Cross-border, private-capital flows continue to be disappointing. Flows to emerging markets, for instance, fell sharply in the summer last year and remain stalled. Investors appear cautious, notwithstanding central bankers' ceaseless efforts to tempt them to buy riskier assets by suppressing yields of government-backed securities.
Investors are also demonstrating increasing home-country bias, disproving the theories that emerging economies would be immune to global weakness. Companies are similarly exercising considerable self-restraint in their investment in long-lived assets, such as factories, at home and abroad. The massive provision of public funding cannot mask the shortfall in private investment flows.
Many of the world's largest banks are forgoing their global ambitions. Conflicting capital requirements and massive regulatory complexity across jurisdictions render global banking a less attractive aspiration. Serial bank bailouts have given greater impetus to governments to direct the activities of their domiciled banks. Many big banks are now state-owned, and many more find themselves in limbo. They are quasi-public utilities, trying to serve the wants of their governments and the demands of their supervisors, leaving the remnants for private shareholders. The resulting bank deleveraging is reducing credit to the real economy, exacerbating economic weakness.
Trade is the glue that connects the global economy. Trade has grown much faster than economic growth for most of the last few decades, thanks largely to the globalization wave. Only twice since 1982 has global trade growth trailed economic growth.
But trade has weakened over recent quarters. According to the International Monetary Fund, trade growth volume is projected to slump to 3.2% this year, down from 5.8% last year and 12.6% in 2010. The World Trade Organization recently cut its forecasts for global trade by more than a full percentage point for this year and next. Absent fundamental policy changes, these data mean that the IMF's global GDP forecasts for this year (3.3%) and next (3.6%) are challenging to meet.
I'll spare you the doom-and-gloom editorializing that follows the above analysis. The reaction to the crisis, withdrawing from the world, is a lagging indicator. One hopes that political instability won't prolong the dark times. But a new era of globalization will emerge and lay claim to a greater share of the globe (e.g. Middle East). Depending on the scholar you reference, we should be entering Globalization 5.0. It will be more of the same, but different.
What will Globalization 5.0 look like? Mexico:
Here is Uncle Sam’s Latin American reality. First, Mexico is rapidly becoming as important to the US economy as China. There has been much excitement in recent months about the possibility of “reshoring” manufacturing jobs from China to America. If you broaden the destination to North America, the trend is already under way. Mexico is now vying with China as the manufacturing hub of choice for US and other multinational companies – it is as economically integrated with the US as any two members of the eurozone are to each other. ...
... Second, America’s demography is changing at vertiginous speed. Many focus on the distant horizon of 2050, when Mexican-Americans are projected to account for a third of the US population. But today’s numbers are dizzying enough. In Texas and California, America’s two most populous states, a majority of schoolchildren are now Hispanic. They are tomorrow’s voters. It is doubtful they will tolerate a US-Mexican relationship that is largely couched as a law and order issue.
Mexico, a country lost in all the BRIC sensationalism, is ready to boom. And don't sleep on Canada, still America's largest trading partner. NAFTA already dwarfs China. However, the treaty isn't binding together the fortunes of these three countries. Migration is the agent. More from the Financial Times:
As a result of their country’s manufacturing boom, Mexicans are no longer quite so hungry to work on US construction sites or pick fruit in California and Florida. Contrary to what the US election debate would imply, illegal immigration to the US has been in reverse for several years. Ten years ago, roughly 800,000 Mexicans crossed the border every year to the US, mostly illegally. Today the flow is the other way. The greatest peaceful emigration in the history of immigrants is over. Neither Mr Obama nor Mr Romney appears to have received that memo, although the president has assisted the trend by deporting almost 1.5m illegal immigrants – more than George W. Bush and Bill Clinton combined.
Nowadays, Mexicans are as likely to cross the border to the US to invest. As my colleague Adam Thomson has reported, there is a boom in Mexican corporate activity north of the border.
In Mexico, they jokingly call it the reconquista – the country lost a huge amount of territory to the US in the war of 1846. In the US, they still think of it as a law and order problem. But the significance of US-Mexican integration is economic. Companies such as Cemex, which is the largest cement maker in the US, and Grupo Bimbo, which recently acquired Sara Lee for almost $1bn, are leading the way. Univision, which is now partly owned by Televisa, the Mexican broadcaster, is now the fifth-largest television network in the US. Soon it may break into the top three.
Demographically, Mexico is much more important to the United States than China. Instead of the exchange of goods and services, we should track talent churn. Is there a more dynamic pair than Mexico-US? This is where I expect Globalization 5.0 to spring.
Thanks to return migration (and remittances), Mexico is becoming a major market for US goods and services. The burgeoning middle class will need more petrol. Domestic production is declining. The Bakken is ready to fill the void. China has no such luck in the game of energy security. The diffusion of globalization will exacerbate the demand for fuel. Middle Eastern exporters will become major consumers. The market will get tighter. Supply uncertainty will increase. You might want to reconsider you child's Mandarin classes. Viva la globalización!