Is globalisation due a rethink?

Leading economists consider how attitudes have changed and what the future might hold, in discussion with Linda Yueh

By Linda Yueh 14 October 2019

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Nothing has shaped modern life more than globalisation — the process by which countries are bound together by trade, capital flows and technology. It affects our job prospects, our communities, what we consume, our freedom to travel – and what we experience. For decades it has been the cornerstone of economic practice and international relations, encouraging co-operation and consensus between nations.

But in the current era of Brexit, populism and trade wars, that consensus appears to be under threat. Globalisation is increasingly blamed for the ills of the world; by both populist politicians and those not within the circle who are worried about jobs, immigration and inequality.

These challenges raise urgent questions. What has happened to our attitudes to globalisation? Is the consensus on which it depends breaking down? And what role will it play in future?

We’ve been here many, many times before, reminds Ian Stewart, Partner and Chief Economist at Deloitte UK. The vexed issue of global free trade dominated British politics in the 19th century until the protectionist Corn Laws were repealed in 1846, liberalising the market. Historically, the pace of change has ebbed and flowed. It was frenetic in the late 19th and early 20th centuries, then stagnated from the First World War until the 1950s. Subsequent decades saw “a period of incredible globalisation”, turbocharged by the collapse of communism and the reunification of Europe, the creation of the single market and single currency, and China’s entry into the World Trade Organization (WTO). “Anything after that was always going to be a disappointment,” Stewart suggests.

Even during the boom years of the 1990s and early 2000s, there “never really was a consensus around globalisation”, according to Harvard professor and former Obama advisor, Jason Furman. There were anti-WTO riots in Seattle in 1999 (back then the protesters were left wing). And this was a time when, with low unemployment and high wage growth, the US economy was at its best. “If there was a consensus, it was probably more that foreigners were stealing our jobs,” Furman notes, gloomily.

“In plain language, globalisation is about freedom”

It wasn’t until after the 2008 financial crisis that such sentiments went mainstream, along with growing distrust of “elites”. “When you have an almighty recession, you then expose some of the stresses in the system,” Stewart says. “The collision of the financial crisis with some of the stresses around income and inequality have triggered the current debate, but I don’t think it is any different to the debates we’ve seen before about liberalisation versus regulation.”

In an increasingly complex world, it is easier to point the finger at globalisation. Automation is a gradual process of change. As technology threatens wages and jobs, especially those that are mid-skilled and routine, we don’t blame robots – we blame international trade.

Jean Boivin, Managing Director and Global Head of Research at Blackrock Investment Institute, agrees: “People like a simple narrative. ‘Globalisation’ is being used in an all-encompassing way.”

Perceptions of globalisation also differ markedly, depending on where you are in the world. It is in developed, western countries that the crisis of confidence is most acute. This is not surprising: developing economies have benefited hugely from greater access to world markets, at the expense of rich countries such as the US, Canada and those in Europe.

Twenty years ago, 62% of all bilateral trade was between wealthy countries, according to a recent Bloomberg analysis. Now that share is down to just 47%. The value of trade between emerging economies is up tenfold over the same period.

“There is no debate about productivity and social inclusion that doesn’t end up with a long discussion about skills and education”

Meanwhile, western countries are struggling with wage stagnation, even as their economies continue to grow, fuelling the general sense of discontent among those “left behind”. From their perspective, globalisation simply isn’t working.

“This is a real problem,” says Stewart. “But I don’t think globalisation is as unpopular as we are suggesting. There aren’t really many politicians in the west who take the same view as Trump. In July, Japan and the EU struck what was probably the world’s biggest free-trade agreement, so trade deals are still taking place. The real issue is around the distribution of gains from work and the quality of work. And we would be debating those things with or without globalisation.”

So, what can be done? Lucian Cernat, Chief Trade Economist at the European Commission, suggests we should borrow from the Trump playbook and “make globalisation cool again”.

“In plain language, globalisation is about freedom,” he says. “It’s about your ability to do things across borders, to enjoy things that come from far away, to go far away yourself. But we need to address some of the problems. If people believe globalisation is unfair, maybe there is some truth to it.”

