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Typically, disasters are seen as disruptions of normal economic activity and thus reducing trade. However, the existing empirical evidence for a negative relationship between disasters and trade is contradictory. On the contrary, it has been recognised that disasters may stimulate trade. How come? And what are the policy implications of this finding?
While this article deliberates on these central questions in brief, the motivation to write this article stems from my recently published collaborative work (Li and van Bergeijk 2019 in Nitsch and Besedes) on the same subject where this topic is discussed in greater detail.
Ensuring economic resilience and preventing trade disruptions has been an important issue for research and policymaking. The impact of natural disasters, closely related to this issue, is thus a topic of rising relevance for development studies. This is particularly true for countries that suffer often from natural disasters, especially the Small Island Development States (SIDS). In general, the occurrence of natural disasters has also been increasing over the past decades.
Further, disasters are commonly seen as disruptions in the normal economic activity and thus causing reduction in trade (e.g. Gassebner, Keck and Teh 2010; Oh and Reuveny 2010; Martincus and Blyde 2013; Hayakawa, Matsuura, and Okubo 2015). However, the existing empirical evidence does not convincingly support a negative relationship between disasters and trade, both when it comes to imports and exports (Li and van Bergeijk 2019).
Disasters could also potentially impact trade positively, as recognized by more recent studies, through demand, technology upgrading and firm productivity. For example, disasters generate import demand in order to replace the lost production (Adam 2013). From a supply side perspective, Pelli and Tschopp (2012) pointed out the creative destruction aspect of disasters, supported by micro evidence from Yogyakarta Indonesia (Brata, De Groot and Zant 2018). The evidence suggests that the 2006 earthquake in Indonesia had a ‘cleaning effect’ on the manufacturing sector, forcing out unproductive firms, and opening rooms for new firms, which are recognized to be even more productive and have higher productivity growth than the surviving firms.
Recent macro level empirical evidence from 63 countries supports the counterintuitive idea discussed above (Li and van Bergeijk 2019). The main finding is that the natural disasters are associated with higher trade growth, both regarding imports and exports. In addition, the evidence suggests lower level of development is associated with higher disaster resilience. In particular, Least Developed Countries (LDCs) appear to have higher trade resilience, possibly due to better access to aid and greater awareness of the aid community. Preliminary evidence suggests Foreign Direct Investment (FDI) enhances trade resilience by different mechanisms for imports and exports. The enhancing effect for imports is associated with FDI flows while for export it is linked to FDI stocks. It is suggested that the political system, i.e. level of democracy, the often-assumed significant factor to resilience, is not determinative.
What does this finding imply? First of all, the study suggests that trade is even more important than normally thought. The countries that encounter more natural disasters, i.e. SIDS, are often the ones that largely depend on global markets. In a world of de-globalization (van Bergeijk 2019), trade resilience and preventing trade disruptions should be given attention for research and policy-making, and should be considered as a global joint task.
Second, mechanisms that are primarily discovered to cope better with, or even take advantage of natural disasters, offer new insights to policy makers. For example, giving priority to attract FDI could be an effective method to remain resilient. After natural disasters, a group of new firms with great growth potential is likely to emerge. Providing appropriate support to these firms could contribute to better economy. However, this requires more research on firm behavior after a natural shock as suggested by Brata, De Groot and Zant (2018).
It may be difficult to conclusively state whether disasters are good or bad for trade. The conclusiveness suffers from limitation of econometric methods. And there is a lack of country case studies on this subject. However, the importance of trade and investment flows for the resilience against natural disasters is clear. This gives extra reasons for policy makers and the international communities to be alert to possible trade disruption. This might be of particular significance given the current global dynamics, where the China-US trade war, Trumpism, and Brexit often dominate the headlines and create threat to global trade.
Adam, C. (2013). Coping with adversity: The macroeconomic management of natural disasters. Environmental science & policy, 27, S99-S111.
