The growing political backlash against trade in the advanced economies has raised a crucial question: does globalization need to be rolled back in order to preserve an open world economy? If policymakers don’t address it now, they are likely to answer for it later.
LONDON – At the beginning of the new millennium, when the world was deemed “flat” because of its economic openness, international trade was a subject confined to the business pages and discussions among technocrats. Now, trade tops the political agenda in much of the world; in the advanced economies, it is populists’ favorite horse to whip. Even politicians who once embraced trade deals are now disavowing them.
In Britain, as a result of the Brexit vote, debates about the merits of trade with the European Union’s single market versus trade under World Trade Organization rules are now heard almost nightly. In the United States, both presidential candidates have made opposition to mega-regional trade deals – specifically, the 12-country Trans-Pacific Partnership (TPP) and the Transatlantic Trade and Investment Partnership (TTIP) with the European Union – central to their campaigns.
None of this should be surprising, given how sharply public opinion has soured on such trade agreements. Opinion polls on both sides of the Atlantic identify trade as one of the major sources of the discontent roiling the world’s developed democracies. A survey by YouGov indicates that approximately 71% of Americans and 58% of Germans believe that their countries should embrace more restrictive trade policies to protect their economies from foreign competition. So the window of opportunity to conclude the TPP and the TTIP is closing; in fact, leaders like French President François Hollande are increasingly adamant that the TTIP is already a dead acronym.
Project Syndicate’s columnists are deeply divided over the meaning of this turn against trade. Is there a risk, as some suggest, that the US – and Britain – could turn the clock back to the 1930s, when the US Congress enacted the Smoot-Hawley Tariff and Britain abandoned the gold standard, allowing sterling to depreciate and triggering a wave of restrictions on international trade and payments? Or is the turn against trade the inevitable reaction to an assumption – that free trade benefits all – that was never true in either theory or practice?
Closing Time?
Despite much academic and official hand-wringing, Harvard’s Dani Rodrik, no free-trade cheerleader, sees “few signs that governments are moving decidedly away from an open economy.” Similarly, Rodrik’s Harvard colleague Joseph Nye, referring to the US presidential campaign, warns that it would be “an overstatement to say that the 2016 election highlights an isolationist trend that will end the era of globalization.”
Nonetheless, the signals coming from both sides of the Atlantic – and what they imply for the future of the international economic order that emerged at Word War II’s end – worry many observers. Otaviano Canuto, an executive director of the World Bank, points to “a lack of progress in recent rounds of trade liberalization and the implementation of protectionist non-tariff trade barriers.”Although such “creeping protectionism has not yet had a significant quantitative impact on trade,” he argues, “its emergence has become a major source of concern amid rising anti-globalization sentiment in the advanced economies.”
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A repetition of the experience of the 1930s was precisely what many experts, policymakers, and business leaders sought to avoid in the aftermath of the 2008 global financial crisis. In the first major test of the G20 – the major developed and emerging countries that account for some 85% of world GDP – its members’ leaders were hastily summoned to Washington, DC, in November 2008 to coordinate measures to address the crisis. Maintaining an open trade regime and avoiding protectionist measures were what everyone had in mind.
This was a geopolitical agenda as much as it was an economic one – if not more so. Indeed, as Barry Eichengreen reminds us, it would be wrong to “invoke the old saw that Smoot-Hawley caused the Great Depression, because it didn’t.” Nonetheless, by eroding trust and removing incentives to cooperate, currency and trade wars “fanned geopolitical tensions” in the 1930s. In particular, Eichengreen points out, “US, British, French, and Canadian leaders were at one another’s throats at a time when they should have been working together to advance other common goals” – namely, mobilizing “a coalition of the willing to contain the Nazi threat.”
Fast-forward to 2016, and “[m]ore than rhetoric has shifted,” says Bjørn Lomborg, the director of the Copenhagen Consensus Center. From Lomborg’s perspective, what Canuto characterizes as an upward creep in global trade restrictions is in fact a galloping trend. He laments that “the use of protectionist policies” was “up 50% in 2015, outnumbering trade-liberalization measures by three to one,” and that G20 members accounted for 81% of these new restrictions.
