Can Globalization Be Reversed?

by Joseph Joyce

Can Globalization Be Reversed?

The wide-scale imposition of tariffs by the Trump administration is part of a larger effort to undo the expansion of markets around the globe and ensure that the goods consumed in the U.S. will be produced here. Will it be successful? And what would a world that represented a retreat from the globalization of the 1990s and early 2000s look like?

Martin Sandbu of the Financial Times believes that the open world economy “can withstand the assault.” He points out that the emerging market economies that have benefitted from the increase in international trade have an interest in maintaining the current regime. Moreover, it will be difficult to replace global supply chains with production facilities in each economy where a firm sells its products. Finally, limiting overseas expansion of markets will do nothing to address the problem it is supposed to correct: the stagnant wages of relatively low-skilled people. There are policies to help those whose jobs have been eliminated by technology, but these include better educational opportunities and health care, not limitations on trade.

While globalization will not be replaced by national autarchies, it is possible to imagine more narrow organizations of production and finance. The increase in the number of regional trade pacts will accelerate If the World Trade Organization is undermined by the Trump administration. Whether or not regional trade agreements are the source of trade creation or diversion is an empirical issue. Research by Caroline Freund of the Peterson Institute for International Economics and Emanuel Ornelas of Sao Paulo School of Economics-FGV indicates that such pacts in the past were beneficial for trade. But there is no guarantee that this outcome will continue in the future, particularly if the regional pacts replace wider agreements.

 

The world could divide into competing spheres of influence. China is taking advantage of the withdrawal of the U.S. from international pacts to advance its Belt and Road Initiative that will link it to resource-rich developing economies in Asia and Africa as well as markets in Europe. Advocates of British withdrawal from the European Union claim that there are better opportunities in the “Anglosphere” of English-speaking countries such as the U.S. and Australia.

But the Trump administration has exhibited animus to even regional pacts such as NAFTA, and seemingly favors bilateral pacts guided by mercantilist goals. Such an approach would be a serious problem for U.S. based multinationals that have integrated production lines across the borders with Mexico and Canada. Nor will the governments of those agree to mercantilist arrangements that are designed to ensure bilateral trade surpluses for the U.S.

A world of tariffs and quotas, moreover, would also be a step towards increased government controls on the private sector. Anne Krueger of Johns Hopkins points out that quotas, such as those on steel that South Korea has agreed to, must be administered by either the Korean or U.S. government. Similarly, exemptions from tariffs must be granted by a bureaucracy that reviews applications from private firms. These grants of authority open up opportunities for corruption. They also act as barriers to entry for new firms, and lessen incentives to innovate. All this adds to the higher costs that consumers and those who rely on imported intermediate goods will pay.

Perhaps the most self-defeating counter-globalization measure would be to lower immigration. While most of the benefits of immigration flow to the migrants themselves, there is also a “migration surplus” for the economy that hosts them. The tax payments of migrants can be used to pay rising Social Security payments at a time when the native U.S. population is aging. Moreover, immigrants have a strong record of establishing new businesses. The Center for American Entrepreneurship reports that 43% of firms listed in the 2017 Fortune 500 were founded or co-founded by first- or second-generation migrants.

Not all movements towards globalization were beneficial for those countries that opened up their borders. In the area of finance, financial flows led to the Asian crisis of 1997-98 and the global financial crisis of 2008-09, while their impact on growth is slim at best. The IMF has renounced its previous advocacy of capital account deregulation and now views capital controls as part of a government’s toolkit of macroprudential measures to stabilize the financial sector.

Moreover, Dani Rodrik of the Kennedy School has pointed out that the hyperglobalization drive of the 1980s and 1990s pushed trade agreements beyond their “traditional focus on import restrictions and impinged on domestic policies…” Rodrik argues that some of the recent trade pacts are designed to increase the revenues of multinational firms, and their redistributive effects will overwhelm any increases in efficiency.

But attempting to impose a system of nationalistic managed trade that limits the movements of people is inherently difficult, and will lead to widespread government intervention. Workers and firms who benefit from such measures will be outnumbered by those who lose export opportunities and those who must pay higher domestic prices. Over time, firms will cut back on investments if they feel the need to secure government approval. All this will lower productivity in economies where productivity growth is already depressed. There is a need for a better-designed globalization, but what we are seeing is a movement to a world of national barriers that will only fuel xenophobia and hamper long-term growth.

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