Bergeijk, P.A.G. van (2010). On the Brink of Deglobalization: An alternative perspective on the world trade collapse. Deglobalization 2.0
Brata, Aloysius GunadiA.G. & de Groot, Henri H.L.F. & Zant, Wouter. (2018). Shaking up the Firm Survival: Evidence from Yogyakarta (Indonesia). Economies. 6. 26. 10.3390/economies6020026.
Gassebner, M., Keck, A., & Teh, R. (2010). Shaken, not stirred: the impact of disasters on international trade. Review of International Economics, 18(2), 351-368.
Hayakawa, K., Matsuura, T., & Okubo, F. (2015). Firm-level impacts of natural disasters on production networks: Evidence from a flood in Thailand. Journal of the Japanese and International Economies, 38, 244-259.
Oh, C. H., & Reuveny, R. (2010). Climatic natural disasters, political risk, and international trade. Global Environmental Change, 20 (2), 243-254.
Trade and Openness During the Great Depression and the Great Recession Edward Elgar: Cheltenham.
About the authors:
Chenmei Li is currently a Project Specialist at Institute of New Structural Economics at Peking University, Beijing. She was in Economics of Development program, Batch 2014-15 at ISS. During the program she worked with Professor Peter van Bergeijk on the DEC research project “Crisis, deglobalization and developing countries”.
Anti-globalists and some environmentalists argue that globalisation is harmful to the environment because it leads to an increase in the global demand for and supply of goods and increased energy production. If globalisation is perceived as harmful to the environment, then should we expect that the current deglobalisation trend in the Global North can reverse the harmful impacts that globalisation is seen to have borne on the environment?
An important global concern has been to understand the way in which the increasing pace of globalisation affects the environment. Although the literature has been fraught with contrasting results, there are many who strongly believe that increased globalisation has had a deleterious effect on the environment. A large number of environmentalists supporting this view base their argument on the premise that globalisation leads to an increase in the global demand for goods, resulting in increased production that exploits and depletes natural resources and the environment—what is known as thescale effect. On the basis of rising environmental concerns, an important question, then, is whether deglobalisation would produce the opposite effect. Put differently, if globalisation is harmful to the environment, then should we expect deglobalisation to inflict less harm?
Currently, this is an important question to ask considering the heightened anti-globalisation sentiments that have engulfed the Global North. In the recent past, we have not only witnessed Brexit, the election of Trump, and the Belgian opposition of the trade agreement between the EU and Canada, but, more recently, we have seen anti-globalisation sentiments reaching a climax even and especially in the United States (USA) that once was the strongest architect and proponent of globalisation. This has culminated in increased uncertainty and an a near-stalemate for NAFTA, with the US pulling out of Trans Pacific Partnership (TPP) trade agreement, proposing the erection of a wall the border it shares with Mexico, and hiking steel and aluminium tariffs as part of the ongoing trade war with China.
The adverse effect of globalisation on the environment is supported by race-to-the-bottom hypothesis. This school supports the hypothesis that increased gains from globalisation is achieved at the expense of the environment by economies more open to global trade adopting looser environmental standards. Those who support this view of the detrimental impact of globalisation on the environment allude to how increasing globalisation creates global competition, resulting in an increase in economic activities that deplete natural resources. An increase in economic activities as a result of the thriving of economies of scale leads to increased emissions of industrial pollutants and to environmental degradation. The pressure on international firms to remain competitive forces them to adopt cost-saving production techniques that can be environmentally harmful.
Lower environmental standards
However, deglobalisation may not necessarily translate into the reduced emission of harmful gases such as CO2, SO2, NO2, but could actually produce the opposite effect. Through the technique effect, we know that globalisation can trigger environmentally friendly technological innovations that could be transferred from countries with strict environmental regulations to pollution havens. With globalisation not only entailing the movement of final goods, but also the transfer of intermediate, capital goods and technologies, multinational corporations with clean state-of-the-art technologies could transfer their green technologies to countries with low environmental standards. It is widely recognised that multinational firms use cleaner types of energy than local firms and thus attain more energy-efficient production processes. Thus, deglobalisation could mean a minimal transfer of these environmental-friendly technologies.