So how, asks Nobel laureate economist Joseph Stiglitz of Columbia University, “can something that our political leaders – and many an economist – said would make everyone better off be so reviled?” One reason, as Harvard’s Jeffrey Frankel argues, is that enlarging the economic pie – “a fundamental proposition in economics” – is necessary to maintain consensus on trade. As the size of the pie is no longer increasing enough for the winners, even in principle, to compensate the losers and thus leave everyone better off, the losers have felt increasingly disenfranchised.
Yale University’s Stephen Roach makes a similar case. He cites data from the International Monetary Fund showing that “annual growth in the volume of world trade has averaged just 3% over the 2009-2016 period – half the 6% rate from 1980 to 2008,” owing both to the post-2008 recession and a slow and sluggish recovery. “With world trade shifting to a decidedly lower trajectory,” he says “political resistance to globalization has only intensified.”
Trading Doubts
But that does not mean that faltering growth in world trade is the most important issue to address, as many – including the IMF – believe. On the contrary, Daniel Gros, Director of the Center for European Policy Studies, argues that “[b]lind faith in globalization” is the main source of the current political backlash, because it “led many to overhype” the benefits, “creating impossible expectations for trade liberalization.”
Gros blames policymakers’ refusal to distinguish between liberalization-driven trade and commodities-driven trade. “By the early 1990s,” he says, “when tariffs and other trade barriers had already reached very low levels, the traditional benefits of trade liberalization had largely been exhausted.” But the “two-decade-long commodity-price boom” that followed “enabled major commodity exporters to import more,” while also boosting the total value of world trade.
It was an outcome that “most economists and politicians,” Gros continues, eagerly “attributed…to trade-liberalization policies,” thereby reinforcing “the notion that ‘hyper-globalization’ was the key to huge gains for everyone.” The crucial point is that “growth fueled by higher commodity prices, unlike that produced by the dismantling of trade barriers, caused a decline in living standards in the commodity-importing advanced countries, because it reduced the purchasing power of workers.” As a result, “when advanced-country workers were squeezed economically, they concluded that globalization was the problem.”
Gros is not alone in doubting that further liberalization can do much to revive world trade and economic growth. Jomo Kwame Sundaram and Vladimir Popov, of the Food and Agriculture Organization of the United Nations and the Russian Academy of Sciences, respectively, make a similar point. “With global trade already significantly freed up – and with incomes already stagnant or falling – claims that new [free-trade agreements] will boost incomes are dubious, at best,” they say. Likewise, Eichengreen maintains that “[j]ust as tariff protection is not a macroeconomic problem in deflationary, liquidity-trap-like conditions, freer trade, the economist’s familiar nostrum, is not a solution.”
Lomborg, for his part, nonetheless believes that trade liberalization still has much to offer to poorer countries. “Reviving the moribund Doha Development Round of global free-trade talks,” he says, would make the world “$11 trillion richer each year by 2030, with $7 trillion going to developing countries.” This would “cut the number of people in poverty by an astonishing 145 million in 15 years.”
But Sundaram and Popov offer a sobering corrective to Lomborg’s rosy scenario. They warn that the non-trade provisions contained in deals like the TPP would “strengthen the hand of financial rent-seekers, intellectual-property owners, and multinational corporations vis-à-vis governments – all of which would hold emerging economies down, rather than helping them up.”
Threadbare Theory or Unfair Practice?
Roach, who counts himself among “those who defend free trade and globalization,” nonetheless takes his fellow economists to task for failing to develop an adequate intellectual basis for the policies they promote. “The best that economists can offer,” he admits, “is David Ricardo’s early nineteenth-century framework: if a country simply produces in accordance with its comparative advantage (in terms of resource endowments and workers’ skills), presto, it will gain through increased cross-border trade.” That’s not good enough, Roach insists:
Ricardo’s arguments, couched in terms of England’s and Portugal’s comparative advantages in cloth and wine, respectively, hardly seem relevant for today’s hyper-connected, knowledge-based world. The Nobel laureate Paul Samuelson, who led the way in translating Ricardian foundations into modern economics, reached a similar conclusion late in his life, when he pointed out how a disruptive low-wage technology imitator like China could turn the theory of comparative advantage inside out.
