Globalization is under attack. It was meant to be the unstoppable economic force bringing prosperity to rich and poor alike, but that was before the financial crisis ripped up the rulebook.
Over the past four years, international trade flows have increased more slowly than global GDP — “an outcome unprecedented in postwar history,” as Capital Economics analyst Michael Pearce put it in a recent note.
Crisis-scarred global banks are retreating from risky cross-border lending, and multinationals are casting a skeptical eye over foreign opportunities as geopolitical tensions simmer. Populist politicians in a string of countries, not least Britain, are playing on public fears about migrant workers undermining their pay.
Illustration: Mountain people
Global trade flows are still expanding, but they have never regained the breakneck pace of the 1990s and early 2000s.
In the “innocent” days before the global economic downturn of 2008, the dismantling of trade barriers between nation states often seemed inevitable. Yet, more than 13 years after the Doha round of multilateral trade talks started, with the aim of binding developing countries more closely into the international system, the idea of a global trade deal remains locked in the deep freeze. Some analysts are starting to ask: Has globalization come to a halt?
The lesson many governments and companies learned from the turmoil that followed the collapse of Lehman Brothers was that there are risks to being too unthinkingly exposed to the ebbs and flows of the international system.
“There’s quite a fundamental shift going on here,” said professor Simon Evenett, an expert on trade at the University of St Gallen in Switzerland. “You can’t say it’s across the board, but there are some sectors where globalization is in substantial retreat.”
For example, he points to steel, where his recent research shows that trade flows have never returned to pre-2007 levels.
“I think the direction of travel is depressing,” he said.
At the London G20 summit back in April 2009, when trade volumes were spiraling downward, the fear was of a tit-for-tat protectionist battle breaking out. Seeking to avoid that disastrous outcome, world leaders publicly pledged in the conference communique that they would “not repeat the historic mistakes of protectionism of previous eras.”
However, while governments have generally not resorted to blatant protectionist measures of the kind that characterized the interwar years — for example, the notorious Smoot-Hawley Tariff Act in the US, which slapped import taxes on more than 20,000 types of foreign goods — Evenett says they have often used quieter ways of giving domestic firms an unfair advantage.
They might offer credit guarantees or tax rebates for exporters, for example — or just throw government money behind export promotion. Evenett’s recent work suggests that 90 percent of the exports from least-developed countries — the world’s poorest — have to compete against “some kind of subsidized rival.”
Where politicians are pushing for renewed trade liberalization — in the Transatlantic Trade and Investment Partnership (TTIP), for example — they are facing a powerful public campaign from consumers nervous that multinationals would be handed too much control.
Other bulwarks against globalization are also on the agenda, from the tougher curbs on the rights of migrants being promoted by British Prime Minister David Cameron as part of his renegotiation with the EU, to the capital controls — albeit temporary — imposed by Cyprus after it was bailed out to prevent money flooding abroad.
A recent Bank of England research paper noted that banks were retreating from cross-border lending, which is now perceived as jeopardizing financial stability.
Policy Research in Macroeconomics director Ann Pettifor said the impact of the financial crisis has led the public to feel they need protection from the ravages of the markets — an instinct described by the economist Karl Polanyi in the 1930s and 1940s.
“It has made us more inward-looking and more nationalist,” she said.
“Polanyi said what people were looking for was protection from the markets — from these forces that appear to be beyond our control,” she said.
Pettifor argues that the resurgence of Scottish nationalism, rising support for the Front National in France, and the election of the radical SYRIZA government in Greece, can all ultimately be traced back to some version of this impulse.
Columbia University economics and law professor Jagdish Bhagwati, an Indian-born economist who is an vociferous proponent of free trade, said part of globalization’s image problem comes from the assumption that it has to mean unleashing capital flows, which he calls “the weak underbelly of globalization.”
“The freeing-up of capital flows is what led to the East Asian financial crisis [of the late 1990s], and we need to do something about that,” Bhagwati said.
He argues that free capital flows are not a necessary part of globalization.
“Did you expect me also to be for free love?” he said. “Maybe I am, but not because I’m a free trader!”