Domestic production means greater pollution
Moreover, the rise of anti-globalisation forces would mean less specialisation in sectors of countries with a comparative advantage. The gains-from-trade hypothesis states that this can result in the loss of the associated gains from trade and specialisation, resulting in the inefficient allocation of resources that would lead to the dissipation of scarce economic and natural resources. If every country has to produce goods to meet its domestic demand, this could result in duplication in the production process, with an associated increase in local emissions. Since some countries have weaker environmental standards, this could possibly worsen overall global emissions. For example, the imposition of economic sanctions on Iran (making Iran less integrated into the world economy) has triggered domestic production (of oil) that has resulted in immense damage to the environment. As a result of import bans, Iran started refining its own crude oil that contains ten times the level of pollutants of the oil it formerly imported.
The rise of ‘eco’ products
The notion of globalisation also has been used to create public awareness regarding labour and environmental standards through international campaigns culminating in the Fairtrade and Eco labellings, for example. The success of these public awareness programmes is based on the different preferences of consumers. Producers are able to increase their market access by producing eco-friendly products. Without international trade, consumers would have been presented with limited choices, and may have been forced to only purchase the domestic goods that may have been produced under loose environmental standards. Thus, globalisation can expand the choice of consumers, enabling them to select environmentally friendly products.
Indirect conservation mechanisms
Globalisation achieved through multilateral negotiations on the platform WTO has also demonstrated that although environment protection is not the WTO’s core mandate, it has indirectly stimulated enthusiasm within its member countries for sustainable development and environmentally friendly trade policies. The green provisions of the WTO provide general exceptions that allow countries to protect human, animal or plant life and conserve their exhaustible natural resources.
Apart from the WTO, regional trade agreements (RTAs) are another appendage of globalisation that promote environmentally sustainable policies. As countries seek to join RTAs, they are made to simultaneously embrace environmental co-operation agreements. Many countries (such as Canada and member states of the EU) have developed national policies whereby conducting environmental impact assessments before signing trade agreements is mandatory. Thus, trade agreements can only be signed when they are compatible with the environmental standards of individual EU member states. This thus compels partners to trade agreements to adhere to environmental provisions contained in the agreements.
Leaders and followers
We have seen over the years how countries such as China that used to be pollution havens have had tremendous gains in reducing their emissions, especially after becoming more integrated into the world economy. Because of globalisation and the incentives to increase its global market access for its products, China has moved away from its image as a top polluting country in the world to a global leader spearheading the fight against pollution. In 2017, China closed down tens of thousands of factories that were not complying with its environmental standards.
In contrast, we have seen a country like the US that has been at the forefront of fighting against environmental damage slowly drifting away from this fight because of its embracing the anti-globalisation sentiments of the current president Donald Trump. Through its America First Energy Plan, the Trump administration has outlined its preference for polluting industries, the use of fossil fuels, and revival of the coal industry. This points to the fact that countries seeking self-sufficiency or expressing anti-globalisation sentiments may drift away from sustainable development practices towards industrial policies that may be injurious to the environment.
Restricting international trade may have a negative impact on the environment. Deglobalisation would isolate countries, making them less accountable toward other countries for protecting the environment. The gains associated with globalisation could be used as an effective bargaining strategy or as an incentive to demand environmental accountability from countries that want to benefit from global trading systems.
About the authors:
Sylvanus Kwaku Afesorgbor is Assistant Professor at the Department of Food, Agricultural and Resource Economics (FARE), University of Guelph, Ontario, Canada. His research and teaching experiences are in the areas of International Political Economy, Globalisation and Development, Impact Evaluation, Applied Econometrics, and Food and Development.
