The big mistakes of the anti-globalisers
Globalization is not dead. It may not even be dying. But it is changing. In the process, the institutions that shape it, especially the World Trade Organization, are also being forced to change. We are going to a different and much more difficult world. But in charting our new course, we must avoid some mistakes. Here are seven.
The first is to focus only on trading. As Maurice Obstfeld, the former chief economist of the IMF has noted that today’s fluid global capital markets have generated waves of financial crises while yielding little apparent benefit. This reality is not given enough attention, especially because the interests in favor of free capital flows are so powerful, while their economic impact is so difficult for most people to understand.
The second is the belief that the era of globalization was an economic catastrophe. However, in a recent note Douglas Irwin of Dartmouth College finds that between 1980 and 2019 virtually all countries are substantially better off, global inequality has declined and the proportion of the world’s population living in extreme poverty fell from 42 percent in 1981 to just 8.6 percent in 2018. I apologize have not supported policies with such results.
The third is the idea that rising inequality in some high-income countries, especially the US, is primarily a result of openness to trade or at least a necessary consequence of such openness. Evidence and logic is the opposite. This is indeed a wonderful example of “lamppost economics” – the tendency to focus attention and blame where politics throws the brightest light. It is easy to blame foreigners and resort to trade barriers. But the latter are a tax on consumers for the benefit of everyone in a specific industry. It would be better to tax and redistribute income less arbitrarily, more fairly and more efficiently.
The fourth is the assumption that greater self-sufficiency could have protected economies from recent supply chain disruptions, at a modest cost. To someone whose country was forced into a… three day week due to a miners’ strike in 1974 this never seemed plausible. The recent baby food shortage in the US is another example. Greater diversification of offerings makes sense, although it can be costly. Investing in stocks can also make sense, although it will also be costly. But the idea that we would have been driven by Covid-19 and its aftermath if every country had been self-sufficient is ludicrous.
The fifth is the notion that trade is an optional economic extra. Here lies a paradox in trade policy: the countries that matter most in trade are those for whom trade is least important. The US is the only economy in the world that could envision being largely self-sufficient, although even it would find this expensive. Smaller countries depend on trade and the smaller they are, the more dependent they tend to be: Denmark or Switzerland would not have been able to achieve their current prosperity without it. But big countries (or, in the case of the EU, big trading blocs) shape the world trading system because they have the biggest markets. Thus, the trading system relies on the most indifferent. Smaller countries must do their best to compensate for that indifference.
The sixth is to assume that we are already in an era of rapid deglobalization. The reality is that the ratio of world trade to output is still close to an all-time high. But it stopped rising after the financial crisis of 2007-09. This is the result of the loss of new opportunities. The liberalization of world trade essentially ground to a halt after China’s accession to the WTO in 2001, given that the world has largely exploited trade opportunities. But, as the World Bank’s 2020 World Development Report noted, this is a loss: the ability to participate in global value chains has been a driver of economic development. These opportunities need to be spread more widely, not less.
The last mistake is the view that the WTO is superfluous. On the contrary, both as a series of agreements and a forum for global discussion, it remains essential. All trade involves the policies (and thus politics) of more than one country. A country cannot “take back” trade. It can only decide the policy on its side. But if companies want to make plans, they need predictable policies on both sides. The more dependent they are on trade, the more important that predictability becomes.
This is the essential case for international agreements. Without them, the recent downturn would certainly have been greater. The WTO is also needed to ensure that regional or plurilateral agreements fall within a set of agreed principles. Last but not least, it is the place to discuss topics closely related to trade, such as the digital economy, climate or the biosphere. Some seem to imagine that such discussions could take place without involvement with China. But China is too important for too many people to make that possible.
As WTO Director General Ngozi Okonjo-Iweala noted in April, the impact of new competitors, increasing inequality within countries, the global financial crisis, the pandemic and now the war in Ukraine “have led many to conclude that global trade and multilateralism — two pillars of the WTO — are more of a threat than an opportunity. They argue that we should withdraw into ourselves, make as much of our own, grow as much as we can.” trade integration in recent decades.
But the disruptions of our time – especially the rise of populism, nationalism and superpower conflict – are questioning the future of global trade. So how should we try to reshape trade and trade policy? That will be my topic for next week.
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