The big mistakes of alterglobalists
Globalization is not dead. He might not even be dying. But that’s changing. In the process, the institutions that shape it, including the World Trade Organization, are also being forced to change. We are heading to a different and much more difficult world. But, in setting our new course, we must avoid certain errors. Here are seven.
The first is to focus attention only on the trade. As Maurice Obstfeld, former chief economist of the IMF, noted that the current fluidity of global capital markets has generated waves of financial crises, while bringing few obvious benefits. Insufficient attention is given to this reality, in large part because the interests in favor of the free movement of capital 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 disaster. In a recent note, however, Douglas Irwin of Dartmouth College observes that between 1980 and 2019, virtually every country improved dramatically, global inequality declined, and the share of the world’s population living in extreme poverty fell from 42% in 1981 to just 8.6 % in 2018. I make no apologies for supporting policies with such results.
The third is the idea that the rise in inequality in some high-income countries, notably the United States, is mainly the result of openness to trade or, at least, a necessary consequence of this openness. Evidence and logic are the opposite. Indeed, it is a superb example of “streetlight economics” – the tendency to focus attention and blame where politics shines 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 all those in a specific industry. It would be better to tax and redistribute income in a less arbitrary and more equitable and efficient way.
Fourth is the assumption that greater self-sufficiency could have shielded economies from recent supply chain disruptions, at modest cost. To someone whose country was forced into a three day week by a miners’ strike in 1974, it never seemed plausible. Another example is the recent shortage of infant formula in the United States. Greater diversification of supply makes sense, even if it can be costly. Investing in stocks can also make sense, although it will also be expensive. But the idea that we would have gone through Covid-19 and its consequences if every country had been self-sufficient is ridiculous.
The fifth is the idea that trade is an optional economic supplement. This is a paradox of trade policy: the countries that matter the most in trade are those for which trade matters the least. The United States is the only economy in the world that could conceive of being largely self-sufficient, even if it would find it costly. Small countries are dependent on trade and the smaller they are, the more they tend to be: Denmark or Switzerland could not have reached their current prosperity without it. But the big countries (or, in the case of the EU, the big trading blocs) shape the global trading system because they have the biggest markets. Thus, the trading system depends on the most indifferent. Small countries must try to compensate for this indifference.
The sixth is to assume that we are already in an era of rapid de-globalization. The reality is that the ratio of world trade to output is still near an all-time high. But it stopped rising after the 2007-09 financial crisis. This is the result of fewer new opportunities. Global trade liberalization essentially came to a halt after China’s accession to the WTO in 2001. However, the world has now largely exploited trade opportunities. But, as the World Bank‘s World Development Report 2020 pointed out, it’s a loss: the ability to participate in global value chains has been a driver of economic development. These opportunities need to be shared more widely, not less.
The last error is the idea that the WTO is redundant. On the contrary, both as a set of agreements and as a forum for global discussion, it remains essential. Any trade involves the policies (and therefore the politics) of more than one country. A country cannot “take back control” of trade. He can only decide policies on his side. But if companies are to plan, they need predictable policies on both sides. The more they depend on trade, the more important this predictability becomes.
This is the essential case of international agreements. Without them, the recent decline would surely have been greater. The WTO is also needed to ensure that regional or plurilateral agreements are part of an agreed set of principles. It is in particular the place for discussions on subjects closely linked to trade, such as the digital economy, the climate or the biosphere. Some seem to imagine that such discussions could take place without engagement with China. But China is too important to too many people for that to be possible.
As WTO Director General Ngozi Okonjo-Iweala pointed out in April, the impact of new competitors, rising inequality within countries, the global financial crisis, the pandemic and now the war in Ukraine “have led many to conclude that trade and multilateralism — two pillars of the WTO — are more of a threat than an opportunity. They argue that we should turn inward, do whatever we can on our own , grow as much as we ourselves can. That would be tragic folly: consider the economic damage that would be wrought by the process of reversing much of the trade integration of the past decades.
Yet the upheavals of our time – above all the rise of populism, nationalism and great power conflict – call into question the future of global trade. So how should we try to reshape trade and trade policy? This will be my topic for next week.
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