A panel at a World Economic Forum (WEF) event in London has warned that the ongoing “balkanisation” of global trade and investment will severely damage the real economy.
At the launch of its Global Risks 2014 report, speakers said that since the financial crisis, economies have become more focused on domestic issues to the detriment of economic integration.
John Drzik, president of global risk and specialties at Marsh (which along with Swiss Re and Zurich Insurance helped author the report), said that this has been borne out in quests for energy independence and the advent of domestic and regional legislation.
Drzik said: “Banks are exiting markets because of the focus on domestic regulation. Multilaterals are finding it harder to reach agreements on climate change, cybercrime and free trade. In the energy sector, resource nationalism is emerging, particularly with the influx of shale. In the energy sector, we need global investment of US$27tn over the next 30 years in order to give electricity to the world.”
The result is that investors have become spooked – wary of long-term investments and emerging markets. David Cole, global chief risk officer at Swiss Re, agreed that regulation is important, but that it has led to investment funds being “directed away from the markets which have more resource requirements because of higher population growth”.
He warned that infrastructure investment is falling, with a lack of long-term investment being an unwanted trend in the market. This is particularly true in developing countries. The past few years have seen a mass retrenchment of developed country investors and trade facilitators to their home markets, Cole said.
He continued: “In response to financial crises, there’s been reduced investment and failure to adapt infrastructure. There’s a lack of long-term thinking. Developed markets are going back into their caves and closing the door behind them.”
The fragmentation of the trade world can be seen in the watered-down global trade agreement the WTO celebrated in Bali late last year. Almost all of the criteria set out in Doha in 2001 had been compromised greatly, leading to onlookers describing the agreement as “underwhelming”.
The current trend of onshoring US production to home soil or neighbouring Mexico has led some to speculate that the age of freewheeling globalisation has already peaked. Fears over IP theft and predatory capitalism have caused consternation among the US public.
But panellists called for multilaterals to be strengthened, with Drzik telling GTR after the event that the establishment of regional trading blocs and accords may be the most realistic alternative: “Getting global accords, because of the financial environment, looks to be getting harder and harder. If you can’t do those, then go for the next best thing… regional accords.”
This in itself could bring new dangers to the trade world. Fractured national protectionism is an ongoing and surmountable issue, but organised regional protectionism would be a have a much larger effect on the global economy.
A concrete solution was not set-out, with speakers saying that the objective of the WEF is to bringing such issues to the discussion table, rather than solve them immediately.
However, there was a call for more PPPs involving government, corporate bodies and NGOs in order to increase greater harmony among trade stakeholders. Drzik cited the Bill and Melinda Gates Foundation which has worked with the pharmaceutical industry and governments to spread vaccines around the world and power co-operative initiatives which have been bringing solar power to off-grid citizens of developing countries.
In the banking sector, the South Asian Federation of Exchanges (SAFE) recently worked with governments to adopt a ‘rulebook’ which will help create a harmonised regulatory framework for capital markets throughout the region. The overall aim is to boost GDP across the member states.
In trade and finance, there have been repeated calls for uniform regulation, with those active in the EU market being forced to comply with Basel III regulations and being subjected to far more stringent tariffs than, for example, Chinese companies.
“Increased regulation is important,” said Cole, “but there needs to be much more long-term thinking,”