Weaponising global networks
* Globalisation has been one of the defining features of the modern era. It has been marked by the movement of goods, services, ideas, capital and people through a plethora of cross-border networks.
* Networks are the largely hidden plumbing of the global economy. Agreements between states govern trade, most notably in the form of the World Trade Organization (WTO) or in regional deals such as the EU single market. International agreements regulate migration, trade, air travel, the rules of the internet and much else. Communication networks such as the internet and digital platforms are vital to the flow of information and data. The global payments network facilitates the movement of capital which is the bedrock of the international trading and financial system. Multinationals and supply chains are, themselves, complex networks.
* The more extensive a network the greater the potential to create value. China’s accession to the WTO in 2001 brought it into the global trading system. Joining boosted Chinese growth and collapsed the cost of imports for western consumers. The value to users and investors of digital networks rests on scale. Facebook’s $500bn valuation reflects the fact that it has a staggering 2.5bn users, equivalent to roughly one-third of the world’s population.
* Globalisation, and the networks that fuel it, have always had their critics, often on the political left. Now Western anxieties about de-industrialisation, migration, the rise of China and the power of digital networks have swelled their ranks.
* Globalisation is facing new scrutiny and global networks have become more politicised. Some go further, arguing that networks are being weaponised as nations seek to exploit interdependence to coerce others. This, in turn, encourages nations, in the words of a recent MIT journal article, to “reshape networks so as to minimise their vulnerabilities or increase the vulnerabilities of others”.
* The US accuses China of flouting trade rules through industrial-scale theft of intellectual property and by backing state-owned enterprises. Concerns have grown about China’s burgeoning capacity in advanced technologies and its foreign policy intentions. The US administration wants to restrict the supply of US technology components to Chinese companies. President Trump wants US businesses to scale back their Chinese supply chains.
* The West may see institutions such as the International Monetary Fund (IMF) or the World Bank as being neutral but they were shaped by Western values and nations. For Russia, Iran and others facing sanctions, the international payments and banking systems look anything but neutral. As emerging economies have grown they are seeking influence in shaping networks commensurate with their economic scale.
* Thus America’s use of the dollar clearing system – which facilitates cross-border transactions in dollars – to enforce sanctions has encouraged some countries to reduce their dependence on the dollar. (America’s control of dollar transactions, and of US subsidiaries of foreign businesses, gives it significant power.) Russia has pursued a ‘de-dollarisation’ programme to reduce the number of transactions in dollars. It has also created a domestic card payment system, Mir, designed to help it cope in the event of being cut from the international payments system. China is developing yuan-denominated commodity futures as an alternative to the dominant dollar market.
* US-China trade tensions have mutated from a disagreement about a handful of goods to a full-blown trade war and now a contest encompassing China’s currency and technology.
* China’s Belt and Road Initiative provides loans and support for infrastructure in emerging markets in a programme that the US sees as extending China’s influence and power. The US has been equally sceptical about the Chinese-led Asian Infrastructure Investment Bank which has 74 member states and finances Asian infrastructure projects.
* The growing power of technology networks including Google and Facebook has prompted its own backlash. Europe and China are responding with support for domestic tech champions and are doubling down on regulatory scrutiny of US companies. Russia has passed a ‘sovereign internet law’ requiring all internet traffic to pass through a government body. The US wants to stop Huawei from providing equipment to build new 5G networks and has encouraged its allies to follow its example. In a bid to shrink one of the key networks of globalisation Mr Trump has urged US companies to move supply chains out of China.
* We have come a long way from the heyday of globalisation at the turn of this century. Yet looking back we may come to think of this period of booming global trade, political stability and expanding international networks as an aberration.
* On a longer view incumbent powers inevitably face challengers; networks have often been contested.
* Leading powers have always dominated international networks. Thus a global financial and trading order largely run by Britain in the nineteenth century gave way to a US-led system in the twentieth century.
* The post-war international order, built on the dollar, the Marshall Plan and institutions such as the IMF, was the creation of America and its allies. For 40 years it faced off against the Soviet Union and Communist China. The demise of the former, and the market reforms of the latter, seemed to usher in a liberal global order, a new era of consensus and globalisation.
* Such a notion seems fanciful today. Globalisation, and the networks that sustain it, face new pressures. Some networks will prosper, some will fragment and new, challenger networks will emerge. Emerging economies will play a larger role in established networks; and they will create their own networks, as has already happened with China’s creation of the Asian Infrastructure Investment Bank and its Belt and Road Initiative.
* Global networks are changing. They are becoming more contested and more politicised. For their users it spells a more complex, uncertain environment.
