Deglobalization? More words than deeds

The European plan to become independent from Russian energy is part of a broader trend. Brexit, America First: in recent years, more countries have put their own interests first. In practice, however, these are mostly tough words: world trade is steadily increasing.

Globalization has brought many good things to the world economy. All kinds of articles became cheaper because production processes were moved to low-wage countries. Thanks to tightly planned logistics processes, many companies were also able to work with very low stocks. Consumers have benefited from this movement in recent decades in the form of low prices for all kinds of items. In recent years, however, globalization seems to be turning into deglobalization.

More and more countries are opting to make their own economies less dependent on foreign flows of goods. A recent example is the European desire to stop importing Russian oil and natural gas. However, the movement has been going on for some time. Brexit and the trade war between China and the United States, among others, fit into the same picture. Has a turnaround been reached in the wave of globalization?

The answer to that question falls into two parts. From a political point of view, many heads of government choose to put the national interest more emphatically, at least in word. This is often done to meet the growing nationalism among the grassroots. The best example is, of course, Donald Trump's slogan 'America First'.

New trading records
Meanwhile, economic developments tell a completely different story. Despite all the threatening language, the economies of the United States and China are still very closely intertwined. World trade recently reached a new record level; measured both in dollars and in the volume shipped. This also applied to European exports to Great Britain; Brexit and the corona uncertainty have not changed that.

If globalization does reverse, it will lead to lower trading volume in global currency markets. It is estimated that more than $6 trillion is now traded daily. When there are fewer buyers and sellers active, it becomes more difficult to find a counterparty for a transaction. This can increase the price results. Another possible consequence is that currencies of emerging markets will come under some pressure as foreign parties reduce their investments in these countries.

Double deficiency can hurt
For now, however, globalization is much more about words than deeds. In contrast, emerging market currencies currently have relatively good prospects – especially when compared to the US dollar. Fears of a recession in the United States are growing. The central bank is currently in the process of raising interest rates in response to high inflation, but there is a growing chance that a more lenient policy will be implemented in the second half of the year.

The United States has been struggling with a deficit on both its trade balance and its budget for some time. In the past, the currencies of countries with such a double deficit (twin deficit) came under pressure sooner or later. And with the dollar, that could just happen once the interest rate tailwind dies down.

Joost Derks

Joost Derks is a currency specialist at iBanFirst. He has over twenty years of experience in the currency world. This column reflects his personal opinion and is not intended as professional (investment) advice.

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