Binyam Afewerk Demena is a Teaching and Research Fellow at the ISS. His research interests are in the broad area of applied empirical research with a particular focus on applied micro-econometrics in development, international and fishery economics. In his PhD, he examined the impact of transmission channels of intra-industry productivity using applied micro-econometrics, meta-analysis, multi-country micro-panel data, and applied field research via on-site visits.
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After benefiting from international trade and investment for the past 30 years, China’s global position is starting to change. This is perhaps most evident when regarding its position at the centre of an ongoing ‘trade war’ with the United States. Given its role as leader in international trade, will China be able to ‘restart’ globalisation and offer an alternative to globalisation and deglobalisation as defined by the West?
As developed countries appear to step back from globalisation, China senses an opportunity to step forward and set new rules for globalisation. A major component of the Chinese strategy to lead changes in how globalisation is thought of and practiced is the One Belt and One Road Initiative (OBOR) of the Chinese government. Aimed at improving infrastructure and connectivity between China and the world, this initiative comprises more than physical connections. The Chinese government argues that this initiative includes not just economic, but also socio-cultural linkages, ultimately leading to mutual benefits for all countries involved. The OBOR defines China’s idea of globalisation in a new era in which emerging economies backed by rising economic power and strong alliances are seeking greater influence on global issues.
China’s push for globalisation has evoked mixed reactions across the world, and Beijing has had to deal with multiple obstructions to its vision. Moreover, logistical and bureaucratic issues are plaguing countries participating in the OBOR. For instance, although China has signed bilateral cooperation agreements with Pakistan, Hungary, Mongolia, Russia, Tajikistan, and Turkey, with a number of projects planned under those agreements, the proposed projects have not been implemented. Most such projects are infrastructure-related, for example a proposed train connection between eastern China and Iran, which eventually may be expanded to Europe. Powerful Western economies and neighbouring Asian giants have remained cautious in their assessments and acceptance of the initiative.
Sustaining the benefits of globalisation
An important motivation behind the OBOR is the endeavour to continue to benefit from globalisation. Since 1979, China has implemented an Opening and Reforming Strategy. However, its export in percentage of GDP (trade openness) in 1980 was only 5.9% and outward Foreign Direct Investment (FDI) was 1.7 billion US dollars. Only after the 1990s China’s globalisation process really began. Joining the WTO in 2001 pushed its trade openness to the highest point—higher than the world average and the levels of the UK and US (Figure 2).
China is said to have been the largest beneficiary of globalisation until the economic crisis hit in 2008. After the economic crisis, the international market became weak and the Chinese economy could no longer count on export as its most powerful economic ‘carrier’ (besides investment and consumption). Immediately following the crisis, the Chinese government injected 4 trillion renminbi (RMB) into the economy and boosted short-term investment and consumption. Its long-term plan, which was not clear until 2012, is to further stimulate trade openness and integration into the world economy. China thus seeks to leverage the global market and resources to boost its economic growth.
At the helm of rebuilding globalisation efforts?
China does not only want to continue to benefit from globalisation, but also wants to lead the rebuilding of a global system where it could assume a leading role. The current deglobalisation phenomenon does not mean that the general globalisation trend will cease, because the core driver of globalisation is technology, which is advancing faster than ever. However, it does suggest a splintering (if not collapse) of the current globalisation system created after World War II and shaped to its current state largely by developed economies.
Trumpism and Brexitism are both symbols of the deglobalisation phenomenon but are not evidence that the traditional leaders of globalisation are deglobalising their economies. Instead, such symbols show the recognition of the need for a new globalisation system by both ‘traditional’ world leaders like the US and UK as well as emerging powers who were largely excluded from the last global rulemaking process and now hold a share of the world GDP so significant that they cannot be ruled out again.
