Globalization backlash

Who's Afraid of Global Trade?

  • Why it matters

    Why it matters

    • Suspicion that greater openness to trade kills jobs can be damaging globally,
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  • Facts

    Facts

    • World trade growth has slowed from an average of 6.5 percent between 1986 and 2008, to 3.2 percent between 2012 and 2015, and is predicted to have expanded by just 1.7 percent in 2016.
    • Calls are growing louder to restrict trade, an issue which shaped the outcomes of the U.S. presidential election and Brexit referendum.
    • Germany holds the G20 presidency and it aims to intensify global cooperation and unite countries under the motto “shaping an interconnected world.”
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Hamburg ohne Freihafen
The seas of global trade have grown rougher. Source: DPA [M]

One can say with certainty that we are living in times of elevated uncertainty. This could intensify in the period ahead, given the heightened risks to global growth brought about by the current geopolitical environment. We have been witnessing a rise in populism against multilateralism and globalization. As both the Brexit vote in the U.K. and the presidential election in the U.S. made clear, there are increasing concerns with the burden resulting from globalization, which have resulted in support for tighter controls on trade and migration.

Some of these fears are founded on the assumption that slow economic growth, increasing unemployment and higher inequality are the consequence of free trade, growing cross-border movement of labor and off-shoring of business operations. The push-back against globalization and free trade, as well as the embracing of nationalistic tendencies in an interconnected global world, should be of concern to all of us.

In advanced economies, nothing symbolizes the problem more clearly than the impression that good manufacturing jobs have been lost to other countries. However, contrary to the current rhetoric, trade has not been the primary reason for the loss in manufacturing employment. Rather the explanation lies with productivity gains as a result of increased mechanization and technological progress. It is for this reason that even Germany – where manufacturing has flourished and manufacturing employment is increasing again – has seen a halving of the manufacturing share of employment since 1970.

The push-back against globalization and free trade, as well as the embracing of nationalistic tendencies in an interconnected global world, should be of concern to all of us.

In fact, greater trade openness has led to the development of global value chains, known as GVCs, which have allowed countries to participate in stages of the production process in which they have a competitive advantage. Improved competitiveness results in goods being produced at lower cost, which ultimately increases the spending power of consumers. This, in turn, facilitates higher demand, as well as promotes trade, wealth, investment, and ultimately, more jobs. In turn, more trade implies a wider range of goods and services which also means a higher welfare.

Yet world trade growth has slowed from an average of 6.5 percent between 1986 and 2008 to 3.2 percent between 2012 and 2015. It is also predicted to have expanded by just 1.7 percent in 2016.

Protectionists believe that trade barriers will bring jobs home, boosting growth and employment. However, given the spread of GVCs, trade restricting measures might result in a significant disruption to global production with adverse consequences for global demand. And this global economic downturn could dampen domestic production, too. Additionally, barriers to imports will lead to higher consumer prices. In the end, protectionist measures would reduce the purchasing power, especially of the socially weakest in society who are usually not able to protect themselves against higher consumer prices.

None of this means we should overlook the rise in inequality – a trend which has coincided with globalization and the need to improve governance. Lowering inequality would improve the resilience of economies by making them more robust to shocks. It is also likely to have broader social and political benefits.

It is important to figure out how to ensure that the benefits of globalization are more fully realized and widely shared. The G20 was created in the wake of the financial crises of the 1990s with the primary objective of finding solutions to the problems confronting an integrated world. Paul Martin, former prime minister of Canada and a founding member of the G20, said in 2001 that globalization has to work for all. This is the challenge confronting the G20 today, which is why it has been made a priority in Germany’s 2017 G20 presidency.

The G20 has updated its growth agenda to include not only “strong, sustainable, and balanced growth”, but also inclusive growth. There is recognition that the path to achieve this goal will likely have characteristics tailored to individual countries’ needs, while not compromising on the agreed upon principles for macro-economic frameworks that support resilience and sustainability. This implies striving for sound public finances, reducing vulnerabilities in the private sector and financial systems, and ensuring favorable business environments. Creating flexible labor market conditions and efficient social security systems are also of key importance.

What do globalization and trade mean for Africa? Trade is critical to enhancing growth and development on the continent. This calls for accelerating both inter-African trade as well as embracing partnerships for innovative approaches to securing fairer access and stronger participation in global trade for the continent. The “Compact with Africa” initiative is therefore intended to create better investment conditions – for example, by improving legal systems, making taxation more reliable, and reducing investment risks with the help of international guarantees. Furthermore, the G20 will provide political support for specific investment agreements between African countries and international organizations. If desired, this can also be arranged with developed partner countries.

In addition, transfers of money from migrant workers to their home countries are an important source of funds for many countries, and not only in Africa. In several countries these remittances account for up to one fifth of GDP and significantly contribute to domestic consumption and investment. The aim is therefore to improve the conditions for frictionless and efficient money transfers without weakening existing rules against money laundering and the financing of terrorism. In this regard, the decline in correspondending banking services in the region – an unintended consequence of the global regulatory reform undertaken in the wake of the Global financial crisis – warrants attention.

It is for this reason that where appropriate we should be open to revisiting the reform agenda in a prudent manner. This means ensuring the agenda’s effectiveness in achieving its stated goals, while preserving hard-won progress achieved over many years of hard work and collaborative engagement.

In short, the future of globalization and multilateralism will, to a large extent, depend on G20 countries delivering on the commitment made at the G20 Hangzhou Leaders’ Summit in 2016. There, a promise was made to “work to ensure that our economic growth serves the needs of everyone and benefits all countries and all people – including in particular women, youth and disadvantaged groups, as well as generating more quality jobs, addressing inequalities and eradicating poverty so that no one is left behind.”

Let us harness the positive forces of free trade and globalization, while managing the risks and ensuring greater inclusiveness. Globalization and free trade are not the enemies – short-termism and expediency are!

 

To contact the authors: gastautor@handelsblatt.com

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