finance, services and people – has ebbed in the past year, and over the course of the past three years has slipped backwards to drop below the levels reached in 2012-2013, and at about the same level as crisis ridden 2009-2010.

Perhaps the most basic representation of globalization is trade. An examination of trade in goods and services as a proportion of world GDP shows that trade activity is flattish, though again at a high level. In the course of the last six years, trade has rebounded from the global financial crisis and again attained the level reached in 2008/2009, which historically is the highest level of at least the last fifty years. This leads to the impression that trade, and by extension globalization, has reached its upper limit.

Credit Suisse Globalization Clock

CSRI has taken the indicators and data used throughout the report and updated its “Credit Suisse Globalization Clock,” which plots the development of globalization and multipolarity, scaled against their long-term averages. While both globalization and multipolarity appear to have traced a downward path from their all time high of 2012-2013 (as seen in the figure below), we believe today’s world continues to gravitate towards the evolution of several distinct ‘poles’.

Mapping out the multipolar world

CSRI sees multipolarity evolving in a number of ways, not only with regard to economic power, but notably also in the areas of military power, political and cyber freedom, technological sophistication, financial sector growth and in a greater sense of cultural prerogative and confidence. Many of these variables are not as easily measured as economic multipolarity, but some clear strands are emerging.

The multipolar world that CSRI references is based on the emergence of three significant poles:

• The US or more broadly the Americas
• Europe
• China centric Asia

CSRI further tries to quantitatively capture the relative strength of ten select countries (US, UK, Japan, Russia, India, China, South Africa, Brazil, Mexico, Chile) and two groups of countries – a representative Euro area (made of Germany, France, Italy and Spain) and a set of selected small developed countries (Luxembourg, Hong Kong, Singapore, Switzerland, Belgium, Ireland, Denmark, Iceland). These countries are scored on a five-point scale to display their relative strength as an influencer or pole based on five broad criteria – economic size, hard power, soft/diplomatic power, and governance quality and distinctiveness.

The analysis shows that legacy power players such as the US, the UK and Japan continue to dominate, scoring relatively higher on most indicators. However, Japan is increasingly seen as losing its steam here, given that the country continues to be challenged by a massive and tough economic rebalancing effort. The performance of the small developed countries group is noteworthy, plausibly offering competition to larger powers. Larger growing emerging markets (Russia, India, Brazil, Chile and South Africa) are identified as poles that are significant but yet to realize their full potential.

Lessons from history – measures to be taken

CSRI also takes a historic perspective and draws parallels between the end of the first wave of globalization in 1913, which then saw the onset of the First World War, and just over a century later the scenario the world faces again as the second wave of globalization draws back.

The same three key trends being experienced today were also observed in the past as prime drivers for the collapse of the first wave of globalization: demand weakness and stagnant output growth; constrained policy and operating environment; and rise in protectionism and import substitutions.

However, rather than continue along the path to an ‘end of globalization’ situation, CSRI believes that the transition from globalization to a multipolar world is now underway and it is therefore better to focus policy on creating a multipolar system that works well through clear rules and relevant institutions.

A stable multipolar framework initiative can take several forms – for example:

• In the absence of new global trade agreements, the major ‘poles’ (US, EU, Japan, India and China) may set up a trade coordination body which would help to minimize trade disputes and bring together countries to cooperate on trade based initiatives such as China’s Silk Road project.
• The existence of three to four large ‘poles’ may be accompanied by the creation of coalitions between medium-sized and smaller states – for example the creation of a formal network of small, open economy developed countries (CSRI publication, The Success of Small Countries, 2014) to create a ‘voice’ for smaller nations.
• An international cyber security agreement that follows the nuclear arms control agreements of the 1980s.

Compared to the US and China, Europe will have the greatest challenge institutionally in terms of being able to present a unified policy and voice on economic, financial and diplomatic issues. A senior, heavyweight EU foreign minister will be required, backed by a credible EU defence strategy and army. In finance, Europe will need to push ahead with the establishment of an EU Treasury, and the completion of the euro-zone framework.

Institutionally, 20th century international institutions may be scaled back. The World Bank and the World Trade Organization at least may find themselves defunct in this new landscape and may need to be recast as much smaller, regionally focused institutions (i.e. the World Bank may move its base to Africa). Similarly, the United Nations may find that some of its activities such as health and education remain valued, but that its security council and peace-keeping missions are less popular and fade into disuse.

Attempts to relaunch ‘globalization as we know it’ may struggle in the face of entrenched skepticism over its benefits and the reality that demographics, indebtedness and, to a large degree, productivity weaknesses are likely to persist and hold down the trend rate of growth internationally. In CSRI’s view, accepting the ‘road to multipolarity’ is a more realistic perspective, and certainly a scenario that is preferable to an ‘end of globalisation’ outcome. 

About the Credit Suisse Research Institute
The Credit Suisse Research Institute is Credit Suisse's in-house think tank. The Institute was established in the aftermath of the 2008 financial crisis with the objective to study long-term economic developments, which have – or promise to have – a global impact within and beyond the financial services. For more information, visit: www.credit-suisse.com/researchinstitute.