Last week US equities hit new highs on hopes that China and the US would reach an agreement in their 18-month trade dispute. Financial markets think a deal would reduce uncertainty, boosting investment and growth.
But a trade deal will not remove all tensions. Crucially, it is unlikely to address longstanding US complaints about intellectual property and China’s interventionist industrial policy. And whatever the US and China agree, we are not going to return to the heyday of globalisation in the early 2000s.
This is partly because the global financial crisis had already dealt a major blow to globalisation. Trade was in the doldrums before the US-China trade dispute. Between 2012 and 2016 the volume of global trade grew by around 3% a year, less than half the average rate in the previous three decades.
Since the financial crisis a growing share of global trade has been subject to protectionist measures, creating new distortions in trade, many of them in the form of state subsidies for exports.
Cross-border flows of capital, direct investment and lending have also slowed over the past decade.
Factors unrelated to protectionism have also weighed on trade. Companies increasingly need to control regulatory, reputational and political risk in their supply chains; this encourages companies to keep supply chains short and production close to market. Rising wages in emerging markets, notably China, have eroded the savings from outsourcing. Such factors help explain why, after decades of job losses in US manufacturing, the sector has created a net 1.4m new jobs since 2009, the fastest growth since the 1960s.
Protectionism isn’t just about tariffs and export subsidies. Nations have at their disposal a long list of tools to reduce imports, from restricting market access to foreign companies, blacklisting firms over security concerns and requiring local partners or ownership of foreign ventures.
Policymakers in China, the EU and the US routinely use these tools to prevent the offshoring of key sectors and to ensure security in areas such as telecoms and IT. (The US, for instance, has banned the Chinese technology company Huawei from providing core equipment for America’s 5G network and encouraged its allies to follow suit.)
US president Donald Trump’s hawkish approach to China appears to command broad public and political support in the US. Two of the leading contenders for the Democratic presidential nomination, Bernie Sanders and Elizabeth Warren, are no less protectionist in their outlook than Mr Trump.
As protectionism creeps from trade to technology to intellectual property it becomes more complex and harder to resolve.
Governments are increasingly scrutinising digital networks, tech company profits and cross-border data flows. Digital technology is a major area of disagreement not just between the US and China but between the US and the EU.
Geopolitics and regulation are increasingly impinging on trade. Globalisation is getting more complex.