Recent research by the IMF, highlighted by its managing director Christine Lagarde, suggested that developing countries must be cautious about so-called “financial deepening” — expanding their banking sectors and opening up their capital markets — because without tough regulation it can be too risky.
Inflows of speculative “hot money” can pump up asset prices and lead to a borrowing binge by consumers and businesses — which quickly turns to bust when global investors change their minds and pull their money back home. Some analysts expect these dynamics to be on display when the US Federal Reserve finally starts to push up US interest rates, which is likely to happen this year.
In addition, just as governments have not always been good at protecting their citizens from rapid inflows and outflows of foreign money, the failure to shield workers from foreign competition has also undermined faith in globalization.
“Over the last 10 to 20 years, there has been an explosion of participation in the global economy of big, low-income countries: China, India, the former communist countries,” said Fred Bergsten, senior fellow of the Peterson Institute for International Economics, who advises US President Barack Obama on trade policy.
In effect, about a billion workers once focused predominantly on serving their domestic markets, or scraping a subsistence living, have joined the global workforce.
That has been an extraordinary force for lifting people out of poverty; and as Bhagwati points out, it has been a boon for consumers in the West, who have benefited from imports of cut-price goods.
However, globalization has also become a scapegoat for mass layoffs and stagnating wages among workers in some developed countries, as manufacturing jobs have been shifted offshore.
That argument has been particularly powerful in the US, where trade unions have fought against further trade liberalization.
“I have always thought that the greatest threat to globalization is the US,” Bergsten said.
He believes public skepticism has been fueled by the US’ lack of an effective social safety net — the limited support for workers who lose their jobs.
“The US is a big winner from globalization, but within that there are probably millions of losers, and they don’t have anywhere to turn,” he said.
In Europe, it has been migration flows — a different aspect of global economic integration — that have caused controversy.
The London School of Economics’ Swati Dhingra said there is little evidence that migration lowers domestic wages.
“It has very little impact,” she said. “It’s really one of the most misunderstood issues.”
However, with median wages stagnating, the free movement of goods or of workers often gets the blame.
However, despite public anxiety, Bergsten and Bhagwati both believe it is too soon to write off globalization. While the Doha round is effectively dead, a clutch of new “plurilateral” trade deals between groups of countries are on the drawing board.
Obama repeatedly disappointed the hopes of his European partners and the WTO that he would champion trade liberalization earlier in his presidency. However, he is now throwing his weight behind an effort to convince US Congress to grant him “fast-track” negotiating powers, in a bid to complete the Trans-Pacific Partnership with a group of powerful countries including Japan and Australia.
“He’s been a little bit subdued, but he’s not going to want a protectionist legacy,” Bhagwati said.
Meanwhile, the EU is pushing its own deal with the US — the TTIP — and separate agreements, including with India, where Bhagwati believes the pro-market regime of Indian Prime Minister Narendra Modi will be more sympathetic to lowering trade barriers than his predecessor.
Trade experts warn that these cross-cutting plurilateral deals tend to exclude the poorest countries, which have little leverage in negotiations, and risk creating a “spaghetti bowl” of complex rules and relationships.
“The smaller developing countries are just never going to get the kind of deal they can get from multilateral negotiations,” Dhingra said.
Obama has made it clear that a major rationale for the TPP is not promoting shared prosperity — the idealistic motivation that lay behind the birth of the Doha round — but creating a political and economic counterweight to the might of China.
Bergsten, who is briefing US Congress about the issue, says the traditional way to get trade agreements passed in the US is not to stress the economic benefits, but allay fears about any harm.
“We have to neutralize the economic arguments,” he said, “and then it gets carried across the finish line by foreign policy.”
However, even if the latest crop of trade deals does not succeed in lowering trade barriers further, it might be too soon to read the last rites for globalization.
Pearce points out that technological change could give trade a renewed boost, with increasingly fast Internet connections facilitating the provision of more cross-border services, for example.
However, Pettifor argues that in the long term, politicians would only win public support for globalization if they manage it better — and that means better social safety nets at home and controls on cross-border capital flows.
“For me, it’s about capital mobility,” she said. “If you manage capital flows, then trade won’t be as free — but it will be more stable.”
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