PS: Last week UK chancellor Sajid Javid announced plans to raise the main minimum wage rate to two-thirds of median earnings by April 2024, and extend it to all workers aged 21 and above. This would raise it from £8.21 today to £10.50, which would be among the highest in the world. The Labour Party is committed to raising the minimum wage to £10 as soon as possible. Both Labour and the Conservatives seem committed to over-riding the Low Pay Commission, the independent body charged with advising on increases in the minimum wage. Rapid rises in the UK’s minimum wage in recent years have had little discernible effect on employment. Raising the rate above £10 would significantly increase the number of employees covered, raising the risk that it could start to impact jobs.
OUR REVIEW OF LAST WEEK’S NEWS
The UK FTSE 100 equity index ended the week down 3.6% at 7,155 after a string of poor economic data in the UK and in other major developed economies rattled markets.
Economics and business
* Manufacturing activity is contracting across developed economies with multi-year lows recorded in the US and the euro area in September
* UK service sector activity fell in to contraction territory and to a six-month low in September with jobs in the sector falling by the most since 2010
* The UK construction sector contracted for a fifth consecutive month in September
* Housebuilding across England has fallen to the slowest quarterly rate for three years
* US service sector activity slowed unexpectedly to a three-year low in September
* German service sector activity contracted in September for the first time in six years, adding to the country’s problems in the manufacturing sector and increasing recession fears
* The US unemployment rate fell to a 50-year low in September but wage growth slowed to 2.9%, down from 3.2% in August
* The WTO ruled that the US can impose tariffs on $7.5bn of EU imports after the EU was found to have provided illegal subsidies to airplane manufacturer Airbus
* Australia’s central bank cut interest rates to an all-time low as the economy grows at the slowest pace since the financial crisis
* India’s central bank cut interest rates for the fifth time this year as growth continues to stutter
* Euro area inflation fell to 0.9% in September, its lowest level in nearly three years
* The crown prince of Saudi Arabia warned oil prices could go “unimaginably high” unless “firm action” is taken on Iran
* Microsoft signed a five-year deal with pharma company Novartis to create AI tools that support the Swiss firm’s operations from drug design to finance
* Swedish homeware firm IKEA made a major investment in producing smart home technology, as it looks to expand in to the internet of things sector
* Fitch Ratings downgraded shared office space provider WeWork’s credit rating after it formally withdrew its application for a stock market listing
With the 31st October Brexit deadline looming we are introducing a short new section examining the political opinion polls and the betting odds on different outcomes
Note: Probabilities derived from betting odds from bookmaker Smarkets at 1700 last Friday
* The implied probability of a no-deal Brexit this year is 19%, down significantly from over 40% in August.
* The probability of a general election taking place this year has risen sharply in recent months, and is now 60%. Odds suggest a 14% chance of it taking place in November and 45% in December.
* The opinion polls show the Conservative Party with a 10 percentage point lead over Labour averaging across the last five polls. The two parties were neck and neck in late July, before Boris Johnson became prime minister.
* Betting odds imply a 69% probability of the Conservative Party winning the most seats in a general election.
* However, betting markets see the most likely outcome, with an implied probability of 59%, is a hung parliament. Betting markets assign a probability of 35% to a Conservative majority and 6% to a Labour majority.
Brexit and European politics
* Recent Conservative leadership candidate Rory Stewart has quit the party and will run as an independent candidate in next year’s London mayoral election
* UK prime minister Boris Johnson proposed a new Brexit deal which aims to create a customs border between the Republic of Ireland and Northern Ireland with minimal infrastructure at the border
* Under the proposal Northern Ireland would remain aligned with EU regulation on food, agriculture and industrial goods, requiring checks between it and the rest of the UK
* European Council president Donald Tusk said the EU was “open but still unconvinced” by Mr Johnson’s proposal. The European Parliament’s Brexit steering group said the plan is not “a basis for an agreement”
* Apparently contradicting Mr Johnson’s assertion that the UK will leave the EU on the 31st October, court filings by the UK government state that Mr Johnson would seek an extension to Article 50 if he is unable to secure a deal by the 19th October
* The UK government announced exports of some medicines would be restricted in a no-deal Brexit to prevent speculators running down stocks by selling abroad
* Nissan would review the future of its Sunderland plant in the event of a no-deal Brexit, the FT reports
* The director-general of the European Space Agency stated he was supportive of UK companies continuing to tender for contracts after Brexit
And finally… farmers took their tractors to the streets in the Netherlands last Tuesday in a mass protest against proposals to tackle the emissions of the sector, which have included the closure of some livestock farms. The farmers, who drove their tractors to the centre of The Hague to make their point, are believed to have caused 700 miles of traffic jams during the morning rush hour – an in-tractor-able problem