Amid growing confidence of a global economic rebound and better domestic growth prospects, the 2018 investment outlook should not ignore downside factors that could hinder the long-run growth momentum. Structural challenges from policy uncertainties among the world's economic superpowers and saturating trade and investment flows through global value chains may cast more shadows over the local and global economy than the recovering numbers reveal.
Over the past seven decades after the Second World War, the world economy has been characterised by increasingly integrated flows of goods, services, capital, people and, lately, data and information. This process has been further accelerated as multinational firms offshore outsource their activities across organisational and geographical boundaries, expanding flows of international investment in both developed and emerging economies.
Such integration has been driven partly by the underlying principles of economic liberalisation undertaken through multilateral and regional agreements, from the World Trade Organisation (WTO) to more recent offshoots, such as the Trans-Pacific Partnership (TPP).
While having made substantial headway, this globalisation-as-we-know-it also raises concerns within and across societies. Workers in advanced economies worry that their jobs are being taken away as manufacturing activities are relocated to cheaper destinations, whereas suppliers in emerging markets are concerned of being trapped under the glass ceiling of value creation, unable to take part in higher value-adding activities in technological development or design. After all, inequality does not disappear -- and may well exacerbate -- despite the increased wealth that globalisation generates.
Such anxieties and grievances have given rise to nationalistic and protectionist sentiments, epitomised most glaringly in the United States under President Donald Trump and his controversial "America First" policy orientation. The return to zero mentality on trade and investment leads to policies that are desirable only when and where the US benefits. Tax and tariff incentives that were once used to promote the global expansion of economic activities are being redesigned to shift trade and investment flows in favour of the US and to punish firms whose global operations are perceived as hollowing out America's domestic business activities.
This sharp U-turn towards protectionism is accompanied by President Trump's preference for a bilateral approach over multilateral and regional agreements, resulting in the US's renegotiation of the North American Free Trade Agreement and its withdrawal from the TPP. A similar preference for less multilateralism was earlier evident across the Atlantic with the United Kingdom's referendum to withdraw from the European Union.
The changing policy direction of major economies inevitably leads to a shifting of economic power towards China. Ranked as the third-largest host economy in the world, with a record inflow of US$139 billion in 2016, China has also become the world's second-largest outward investor, having spent US$183 billion in 2016, surpassing traditional investors like Japan and the Netherlands and trailing only the US, according to the United Nation Conference on Trade and Development.
China's increasing economic power might does not result only from its advantageous positioning in terms of its balance of payments, but also from its role as the new dominant regional economic hub for value chain economic activities in and across Asia. China has now eclipsed Japan as the largest source of intra-regional investments in Asia-Pacific, with outflows of US$125.7 billion during 2014-16 compared to Japan's US$95.2 billion and inflows of US$78 billion, which dwarfs Japan's US$8.4 billion almost tenfold, according to data from the United Nations Economic and Social Commission for Asia and the Pacific.
All these geopolitical and geo-economic shifts in the locus of power are taking place amid mixed signs towards global investment recovery. Despite stronger forecasts for the world economy, in view of the World Bank's 2.9% global growth rate for 2018 compared to 2.7% in 2017, a closer look at global value chain economic integration reveals a different picture.
In the first ever-published report on Global Value Chain Development in 2017 jointly conducted by the World Bank, the Organisation for Economic Co-operation and Development, and the WTO, it was clearly stated that world trade through global value chain activities showed a marked slowdown since 2011, when measured in value-added terms as opposed to the traditional method of adding up gross flows of imports and exports. This basically means that the global value chain integration mechanism that has been a crucial driver for global trade and investment flows of the past decades is slowing down.
These uncertainties increase risk levels and paint a different scenario for global investment. Prosperity from global economic integration was once a shared goal among advanced and emerging economies alike. No more can this be taken for granted as regions and countries are taking a more sceptical stand towards their relationships to the world economy. Investment scenarios from 2018 may be characterised more sharply by regional variances and differences.
Such divergent and contradicting attitudes are likely to become a key feature of global trade and investment in the years to come. How countries and firms trace their paths carefully amid policy uncertainties and structural changes in the way the global economy is linked will be a key development challenge. In short, global economic recovery is under way but the new normal of international investment may also be settling in.
Pavida Pananond is an Associate Professor of International Business at Thammasat Business School, Thammasat University.