Cernat points to the European Globalisation Adjustment Fund as an example of positive action that has been taken by the EU to counter job losses in its member states that occur as a result of globalisation, such as when a company moves outside the EU or when there is a financial crisis. It has had some success, helping 150,000 people back into work, and has an annual budget of €150m, but in Cernat’s opinion this is still “peanuts – we don’t redistribute enough.”

Other suggestions include making trade deals fairer; tightening the rules on unfair subsidies, which the WTO rulebook has so far failed to address; taking more measures against tax havens; and improving vocational training – a widely acknowledged problem in the UK, but one that has proved stubbornly difficult to solve. “There is no debate about productivity and social inclusion that doesn’t end up with a long discussion about skills and education,” Stewart says. “We have hit peak university in the UK – a combination of overcapacity, fees and questionable returns.”

Meanwhile, basic literacy and numeracy skills are lacking, Stewart adds: “For our income, the UK should be towards the top of international league tables of literacy and numeracy, and we’re not. Those things are, in my view, far more effective than university education.”

Key to solving global problems is strong global governance, Cernat says. “I would call the Paris Agreement [on climate change] an example of successful global governance. Not everyone is willing to sign up to it [President Trump announced the US’s withdrawal in 2017], but we need to be patient in order to reach a critical mass. What the world needs now is more leadership.”

But what if that leadership takes a less favourable view of globalisation? Can it simply be rolled back?

Here, the experts are split. Stewart and Boivin say no, while Cernat equivocates, saying: “It depends.”

Furman believes the answer lies across the Atlantic: “Watch the US,” he says, “and you’ll find out what the answer is.” 

Buy now, pay later?

What a large trade deficit says about the health of a country’s economy

Does buying more from the rest of the world than you sell matter? It’s a concern for a number of countries, but most notably for the advanced economies of the US and Britain, which have some of the largest persistent trade deficits. Trade is related to being deindustrialised, a challenge that may confront other economies as they develop.

It’s a long-standing issue, but one that has come into the spotlight as Britain’s current account deficit rose to record highs after the 2008 financial crisis, and the Bank of England has warned about the consequences if foreigners stop investing in the UK after Britain leaves the EU, which would make the deficit harder to finance.

The US also has a large trade deficit, but enjoys the privilege of the US dollar being the world’s reserve currency. That means foreigners more readily lend money to America to finance its deficit (although the dollar’s pre-eminence has been questioned by the rise of currencies such as the Chinese renminbi. The geopolitical tensions may be higher, but has the economic sustainability of the deficit changed much?

International trade has attracted much analysis over centuries, particularly in Britain. It was the one of the first issues economists tackled in the late eighteenth century, when the rejection of protectionism in favour of opening up to the world economy marked the start of an era of globalisation which contributed to Britain’s prosperity.

The early nineteenth century saw the publication of David Ricardo’s seminal work on international trade, On the Principles of Political Economy and Taxation.

What would Ricardo make of the persistent trade deficits experienced by the UK and other deindustrialised nations?

His theory of comparative advantage (countries gain from trade even if they are less efficient in all production than their trading partners) has transformed the thinking around international trade and partly explains the benefits accruing from globalisation.

With greater opening of trade and investment in services, Britain’s deficit position may improve if its dominant sector can gain greater traction in world markets.

In the meantime, Ricardo would not have been overly concerned about Britain buying more from the rest of the world than it sells, viewing the deficit as symptomatic of the structure of the economy. Specifically, the UK specialises in services, which, unlike manufactured goods, are partly non-tradeable. So, Britain imports goods that contribute to its trade deficit, while what it produces is in part consumed at home. He would, however, have advocated for the UK to maintain the openness it has had since repealing the protectionist Corn Laws.

Had Ricardo had the chance to expand on the exposition of his trade model, given his recognition of the conflict among classes, he may well have proposed measures to redistribute some of the gains from trade away from rent-seekers to those harmed. That would help those left behind when an economy begins to specialise in certain sectors and less in others.

Extracted from The Great Economists: How Their Ideas Can Help Us Today by Linda Yueh, published by Penguin

Linda Yueh is Adjunct Professor of Economics at London Business School.

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