However, globalisation in China has always been selective, well-managed, and restricted mainly to economic and trade-related activities. Besides its achievement regarding global trade, China shows little achievement or/and willingness to be globalised in terms of, for example, finance, human resources, and culture. The exchange rate is under careful control. English education in China is mandatory since middle school, but the real usage of English is still quite limited. China is known to be the most difficult country for foreigners to attain residence permits, and to date it blocks direct access to the global internet. These are all signs that Beijing is not too eager to participate in all forms of globalisation.
China needs to tread carefully
And thus its attitude may jeopardise China’s idea of globalisation through the OBOR initiative. The explanation often used by Chinese government for the selectivity related to the initiative is its desire to minimise the negative effect of Western-Defined Globalisation and to respect China’s special country situation. However, China’s attitude towards the OBOR must be open-minded and holistic, both tolerable of and acceptable to a wide range of ideologies.
The Chinese government seems to realise that and is promoting the OBOR as ‘the most inclusive globalisation system’. Formally, the OBOR emphasises five key areas of cooperation, including economic, financial and social exchanges, and the private sector is encouraged and expected to be the main driver of the initiative. Unfortunately, the current situation suggests that OBOR has been largely driven by state-owned enterprises and government-level trade agreements, and is limited to global trade. The areas that are not engaged by the plan, such as culture, education, data sharing and immigration, are likely to hinder China’s efforts towards globalisation, especially in a digital world where technology is developed at such a high speed.
In conclusion, China will continue to seek leadership in restoring the globalisation system, with the OBOR initiative as its core measure. However, both traditional leaders and other emerging powers still have a say in how and whether the globalisation system is re-established. Consensus may not have been reached between countries, but the globalisation trend is likely to continue—and at a faster pace due to new technologies. If China truly wants to become a major global leader in the quest to ‘restart’ globalisation, private sector involvement in areas other than trade need to be encouraged through a more open-minded attitude.
Chenmei Li is a Project Analyst at Institute of New Structural Economics, Peking University—one of the top 25 think tanks in China. She is working on economic transformation of developing countries (especially in Africa) and China’s engagement with LDCs. She received a Master’s degree from the ISS in 2016.
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A remarkable ‘big switch’ has emerged from the turn of the millennium in terms of attitudes towards and discourses over globalisation. But while the world is currently witnessing a new backlash against economic globalisation, considerable support for globalisation within some parts of the Global South should not be overlooked.
While the world is currently witnessing a new backlash against economic globalisation, considerable support for globalisation within some parts of the Global South should not be overlooked. Supporters of the UK’s exit from the European Union seek to “take back control” from Brussels, while Donald Trump’s economic ethno-nationalism has promised to put “America first”. In contrast, the picture that emerges in the Global South is quite different, as part of a remarkable ‘big switch’ that has been taking place from the turn of the millennium in terms of attitudes towards and discourses over globalisation.
Support for globalisation in the global South
The polling company YouGov, in a 2016 survey of people across 19 countries, found that France, the US and the UK were the places where the fewest people believe that “globalisation has been a force for good”. In contrast, the survey found the most enthusiasm for globalisation in East and Southeast Asia, where over 70% of respondents in all countries believed it has been a force for good. The highest approval rate, 91%, was in Vietnam.
From a poor starting point, many in the Global South have experienced some improvement in basic development indicators in the 20th and 21st Centuries. People living in Asia accounted for the vast majority of those who experienced relative income gains from 1988 to 2008. In comparison with the 1990s, the Global South now earns a much larger share of world GDP, has more middle-income countries, more middle-class people, less dependency on foreign aid, considerably greater life expectancy, and lower child and maternal mortality rates.
Less of a backlash in the Global South necessarily means support for neoliberal globalisation—and the optimism in countries such as Vietnam may paradoxically be a result of an earlier rejection thereof. China, in particular, has not followed the same approach to economic globalisation as that which was encouraged by the US and organisations such as the IMF and World Bank in the late 20th Century.
Meanwhile, many of the world’s poorest in the Global South have seen very little improvement in quality of life in recent years, yet they are much more marginal and less well-positioned to express their frustrations than the ‘losers’ in countries such as the US and UK. They must not be forgotten.
