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Economics: Global warning

Academics try to define globalisation in all sorts of technical ways but the
simple evidence is all around us: intercontinental travel, offshoring, shopping
on Amazon, even Premiership footballers. Technology has done much to accelerate
globalisation, and the internet has brought it right into people’s homes.

The emergence of China and India as major industrial and trading nations, and
the break-up of the old Soviet empire, have been powerful catalysts for the
acceleration of globalisation. The UK economy is no longer an autonomous
business unit and has to compete internationally for resources such as raw
materials, labour and investment spending by multinational companies, and for a
share of the global market for goods and services.

This was one of the prime minister’s key themes at the June EU summit in
Brussels. He wondered why Europe was so inward-looking, spending money on
protecting its agricultural sector when the real challenge was to compete in
world markets with the likes of China and India. Tony Blair wanted the EU’s
industrial support programmes to focus on science and technology as a means of
raising the added-value content of production. Few would disagree.

Most commentators felt he was talking from a position of strength.
Deregulation, competition, flexible labour markets and lower taxation have
attracted to Britain a disproportionate share of foreign investment into Europe.
In terms of growth and jobs, the Anglo-Saxon approach has delivered better
results than Europe’s social model.

Yet the big macro numbers are not always the best indicator of international
competitiveness. Look instead at trade performance, and the conclusions are very

Over the past decade, both the UK and the US have been running balance of
payments deficits – a reflection of the strength of demand in their domestic
economies. Since the deficits have been easy to finance, policymakers have not
been forced to change stance. But trends in some areas of the current account
raise some uncomfortable questions about the Anglo-Saxon economic model.

The export of goods is still the largest “credit” item on both the UK and the
US current accounts; it is also where the deterioration has been most marked. In
the US, for example, a deficit of $97bn on goods in 1992 had mushroomed to
almost $700bn by 2004. Twelve years ago, US goods exports were worth 82% of
goods imports into the country, but by last year the proportion had dropped to
just 55%. Over the same period, the UK trade deficit in goods has climbed from
£13bn to £59bn while the value of exports, expressed as a proportion of imports,
has fallen from 89% to 76%.

This need not matter, since advanced industrial countries are expected to
move out of basic industries (including some parts of manufacturing) into higher
added-value activities (including services). But here as well there are worries
for both economies since the contribution of the higher added-value activities
to the balance of payments has not fully offset the decline in manufacturing

The US surplus on international trade in services peaked at $90bn in 1997; by
2004 it had almost halved, to $48bn. And while services credits were 57% higher
than debits in 1996, in 2004 the surplus was just 16%. In the UK the surplus on
services has continued to grow, quadrupling to £20bn between 1992 and 2004, but
it has fallen well short of what is needed to close the gap on trade in goods.

The slower-growing and much maligned eurozone, on the other hand, has
recorded a surplus on its trade outside the eurozone every year since the launch
of the currency in 1999. In 2004, goods exports were worth just over one
trillion euros, or 10% more than goods imports. Combined with a growing surplus
on services, the eurozone has a healthy current account surplus despite what
many observers believe to be an overvalued exchange rate.

It seems that the eurozone is competing more effectively in a global context
than the two leading Anglo-Saxon economies. In the short term, however, the UK
and US have enjoyed robust growth, primarily on the back of buoyant domestic
consumers, particularly households and the public sector, who have been prepared
to borrow to sustain spending. In the eurozone, by contrast, the more subdued
level of domestic demand has been largely responsible for holding back economic
growth. But the eurozone’s problem of a lack of spending at home looks to be a
lot easier to solve than the Anglo-Saxons’ apparent lack of international

Dennis Turner is chief economist at HSBC

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