Stiglitz, a longtime critic of the prevailing globalization agenda, is even more pointed in his criticism of the economics profession’s unconditional support for free trade. The problem for him is not so much with the theory as it is with its proponents’ promise that free trade would make everyone better off. In fact, Stiglitz argues, the theory implies just the opposite. “Under the assumption of perfect markets (which underlies most neoliberal economic analyses), free trade equalizes the wages of unskilled workers around the world,” he notes. “Trade in goods is a substitute for the movement of people.” As a result, “[i]mporting goods from China – goods that require a lot of unskilled workers to produce – reduces the demand for unskilled workers in Europe and the US.
Or it lowers these workers’ wages. “Eventually,” Stiglitz explains, “it would be as if Chinese workers continued to migrate to the US and Europe until wage differences had been eliminated entirely.” Unsurprisingly, he notes, “the neoliberals never advertised this consequence of trade liberalization.” Instead, “they claimed – one could say lied – that all would benefit.”
From the standpoint of some free-trade supporters, however, globalization is running into trouble not because of neoliberal theory, but because of illiberal practice. Princeton University’s Harold James suggests that “judicial and quasi-judicial decisions to impose large financial penalties on foreign corporations” could be viewed as an analog of the protectionist trade wars of the 1930s, with the US and Europe once again the main antagonists. He provides a telling example: “After the EU announced that it would require Apple to pay €13 billion ($14.6 billion) in back taxes, which it alleges were illegally reduced by the Irish government, the US fined Deutsche Bank, a German company, $14 billion to settle claims relating to its mortgage-backed securities business prior to the 2008 crash.”
As James acknowledges, such penalties could be regarded as “an effective response in a world where multinational corporations have become extremely skilled at reducing their conventional tax liabilities.” But he’s not convinced. “Unlike normal taxes,” he notes, “fines against companies are not predictably or uniformly levied, and must be haggled over and settled individually in each case.” This is not exactly an environment that nurtures a level playing field. On the contrary, “[t]hese discussions are often politicized and involve high-level government interventions.”
This reflects the tremendous pressure on national governments to show that implementation of international trade rules does not hinder domestic firms vis-à-vis foreign firms. Consider industrial policy. Both the WTO and the European Commission crack down on any project that has a whiff of state aid, such as the new Airbus A350, which, according to a recent WTO ruling, benefited from the “direct and indirect effects” of long-term government support.
A more pressing example is the new bail-in regime for EU banks, which, less than six months after the Brexit referendum, could turn Italy into Europe’s next political flashpoint. In addition to having one of the EU’s most vulnerable banking sectors, Italy also has one of Europe’s highest rates of ownership of bank shares and bonds by individuals and families. The prohibition on using public funds to bail out banks, which took effect at the beginning of this year, thus makes it very difficult for Italy’s government to resolve the country’s banking crisis without jeopardizing its already-wobbly political stability.
Responsible Protectionism?
Given growing awareness of the limits of trade liberalization, how likely is the threat of rising protectionism? More important, just how menacing is the threat?
To answer both questions, Rodrik suggests, one should look not to the 1930s, but to the 1980s. Back then, Rodrik reminds us, “it was Japan, rather than China, that was the trade bogeyman, stalking – and taking over – global markets.” With the US and Europe “erecting trade barriers and imposing ‘voluntary export restrictions’ (VERs) on Japanese cars and steel,” fear of “the creeping ‘new protectionism’ was rife.” And yet the subsequent decade was characterized by the greatest wave of globalization the world has ever known. What happened?
“In hindsight, the ‘new protectionism’ of the 1980s,” Rodrik explains, “was more a case of regime maintenance than regime disruption.” To be sure, the “import ‘safeguards’ and VERs of the time were ad hoc,” he says, “but they were necessary responses to the distributional and adjustment challenges posed by the emergence of new trade relationships.”
So where do we go from here? Stiglitz favors strong, Scandinavian-style welfare measures as part of a social contract that maintains an open society and economy. Frankel and Roach suggest specific policies, such as, in the US, universal health insurance, an expanded Earned Income Tax Credit, and broader Trade Adjustment Assistance to help displaced workers retrain. But, given the persistence of depressed global demand and low commodity prices, such measures are unlikely to restore trade and globalization to their previous vigor.