China and India warn against deglobalisation
Most notably, the last two World Economic Forum gatherings at Davos have seen explicit statements from the respective leads of China and India warning against deglobalisation. In January 2017, China’s president Xi Jinping said that his country would assume the leadership of 21st Century globalisation. Defending the current economic order, Xi said that China was committed to making globalisation work for everyone—its responsibility as “leaders of our times”.
It feels like the opposite of globalisation is happening. The negative impact of this kind of mindset and wrong priorities cannot be considered less dangerous than climate change or terrorism.
The ‘big switch’ on globalisation
It is remarkable that the backlash most associated with the Brexit referendum in the UK and the election of Donald Trump in the US has emerged from the right of the political spectrum, in countries long recognised as the chief architects and beneficiaries of economic globalisation.
At the turn of the millennium, the primary opposition to globalisation was concerned with its impacts in the Global South. Joseph Stiglitz, former chief economist at the World Bank, in his 2006 book Making Globalization Work wrote that “the rules of the game have been largely set by the advanced industrial countries”, who unsurprisingly “shaped globalization to further their own interests.” Their political influence was represented through dominant roles in organisations such as the World Bank, the International Monetary Fund and the WTO, and the corporate dominance of their multinationals.
In the 1990s the anti-globalisation movement opposed neoliberal economic integration from a range of perspectives, with a particular emphasis on the Global South. The movement was populated by activists, non-governmental organisations and groups with a variety of concerns: peace, climate change, conservation, indigenous rights, fair trade, debt relief, organised labour, sweatshops, and the AIDS pandemic.
Yet, in the aftermath of the Brexit vote, UK prime minister Theresa May offered a sceptical assessment at the 2017 World Economic Forum at Davos, arguing that “talk of greater globalisation can make people fearful. For many, it means their jobs being outsourced and wages undercut. It means having to sit back as they watch their communities change around them.” The US, under Trump, subsequently began renegotiating NAFTA and withdrew from the Trans-Pacific Partnership.
Significant proportions of the population in the US and other countries in the Global North have experienced limited, if any, income gains in the most recent era of globalisation. Leading global inequality expert Branko Milanovic has explored changes in real incomes between 1988 and 2008 to show who particularly lost out on relative gains in income. He found two groups lost most: the global upper middle class—those between the 75th and 90th percentiles on the global income distribution scale, of whom 86% were from advanced economies—and the poorest 5% of the world population.
Emerging evidence indicates that increased global trade has played a role in economic stagnation or decline for people in the North, especially in the US. MIT economist David Autor and his colleagues suggest that the ‘China shock’ has had major redistributive effects in the US, leading to declines in manufacturing employment.
Economists had previously argued that the “losers” from trade could be compensated by transfers of wealth. Autor and his colleagues found that while there have been increases in welfare payments to regions of the US hardest hit by the trade shock, they fall far short of compensating for the income loss.
Not just globalisation
Not all of the stagnation and decline experienced in the Global North can be attributed to economic globalisation. Technological change is a big factor and national policy choices around taxation and social welfare have also played key roles in shaping inequality patterns within countries. In such a context, ‘globalisation’ has been deployed as a scapegoat by some governments, invoking external blame for economic problems made at home.
The current backlash is not just about economic globalisation. It has involved ethno-nationalist and anti-immigrant components, for example among supporters of Trump and Brexit.
A key lesson from the late 20th Century is to be wary of wholesale attacks on, and sweeping defences of, 21st Century economic globalisation. In light of the difficulties of establishing solidarity between ‘losers’ in different parts of the world, the challenge of our times is for an alter-globalisation movement which addresses all of them.
Moreover, if the stellar growth rates of the last 15-20 years slow down, the relatively positive view of globalisation in much of the global South may not continue, with the possibility of a backlash (re)emerging beyond the Global North.