New globalisation is smashing internal borders

Trade agreements are stalled or collapsing. Brexit won. World trade volume is slowing down. Has globalisation hit a wall?

Not exactly. Globalisation isn't so much slowing down as it is taking new forms. The most potent form of this today is occurring inside nations, notably China and India.

Globalisation, typically, is defined as the movement of goods, services, ideas, labour and investment across national borders. But many nations lack integrated economic relations within their borders and thus they could reap high gains from trade by opening up internally. This is happening and its logic very much resembles that of globalisation. 

In China, for instance, there has been a long history of geographical fragmentation. The Chinese economy has had a tendency to cluster around megacities, such as the Beijing-Tianjin-Hebei, Shanghai-Nanjing or Guangzhou/Shenzhen/Hong Kong clusters. In the past, a Chinese port might have had better trade connections to Korea or California than to many parts of the Chinese interior. But these days, the story in China is the rise and extension of national brands.

The Internet is bringing the whole country's economy together through Alibaba, WeChat and other services that ease the online purchase, shipping and advertising of goods at the national level.    

You might decline to call this globalisation because economic integration does not fit the formal definition of crossing national borders. But, in the recent past, different regions of China were often economically like distinct nations. Domestic integration is lowering costs, smoothing out price differences and allowing differing cultures and linguistic areas to exchange ideas. So these improved internal trade relations have the economic features of globalisation, whether or not they merit that exact name.

Many barriers to trade across regions still remain in China. For instance, state-owned firms, many controlled by the provincial authorities, often favour local contractors. Some of these barriers are legal and regulatory, while others stem from lack of trust, physical distance, regional rivalries and missing social networks across regions. Still, the decline in these obstacles represents one of the world's most significant and rapid globalisations. 

The more economically integrated China becomes, the more it may retreat from some kinds of global trade. If a Chinese customer can buy a smartphone or pharmaceutical item from the domestic market, he may stop looking for foreign imports.

That will register statistically as a decline in globalisation, but, actually, it is an increase in efficient economic integration. Some parts of the Chinese economy were prematurely hyper-globalised at the same time domestic economic integration lagged, and now, that state of affairs is being remedied.

India is also seeing its different states and regions being tied together through migration, trade and investment. You can see this in the food - tandoori chicken and dosai have become national standards, available throughout the country and less closely associated with their particular regions of origin. Hindi is becoming more of a national lingua franca and the Internet makes it possible to broadcast the same messages to the entire country at relatively low cost.

Many of these "globalising" developments have spread expertise and capital from the more developed southern and western parts of India to the poorer eastern and landlocked regions. Labour, in turn, has migrated from the poorer states to the wealthier cities.

Significant barriers remain; for example, Indian trucks must pass through numerous checkpoints to carry goods around the country. Logistics costs remain high, at about 13 per cent of gross domestic product. Fortunately, the recent move to a national goods and services tax will lower some of the state-level taxes on internal trade. Keep in mind that India's most populous states would be among the larger nations in the world. So, if Uttar Pradesh (over 200 million people) and Bihar (over 100 million people) have closer economic relations, it is a major advance in trade relations and resembles globalisation in its economic consequences.

Indonesia, with a population of over 250 million and thousands of islands, still has a long way to go in terms of economic integration, but there is more internal trade each year. The same is true in the Philippines, Pakistan and much of Africa, among other populous regions.

To be sure, the older cross-border form of globalisation is by no means dead. But a lot of today's globalisation-by-any- other-name is, counterintuitively, taking the form of nation-building. And just as there are good and bad sides of globalisation, this process of nation-building will also be a mixed bag. It may, for example, sometimes include too much nationalism.

Nonetheless, these stronger and better-integrated political units probably will grow in wealth and economic sophistication and, in due time, that will give us more globalisation yet.

BLOOMBERG VIEW

A version of this article appeared in the print edition of The Straits Times on September 20, 2016, with the headline 'New globalisation is smashing internal borders'. Print Edition | Subscribe