Ultimately, Rodrik is probably right about the need for a “better balance between national autonomy and globalization.” As he puts it, today’s anti-trade backlash is a message to policymakers that they must “place the requirements of liberal democracy ahead of those of international trade and investment.” Free-trade orthodoxy is not the only alternative to populism, and “center-right and center-left parties should not be asked to save hyper-globalization at all costs.” The point is to preserve a relatively open global economy, not to adhere piously to some ideal model that even the staunchest free-trade advocates admit doesn’t exist.
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LONDON – At the beginning of the new millennium, when the world was deemed “flat” because of its economic openness, international trade was a subject confined to the business pages and discussions among technocrats. Now, trade tops the political agenda in much of the world; in the advanced economies, it is populists’ favorite horse to whip. Even politicians who once embraced trade deals are now disavowing them.
In Britain, as a result of the Brexit vote, debates about the merits of trade with the European Union’s single market versus trade under World Trade Organization rules are now heard almost nightly. In the United States, both presidential candidates have made opposition to mega-regional trade deals – specifically, the 12-country Trans-Pacific Partnership (TPP) and the Transatlantic Trade and Investment Partnership (TTIP) with the European Union – central to their campaigns.
None of this should be surprising, given how sharply public opinion has soured on such trade agreements. Opinion polls on both sides of the Atlantic identify trade as one of the major sources of the discontent roiling the world’s developed democracies. A survey by YouGov indicates that approximately 71% of Americans and 58% of Germans believe that their countries should embrace more restrictive trade policies to protect their economies from foreign competition. So the window of opportunity to conclude the TPP and the TTIP is closing; in fact, leaders like French President François Hollande are increasingly adamant that the TTIP is already a dead acronym.
Project Syndicate’s columnists are deeply divided over the meaning of this turn against trade. Is there a risk, as some suggest, that the US – and Britain – could turn the clock back to the 1930s, when the US Congress enacted the Smoot-Hawley Tariff and Britain abandoned the gold standard, allowing sterling to depreciate and triggering a wave of restrictions on international trade and payments? Or is the turn against trade the inevitable reaction to an assumption – that free trade benefits all – that was never true in either theory or practice?
Closing Time?
Despite much academic and official hand-wringing, Harvard’s Dani Rodrik, no free-trade cheerleader, sees “few signs that governments are moving decidedly away from an open economy.” Similarly, Rodrik’s Harvard colleague Joseph Nye, referring to the US presidential campaign, warns that it would be “an overstatement to say that the 2016 election highlights an isolationist trend that will end the era of globalization.”
Nonetheless, the signals coming from both sides of the Atlantic – and what they imply for the future of the international economic order that emerged at Word War II’s end – worry many observers. Otaviano Canuto, an executive director of the World Bank, points to “a lack of progress in recent rounds of trade liberalization and the implementation of protectionist non-tariff trade barriers.”Although such “creeping protectionism has not yet had a significant quantitative impact on trade,” he argues, “its emergence has become a major source of concern amid rising anti-globalization sentiment in the advanced economies.”
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A repetition of the experience of the 1930s was precisely what many experts, policymakers, and business leaders sought to avoid in the aftermath of the 2008 global financial crisis. In the first major test of the G20 – the major developed and emerging countries that account for some 85% of world GDP – its members’ leaders were hastily summoned to Washington, DC, in November 2008 to coordinate measures to address the crisis. Maintaining an open trade regime and avoiding protectionist measures were what everyone had in mind.
This was a geopolitical agenda as much as it was an economic one – if not more so. Indeed, as Barry Eichengreen reminds us, it would be wrong to “invoke the old saw that Smoot-Hawley caused the Great Depression, because it didn’t.” Nonetheless, by eroding trust and removing incentives to cooperate, currency and trade wars “fanned geopolitical tensions” in the 1930s. In particular, Eichengreen points out, “US, British, French, and Canadian leaders were at one another’s throats at a time when they should have been working together to advance other common goals” – namely, mobilizing “a coalition of the willing to contain the Nazi threat.”
Fast-forward to 2016, and “[m]ore than rhetoric has shifted,” says Bjørn Lomborg, the director of the Copenhagen Consensus Center. From Lomborg’s perspective, what Canuto characterizes as an upward creep in global trade restrictions is in fact a galloping trend. He laments that “the use of protectionist policies” was “up 50% in 2015, outnumbering trade-liberalization measures by three to one,” and that G20 members accounted for 81% of these new restrictions.
