The People’s Verdict on Globalization

The People’s Verdict on Globalization

photo: Nicolas Raymond

The similarities in the electoral appeals of businessman Donald Trump and Senator Bernie Sanders have been widely noted (see, for example, herehere and here). Both men attract voters who feel trapped in their economic status, unable to make progress either for themselves or their children. Moreover, both men have assigned the blame for the loss of manufacturing jobs in the U.S. on international trade agreements. Regardless of who wins the election, globalization, which was seen as a irresistible force in the 1990s after the collapse of the Soviet Union and the entry of China into the world economy, is now being reexamined and found to be detrimental in the eyes of many.

Trump and Sanders have been particularly vociferous about the North American Trade Agreement, which they hold responsible for the migration of U.S. jobs to Mexico. But those who blame the foreign sector for a loss of jobs should also finger capital flows. The investment of U.S. firms in overseas facilities that then ship their products back to the U.S. represents outward foreign direct investment (FDI), and thus in this story is also responsible for the disappearance of manufacturing jobs. Moreover, Lawrence Summers of Harvard has pointed out that firms that have the option to relocate will be less inclined to invest in new capital in their home country, which leads to lower productivity and wages for their workers.

Whether technology or trade is more responsible for the shrinkage in manufacturing jobs has been the subject of much study (see, for example, here). In the past, most studies assigned the primary role for labor force disruption to technology. David Autor of MIT, Lawrence F. Katz of Harvard and Melissa S. Kearney of the University of Maryland, for example, drew attention to technology that accomplishes routine tasks without human intervention and leads to a polarization of the labor force, as middle-skill level jobs are eliminated, leaving only low-skill and high-skill jobs. In addition, information technology that allows firms to coordinate their facilities in different countries allows more outsourcing and reallocation of plants.

Those who seek to defend global trade flows cite rises in employment due to exports and also gains due to increases in efficiency and economics of scale that accompany specialization. In addition, lower prices due to imports raise real incomes. No one denies that increased imports can disrupt labor markets, but this has viewed as a transitional cost that could be absorbed.

But recent economic studies by widely respected economists (including MIT’s Autor) have found that imports—and in particular, imports from China—are responsible for some of the loss of U.S. manufacturing jobs. Autor, David Dorn at the University of Zurich and Gordon Hanson at the University of California—San Diego view China’s entry into world markets as an epochal shock. Standard economic analysis would have predicted a shift within U.S. industries as workers in firms that lost their markets to Chinese imports migrated to other sectors, with no change in aggregate employment. But in reality the shift to new jobs by those workers exposed to import competition has not taken place and employment has fallen in those labor markets. In another study with MIT’s Daron Acemoglu and Brendan Price, these authors estimate U.S. job losses from Chinese import competition in the range of 2 – 2.4 million.

The relative effects of technology and international trade/finance on employment will undoubtedly be investigated, analyzed and debated for many years to come. But Steven R. Weisman of the Peterson Institute for International Economics makes an important point in his new book on globalization, The Great Tradeoff: Confronting Moral Conflicts in the Era of Globalization:

Facts, by themselves, will never definitely resolve the arguments over the effects of trade and investment on inequality or economic justice in general. Globalization, and indeed the full array of political conflicts in the modern era, must be resolved by men and women, not idealized concepts and truths.

A honest debate over the benefits and costs of globalization is overdue. To date, the U.S. has managed to avoid hard choices, but that will not continue, Dani Rodrik of Harvard’s Kennedy School of Government has examined the policy challenge In his book, The Globalization Paradox: Democracy and the Future of the World Economy. He makes the case for the existence of a policy “trilemma,” by which he means that a nation can not simultaneously have democracy, national sovereignty and “hyperglobalization,” i.e., the removal of all domestic barriers to trade and finance.

Rodrik examines the three possible national positions under his trilemma. If a nation totally embraces the global economy, then it can not allow domestic politics to enact rules and regulations that are not in alignment with international standards. He cites the era of the Gold Standard as a period when nations could not exercise discretionary policies. On the other hand, democratically elected global institutions could devise global regulations for the global markets. This would require a sort of global federalism, i.e., the U.S. model on a wider scale. Rodrik cites the European Union as a possible move in this direction, but was skeptical when he wrote his book of the feasibility of the EU expanding its scope. Recent events have certainly diminished any confidence in that model.

That leaves the “Bretton Woods compromise,” which is the use of national regulations by nations to choose their degree of integration with international markets. The restrictions on capital flows under the Bretton Woods international monetary system allowed governments to use macroeconomic policies to attain full employment (see Ch. 2 here). Similarly, Japan, Korea, China and other East Asian economies implemented measures to promote exports to accelerate growth. The global economy benefitted those who engaged in it, but each nation chose the scale of its involvement.

Rodrik raised a concern that the embrace of the global economy has engendered democratic oversight. In the case of the U.S., this may have been mitigated by the role of the U.S. as a global hegemon that set the pace for hyperglobalization. The U.S. was an active proponent of the World Trade Organization (WTO), which replaced the General Agreement on Tariffs and Trade (GATT) in 1995 and has sought to further trade integration. Financial deregulation began in the U.S. in the 1980s with the removal of regulations on thrifts, and continued in the 1990s with the elimination of restrictions on interstate banking and the repeal of the Glass-Steagall Act that had separated commercial banking from other financial activities such as underwriting.

Both U.S. political parties embraced global economic integration. In the Republican party, the pro-business wing was allied with social conservatives and a group thaty advocated a strong military presence. The Democrats joined together unions with pro-business groups. But this year’s primaries are demonstrating that these coalitions are breaking down. Both Trump and Sanders are giving voice to those who feel that their support has been taken for granted and their concerns and interests ignored. There are projections of fundamental realignments on both sides of the political duopoly (see here and here), which may bring about a change in the U.S. position on globalization.

It is not clear what options are available. Despite the promises of Trump and other politicians, the jobs that have either been outmoded by technology or moved away will not be recreated. But it may be possible to devise stronger safety nets for those who do not share directly in the gains of more international trade and investment. President Obama went a long way in that direction through his achievement of expanded health care coverage. Rodrik believes that upper-income countries “…must address domestic concerns over inequality and distributive justice. This requires placing some sand in the wheels of globalization.” Summers has called for a shift in focus in negotiations from trade agreements to international harmonization agreements, that would include labor rights and environmental protection.

All this should be addressed, and quickly, since China’s impact on the global economy has not yet been fully felt. Arvind Subramanian and Martin Kessler of the Peterson Institute for International Economics claim that China’s effect on global trade makes it a “mega-trader.” A similar phenomenon may take place in the financial markets as China continues its relaxation of capital controls. The IMF has found that growth “surprises” in China already have a significant impact on equity markets in other economies. But the IMF expects that financial spillovers will become more significant in the future, particularly if Chinese residents are allowed to hold foreign equity and bonds. Martin Wolf points out that capital account liberalization may lead to a “large net capital outflow from China, a weaker exchange rate and a bigger current account surplus.” The international financial system is not robust enough to withstand another shock, which would only encourage more calls for nationalist measures. The costs of globalization must be explicitly addressed if we expect the public to ignore the siren song of politicians who would use protectionist measures to protect voters from the consequences of further globalization.