Rising trade tensions between the world’s leading economies could lead businesses to abandon or delay planned overseas investments, a fresh setback to an already slowing process of globalization, a United Nations agency warned Wednesday.
Overseas investment by businesses fell sharply in 2017, and the United Nations Conference on Trade and Development, or Unctad, expects to see only a “modest” recovery this year. Recent weakness marks a contrast with the two decades leading up to the global financial crisis, when flows of foreign direct investment increased rapidly.
“Globalization is slowing down,” said James Zhan, Unctad’s director of investment and enterprise.
The driving force behind much of that investment was the desire of businesses to split production across a number of countries, often in search of lower wages or other cost savings, and sometimes in search of special skills. That process created what are known as “global value chains,” through which components are moved across many borders before their final assembly into a finished product.
In its annual report on overseas investment, Unctad said the internationalization of production has slowed sharply over the last decade, and may continue to do so, particularly if new barriers to trade are erected between the leading economies.
“In recent months, significant tensions have emerged in global trade, encompassing a number of major economies,” Unctad said. “The resultant atmosphere of uncertainty could cause MNEs (multinational enterprises) to cancel or delay investment decisions until the trade and investment climate is more stable. If tariffs come into force, trade and global value chains in the targeted sectors will be affected.”
The Trump administration last week imposed tariffs on imports of steel and aluminum from the European Union, Canada and Mexico, each of which has threatened retaliatory action. The administration has also threatened to impose tariffs on $50 billion of China-made products unless a way can be found to reduce its trade deficit with that country.
Unctad provided a range of measures that suggest globalization has all but stalled over the last half-decade, even as voters in many developed economies have been angered by some of its consequences, including a loss of manufacturing jobs to lower-wage countries.
Its figures show that over the past five years, the sales of overseas affiliates have risen at an annual rate of just 1.5%, down from 9.7% in the five years until 2010. The number of people working for those affiliates has also grown more slowly, by 2.5% as against 7.6% in the period leading up to 2010.
The creation of GVCs has stagnated, Unctad said. It uses the share of a country’s exports that are composed of imported goods and services as a proxy for the scale of GVCs, and found that peaked in the period from 2010 to 2012 after two decades of continuous increase, and indeed fell to 30% from 31% in 2017.
“The rate of growth in GVC participation decreased significantly this decade compared with the last, across all regions, developed and developing,” Unctad said.
Advocates for globalization acknowledge that more help should have been provided to workers who were exposed to competition from counterparts in lower-wage developing economies over recent decades, but argue a slowdown in that process will crimp global growth and raise prices for goods and services.
UNCTAD’s particular worry is the impact on developing economies if firms based in developed economies stop investing in new factories, which provide higher-skilled work than has often been available to many.
Write to Paul Hannon at paul.hannon@wsj.com