So how, asks Nobel laureate economist Joseph Stiglitz of Columbia University, “can something that our political leaders – and many an economist – said would make everyone better off be so reviled?” One reason, as Harvard’s Jeffrey Frankel argues, is that enlarging the economic pie – “a fundamental proposition in economics” – is necessary to maintain consensus on trade. As the size of the pie is no longer increasing enough for the winners, even in principle, to compensate the losers and thus leave everyone better off, the losers have felt increasingly disenfranchised.
Yale University’s Stephen Roach makes a similar case. He cites data from the International Monetary Fund showing that “annual growth in the volume of world trade has averaged just 3% over the 2009-2016 period – half the 6% rate from 1980 to 2008,” owing both to the post-2008 recession and a slow and sluggish recovery. “With world trade shifting to a decidedly lower trajectory,” he says “political resistance to globalization has only intensified.”
Trading Doubts
But that does not mean that faltering growth in world trade is the most important issue to address, as many – including the IMF – believe. On the contrary, Daniel Gros, Director of the Center for European Policy Studies, argues that “[b]lind faith in globalization” is the main source of the current political backlash, because it “led many to overhype” the benefits, “creating impossible expectations for trade liberalization.”
Gros blames policymakers’ refusal to distinguish between liberalization-driven trade and commodities-driven trade. “By the early 1990s,” he says, “when tariffs and other trade barriers had already reached very low levels, the traditional benefits of trade liberalization had largely been exhausted.” But the “two-decade-long commodity-price boom” that followed “enabled major commodity exporters to import more,” while also boosting the total value of world trade.
It was an outcome that “most economists and politicians,” Gros continues, eagerly “attributed…to trade-liberalization policies,” thereby reinforcing “the notion that ‘hyper-globalization’ was the key to huge gains for everyone.” The crucial point is that “growth fueled by higher commodity prices, unlike that produced by the dismantling of trade barriers, caused a decline in living standards in the commodity-importing advanced countries, because it reduced the purchasing power of workers.” As a result, “when advanced-country workers were squeezed economically, they concluded that globalization was the problem.”
Gros is not alone in doubting that further liberalization can do much to revive world trade and economic growth. Jomo Kwame Sundaram and Vladimir Popov, of the Food and Agriculture Organization of the United Nations and the Russian Academy of Sciences, respectively, make a similar point. “With global trade already significantly freed up – and with incomes already stagnant or falling – claims that new [free-trade agreements] will boost incomes are dubious, at best,” they say. Likewise, Eichengreen maintains that “[j]ust as tariff protection is not a macroeconomic problem in deflationary, liquidity-trap-like conditions, freer trade, the economist’s familiar nostrum, is not a solution.”
Lomborg, for his part, nonetheless believes that trade liberalization still has much to offer to poorer countries. “Reviving the moribund Doha Development Round of global free-trade talks,” he says, would make the world “$11 trillion richer each year by 2030, with $7 trillion going to developing countries.” This would “cut the number of people in poverty by an astonishing 145 million in 15 years.”
But Sundaram and Popov offer a sobering corrective to Lomborg’s rosy scenario. They warn that the non-trade provisions contained in deals like the TPP would “strengthen the hand of financial rent-seekers, intellectual-property owners, and multinational corporations vis-à-vis governments – all of which would hold emerging economies down, rather than helping them up.”
Threadbare Theory or Unfair Practice?
Roach, who counts himself among “those who defend free trade and globalization,” nonetheless takes his fellow economists to task for failing to develop an adequate intellectual basis for the policies they promote. “The best that economists can offer,” he admits, “is David Ricardo’s early nineteenth-century framework: if a country simply produces in accordance with its comparative advantage (in terms of resource endowments and workers’ skills), presto, it will gain through increased cross-border trade.” That’s not good enough, Roach insists:
Stiglitz, a longtime critic of the prevailing globalization agenda, is even more pointed in his criticism of the economics profession’s unconditional support for free trade. The problem for him is not so much with the theory as it is with its proponents’ promise that free trade would make everyone better off. In fact, Stiglitz argues, the theory implies just the opposite. “Under the assumption of perfect markets (which underlies most neoliberal economic analyses), free trade equalizes the wages of unskilled workers around the world,” he notes. “Trade in goods is a substitute for the movement of people.” As a result, “[i]mporting goods from China – goods that require a lot of unskilled workers to produce – reduces the demand for unskilled workers in Europe and the US.
