Trade and Investment

If you want to save globalization, here’s how

Bella Truman, 9 and Zina DeVoe, 9, both of Manhattan play in the newly opened Liberty Park above Liberty Street on the World Trade Center site in the Manhattan borough of New York, U.S., June 29, 2016.

Image: REUTERS/Andrew Kelly

Edward Alden
Bernard L. Schwartz Senior Fellow, Council on Foreign Relations
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The rich world today is witnessing the rumblings of what could become a full-scale backlash against globalization. Britain’s vote to exit the European Union was the biggest shock, but not far behind are Donald Trump’s pending nomination as the Republican candidate for US president and the growing strength of far-right populist parties in Europe. What they have in common is a popular – if not necessarily majority – conviction that trade, immigration and other aspects of global integration have been mismanaged by the governments and corporate leaders that were supposed to lead the way to broadly-shared prosperity.

What is shocking about this backlash is that anyone was actually shocked. Political and business leaders in the United States and Europe have long been far too secure in their conviction that growing trade and immigration were a “win-win” for everyone. They ignored both economic theory and the evidence before their own eyes that, while the mutual gains from trade and immigration are often large, there are real costs for some people as well. And little or nothing was done in too many countries to mitigate those costs.

Advance warnings

None of this should be news. As far back as 1971, President Nixon’s top advisor on international economics warned him that the growth of new competition from other countries – then Japan and Germany, and only later emerging market countries like Taiwan, Korea and China – would put enormous pressure on US workers. Pete Peterson, who would go on to become Secretary of Commerce and enjoy a lucrative Wall Street career, told Nixon that these economic changes would “come faster and harder than anything experienced in earlier years”.

“The rising pace of change poses adjustment policy problems which simply cannot be ignored,” he wrote. The failure to develop policies to help workers and others struggling to adapt would be “paid for in abnormal unemployment and wasted opportunity”.

Academic experts reached much the same conclusions. The classic work in the 1940s of economists Paul Samuelson and Wolfgang Stolper had strongly suggested that in trade between richer and poorer countries – which was accelerated by the 1994 North American Free Trade Agreement among the US, Canada and Mexico, and by China’s admission to the World Trade Organization in 2001 – less-skilled workers in the wealthy countries would be the losers. On a smaller-scale, immigration by lower-skilled workers has roughly the same effects. Nobel Prize-winning economist Paul Krugman, who in the 1990s had dismissed the potential negative wage impacts of trade with poorer countries, was by the mid-2000s writing: “It's no longer safe to assert that trade's impact on the income distribution in wealthy countries is fairly minor. There's a good case that it is big and getting bigger.”

Nor were political scientists unaware of the potential governance consequences of these trends. Writing in 1982, then Columbia University professor John Ruggie, who went on to influential posts in the United Nations, argued that the heart of the post-World War II compromise that allowed for freer trade and freer migration was the commitment by governments to ensure high levels of domestic employment and to maintain an effective social safety net. If the latter broke down, popular support for the former would vanish.

A belated response

For some years, especially in the 1990s, strong economic growth alone was enough to prevent a distributional clash. But with the Great Recession, the danger of ignoring such warnings was brutally exposed, and popular anger still runs deep even as the US and Europe climb slowly – very slowly in most of Europe – out the downturn. In the United States, support for Donald Trump and for Democrat Bernie Sanders – who are united in their vociferous opposition to trade agreements – is strongest in those communities that were most affected by import competition in the 2000s.

To be clear, this story is not all about trade or immigration. Technology has likely displaced far more workers in rich countries than trade, and has similarly increased the pay packets of the highly-educated while doing little for their less-educated fellow countrymen. But what both trade and technology have in common is that they have accelerated the pace of economic change, and many rich world governments have been negligent in helping their citizens to cope and adapt.

What to do now?

The challenge for governments and for business leaders now is how to win back some of that lost confidence, and ensure that the growing skepticism about trade and immigration does not produce a full-scale revolt that could do serious damage to global economic prospects for years to come.

A must-do is for more governments finally to listen to the prescriptions of free-trade economists (which is to say almost all economists) that the gains from trade are large enough that more can be redistributed to the losers. That could mean increased income support. Andrew Stern, the former president of the Service Employees International Union in the United States, has called for a basic universal income – though one less generous than that rejected by the Swiss in a recent referendum. The campaign for a $15 minimum wage in the US has been another response that is gaining ground.

A better idea is expanded worker retraining to help those who lose their jobs find decent new ones. It is likely no coincidence that the backlash is strongest in countries like the US and the UK that do the least to help their unemployed workers, though such support has been falling across the rich countries. Still better ideas include wage insurance that would top up the pay packets of those who must take a wage cut to return to the labor market, or expansion of the earned income tax credit that subsidizes lower-income workers.

A second response should be to restore the legitimacy of the less damaging forms of trade protectionism. The global trade system in its pre-WTO form allowed governments some real scope to temporarily block imports if the harm to domestic production and employment was seen as too severe. This is the whole purpose, for example, of “safeguard” rules that are supposed to permit industries and their employees an opportunity to adjust to import competition. Yet over time, almost any form of import relief has come to be seen as improper. The WTO dispute panels for instance, have ruled in ways that make safeguards all but impossible for nations to use. While there are legitimate economic objections to safeguards – or to similar temporary measures like anti-dumping tariffs – they are a political necessity to show that governments are willing to stand up for workers facing overly disruptive or unfair foreign competition.

The story is similar with immigration. There is good research suggesting that the citizens of most wealthy countries are reasonably tolerant and supportive of immigration, but they want it to be controlled and managed. In the United States, support for immigration fell because the US government failed in the 1990s and 2000s to control the large influx of illegal migrants from Mexico. In Europe it has fallen because EU governments took far too long to impose any controls on the vast numbers of refugees fleeing Syria, Afghanistan and North Africa. And in the UK, political leaders were caught offguard by the scale of eastern European migration under the EU’s free movement rules, and had no authority to reduce the numbers.

In such cases, if governments plead powerlessness by insisting that their hands are tied by international arrangements like the WTO or the EU, then the danger increases that voters will demand a severing of those ties.

The young will lead us

There’s a final piece of somewhat hopeful news in the recent developments. Both Trump supporters in the US and Brexit supporters in the UK come largely from a similar demographic – older, white voters who have faced or witnessed the consequences of deindustrialization and are uncomfortable with high levels of immigration. Younger voters, and the fast-growing populations of non-white voters, appear far more comfortable with globalization. In the United States, for example, while Democratic leaders, including presumptive presidential nominee Hillary Clinton, are skeptical of trade, their young, more diverse base of supporters is generally enthusiastic. Nearly 60% of Democratic voters said in a recent Pew Research survey that trade agreements have been a good thing for the United States.

Image: Pew

The support of these younger voters should not be taken for granted. Like the older manufacturing jobs, there are millions of service jobs in the wealthy economies that face the potential for new competition from lower-wage countries. If those competitive pressures are not managed well, the younger generation could similarly turn as it ages.

But rather than marking the end of support for globalization in the rich countries, the current political climate offers a second chance to get it right. The question is whether political leadership in the West can rise to meet that challenge.

This article is part of our globalization series. You can read more here.

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