Revitalizing Globalization

Stephen DeAngelis

November 06, 2013

“Globalization isn’t what it used to be,” writes Robert J. Samuelson. “In its heyday, trade and international investment (‘capital flows’) boomed. Consider. From 1980 to 2007, the value of global exports increased by nearly sevenfold, reports the World Trade Organization. As for capital flows, the annual amounts rose from $500 billion to $11.8 trillion over the same period, estimates the McKinsey Global Institute. New middle classes emerged. Hundreds of millions of people escaped abject poverty. All this seemed a real-world triumph of economic theory.” [“The new globalization,” Washington Post, 16 October 2013] That was before the Great Recession hit and sucked the breath out of the global economy. As Samuelson observes, “Times have changed.”

Samuelson certainly isn’t alone in his assessment of the morass in which globalization is now mired. “In recent years,” the editorial staff at The Economist explains, “the trend to greater openness has been replaced by an enthusiasm for building barriers — mostly to the world’s detriment.” [“The world economy: The gated globe,” 12 October 2013] Both Samuelson and The Economist‘s editorial staff are commenting on an article written by Greg Ip, U.S. economics editor of The Economist, in which he concludes that “the forward march of globalisation has paused since the financial crisis, giving way to a more conditional, interventionist and nationalist model.” [“The gated globe,” The Economist, 12 October 2013] Samuelson hails Ip’s article as “masterful analysis.” Ip writes:

“After two decades in which people, capital and goods were moving ever more freely across borders, walls have been going up, albeit ones with gates. Governments increasingly pick and choose whom they trade with, what sort of capital they welcome and how much freedom they allow for doing business abroad. Virtually all countries still embrace the principles of international trade and investment. They want to enjoy the benefits of globalisation, but as much as possible they now also want to insulate themselves from its downsides, be they volatile capital flows or surging imports.”

Ip doesn’t believe that globalization has been halted — simply paused. He writes, “World leaders congratulate themselves on having avoided protectionism since the crisis, and on conventional measures they are right: according to the World Trade Organisation (WTO), explicit restrictions on imports have had hardly any impact on trade since 2008.” Ip, however, insists that we must look deeper if we want to find reasons to be concerned. “Hidden protectionism is flourishing,” he reports, “often under the guise of export promotion or industrial policy.” Samuelson agrees with this assessment. He writes:

“Trade liberalization has … weakened. … Worldwide negotiations, with the lower tariffs and trade concessions applying to almost everyone, have flagged. The latest round, begun in Doha, Qatar, in 2001, remains stalemated. Meanwhile, countries have resorted to regional deals (such as the North American Free Trade Agreement among the United States, Canada and Mexico), and trade is distorted by a variety of policies, from rigged exchange rates (China) to subsidized export loans (many nations).”

Samuelson notes that “globalization reflects three basic forces: lower transportation costs (containerization, air freight); cheaper communications (phone service, the Internet); and favorable government policies. The first two are well-entrenched; the third isn’t.” The recent circus in Washington that took place during the budget crisis provides sufficient evidence of why government policies are so difficult to establish and maintain. Samuelson continues and asks some very important questions:

“What Ip calls ‘gated’ globalization might also be described as ‘a la carte.’ Countries want to pick and choose — to take what helps and reject the rest. This is understandable, but is it viable? Can globalization coexist with rising nationalism? Can it overcome the rivalry between the United States and China?”

Samuelson believes that distrust is growing between the U.S. and China. Certainly the fact that Congress kicked the debt ceiling/budget debate down the road will do nothing to bolster trust between countries. After all, China owns about $1.2 trillion in American bills, notes and bonds, according to the U.S. Treasury. Samuelson hopes that globalization can be revitalized. He writes:

“Globalization has always had its dissenters, most understandably among workers whose jobs were lost or wages depressed by international competition. But their grievances were muffled by solid overall economic growth. Now the opposite may happen: Slow growth may amplify complaints against globalization. The danger is that governments around the world, trying to shield themselves from globalization’s vices, will cripple its virtues.”

And, according to the editorial staff at The Economist, those virtues are many. It writes: “Imagine discovering a one-shot boost for the world’s economy. It would revitalise firms, increasing sales and productivity. It would ease access to credit and it would increase the range and quality of goods in the shops while keeping their prices low. What economic energy drink can possibly deliver all these benefits? Globalisation can.”

With more barriers being erected every year (even if those barriers have gates), protectionism remains the single most important concern of most analysts. As Ip reports, “The fate of globalisation rests on whether America, China and the rest of the world see open borders as being in their national interest.” [“A question of trust,” The Economist, 12 October 2013] In the concluding article of his special report, Ip notes that “historically globalisation has needed a hegemon. America seems to be retreating from that role and China is not yet ready for it.” [“What kind of capitalism?,” The Economist, 12 October 2013] Nevertheless, he remains optimistic. He explains:

“John Ikenberry, a political scientist at Princeton, notes that even as America’s hegemony has eroded, more of the rest of the world is now democratic and at least nominally committed to free-market capitalism than in the 1980s, when globalisation last paused. That, he thinks, should help its institutions survive. So the chances are that globalisation will not go into reverse. The power of technology to erase distance is too strong, and the economic benefits of international trade and foreign investment are too widely accepted. But nor will globalisation regain the broad and often unquestioned support it had before 2008. The risk is not that the gates to globalisation will be slammed shut altogether, but that governments will make them too effective: that export promotion will shade into protectionism and wasteful industrial policy, that the crackdown on banks and capital flows will deprive deserving countries and businesses of capital, and that the proliferation of rules and regulations will breed costly bureaucracy and rent-seeking. … Gates must remain the exception, and openness the rule.”

America may be losing its hegemonic position, but The Economist‘s editorial staff nevertheless believes that globalization’s fate rests primarily on how the U.S. behaves. It explains:

“The fate of globalisation depends most on America. Over the past 70 years it has used its clout to push the world to open up. Now that clout is threatened by China’s growing influence and America’s domestic divisions. … The moribund world economy needs some of the magic that globalisation can deliver.”

Unfortunately, magic needs a magician. The powers in Washington have done everything they can to ensure that the kind of leadership needed to revitalize globalization doesn’t emerge. The two prominent parties are locked in a stand-off which they see as a zero-sum game. As long as that standoff remains, America remains the biggest loser and globalization is collateral damage. Jeff Madrick writes:

“It’s rare, in economics as in life, to get a second chance. Though economists are constantly learning lessons from past mistakes, seldom are there obvious opportunities to apply them. The current downturn, however, may provide such an opportunity. Globalization, the dominant economic trend of the past quarter century, has slowed significantly since the recession began several years ago. As economies around the world recover, the march of globalization will inevitably resume – but it need not return in the same often destructive form it had before 2008. This time, perhaps, we can get a few things right.” [“Toward Reglobalization,” Harper’s Magazine, August 2013]

I believe globalization will be given a second chance. The upsides are simply too large to ignore. The real question will be: Who will lead the next wave of globalization?