Globalization and its disconnect
While seemingly elegant in theory, globalization suffers in practice. That is the lesson of Brexit and of the rise of Donald Trump in theUnited States.
Truth be known, there is no rigorous theory of globalization. The best that economists can offer is David Ricardo’s early 19th 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.
Trade liberalization— the elixir of globalization— promises benefits for all. That promise arguably holds in the long run, but a far tougher reality check invariably occurs in the short term. Brexit is just the latest case in point.
Voters in Britain objected to several of the key premises of European integration: free labor mobility and seemingly open-ended immigration, regulation by supranational EuropeanUnion authorities, and currency union (which has serious flaws, such as the lack of a fiscal transfer mechanism among member states). Economic integration and globalization are not exactly the same thing, but they rest on the same Ricardian principles of trade liberalization— principles that are falling on deaf ears in the political arena.
In short, globalization has lost its political support— unsurprising in a world that bears little resemblance to Ricardo’s two centuries ago— and therefore Ricardian principles seem irrelevant today. 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 low-wage technology imitator like China could turn the theory of comparative advantage inside out.
But it is not just a problem with an antiquated theory. Recent trends in global trade are also flashing warning signs. According to the InternationalMonetary Fund, annual growth in world trade volume has averaged just 3 percent over the 2009-16 period— half of that from 1980 to 2008. With world trade shifting to a decidedly lower trajectory, political resistance to globalization has only intensified.
Globalization has run into trouble even before. Globalization 1.0— the surge in global trade and international capital flows in the late 19th and early 20th centuries— met its demise between WorldWar I and the Great Depression. Global trade fell by some 60 percent from 1929 to 1932, as major economies turned inward and embraced protectionist trade policies, such as theUS’ infamous Smoot-Hawley Tariff Act of 1930.
But the stakes may be greater if today’s more powerful globalization were to meet a similar fate, because the scope of Globalization 2.0 is far broader, including growing trade in many so-called intangibles— once non-tradable services.
The sharpest contrast between the twowaves of globalization is in the speed of technology absorption and disruption. It took only five years for 50 millionUS households to begin surfing the internet, whereas it took 38 years for a similar number to gain access to radios.
Sadly, the economics profession has failed to grasp the inherent problems with globalization. In fixating on an antiquated theory, they have all but ignored the here and now of a mounting worker backlash. Yet the breadth and speed of Globalization 2.0 demand new approaches to cushion the blows of this disruption.
Unfortunately, safety-net programs to help trade-displaced or trade-pressured workers are just as obsolete as theories of comparative advantage. The US’ Trade Adjustment Assistance program, for example, was enacted in 1962 for the manufacturing-based economy of yesteryear, and a Peterson Institute report says only 2 million workers have benefited from it since 1974.
The design of more enlightened policies must account for the powerful pressures now bearing down on a much broader array of workers. The hyper-speed of Globalization 2.0 suggests the need for quicker triggers and wider coverage for worker retraining, relocation allowances, job-search assistance, wage insurance for older workers and longer-duration unemployment benefits.
As history cautions, the alternative— whether it is Brexit or the US’ newisolationism— is an accident waiting to happen. It is up to those of us who defend free trade and globalization to prevent that, by offering concrete solutions that address the very real problems that now afflict so many workers.
The author, a faculty member at Yale University and former chairman ofMorgan Stanley Asia, is the author of Unbalanced: The Codependency of America and China Project Syndicate