Or it lowers these workers’ wages. “Eventually,” Stiglitz explains, “it would be as if Chinese workers continued to migrate to the US and Europe until wage differences had been eliminated entirely.” Unsurprisingly, he notes, “the neoliberals never advertised this consequence of trade liberalization.” Instead, “they claimed – one could say lied – that all would benefit.”
From the standpoint of some free-trade supporters, however, globalization is running into trouble not because of neoliberal theory, but because of illiberal practice. Princeton University’s Harold James suggests that “judicial and quasi-judicial decisions to impose large financial penalties on foreign corporations” could be viewed as an analog of the protectionist trade wars of the 1930s, with the US and Europe once again the main antagonists. He provides a telling example: “After the EU announced that it would require Apple to pay €13 billion ($14.6 billion) in back taxes, which it alleges were illegally reduced by the Irish government, the US fined Deutsche Bank, a German company, $14 billion to settle claims relating to its mortgage-backed securities business prior to the 2008 crash.”
As James acknowledges, such penalties could be regarded as “an effective response in a world where multinational corporations have become extremely skilled at reducing their conventional tax liabilities.” But he’s not convinced. “Unlike normal taxes,” he notes, “fines against companies are not predictably or uniformly levied, and must be haggled over and settled individually in each case.” This is not exactly an environment that nurtures a level playing field. On the contrary, “[t]hese discussions are often politicized and involve high-level government interventions.”
This reflects the tremendous pressure on national governments to show that implementation of international trade rules does not hinder domestic firms vis-à-vis foreign firms. Consider industrial policy. Both the WTO and the European Commission crack down on any project that has a whiff of state aid, such as the new Airbus A350, which, according to a recent WTO ruling, benefited from the “direct and indirect effects” of long-term government support.
A more pressing example is the new bail-in regime for EU banks, which, less than six months after the Brexit referendum, could turn Italy into Europe’s next political flashpoint. In addition to having one of the EU’s most vulnerable banking sectors, Italy also has one of Europe’s highest rates of ownership of bank shares and bonds by individuals and families. The prohibition on using public funds to bail out banks, which took effect at the beginning of this year, thus makes it very difficult for Italy’s government to resolve the country’s banking crisis without jeopardizing its already-wobbly political stability.
Responsible Protectionism?
Given growing awareness of the limits of trade liberalization, how likely is the threat of rising protectionism? More important, just how menacing is the threat?
To answer both questions, Rodrik suggests, one should look not to the 1930s, but to the 1980s. Back then, Rodrik reminds us, “it was Japan, rather than China, that was the trade bogeyman, stalking – and taking over – global markets.” With the US and Europe “erecting trade barriers and imposing ‘voluntary export restrictions’ (VERs) on Japanese cars and steel,” fear of “the creeping ‘new protectionism’ was rife.” And yet the subsequent decade was characterized by the greatest wave of globalization the world has ever known. What happened?
“In hindsight, the ‘new protectionism’ of the 1980s,” Rodrik explains, “was more a case of regime maintenance than regime disruption.” To be sure, the “import ‘safeguards’ and VERs of the time were ad hoc,” he says, “but they were necessary responses to the distributional and adjustment challenges posed by the emergence of new trade relationships.”
So where do we go from here? Stiglitz favors strong, Scandinavian-style welfare measures as part of a social contract that maintains an open society and economy. Frankel and Roach suggest specific policies, such as, in the US, universal health insurance, an expanded Earned Income Tax Credit, and broader Trade Adjustment Assistance to help displaced workers retrain. But, given the persistence of depressed global demand and low commodity prices, such measures are unlikely to restore trade and globalization to their previous vigor.
Ultimately, Rodrik is probably right about the need for a “better balance between national autonomy and globalization.” As he puts it, today’s anti-trade backlash is a message to policymakers that they must “place the requirements of liberal democracy ahead of those of international trade and investment.” Free-trade orthodoxy is not the only alternative to populism, and “center-right and center-left parties should not be asked to save hyper-globalization at all costs.” The point is to preserve a relatively open global economy, not to adhere piously to some ideal model that even the staunchest free-trade advocates admit doesn’t exist.