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Globalisation: Could the Barriers be Going up Again?

Paper ID: 120 Last updated: 10/05/2011 14:51:36
Criteria: bullet Impact:  Likelihood:  Controversy:  Where: Global When: 11-20yrs How Fast: Years
0 people thought this paper expanded their thinking bullet
Keywords: bullet protectionism, trade, services, goods, globalisation, WTO, tariffs, trade deficits

Summary bullet

The extent of future global economic integration is uncertain, but globalisation will undoubtedly be a key driver in great power relations and international cooperation. With economic barriers starting to rise and signs of economic nationalism emerging, the current model of global economic integration may see a significant renegotiation.

Discussion bullet

The question is no longer “Are you for or against globalisation” [1] but rather, how much openness to trade and movement of capital and labour there should be, [2] and consequently what the rules of globalisation should be.

Economic globalisation and free trade have long been seen as the “route to ever higher standards of living.” [3] Paul Samuelson suggested that traditional notions of comparative advantage may no longer apply; [4] Paul Krugman argues that changing patterns of trade with low-income countries may have a significant effect on inequality in rich countries; [5] Alan Blinder suggests that international outsourcing will cause unprecedented dislocations for both unskilled and highly-skilled US labour, [6] and 40 million service jobs in the US and many more in the Western world could face competition from workers in India and other low wage nations; [7] Martin Wolf has expressed his disappointment with the shortcomings of financial globalisation; [8] and Larry Summers has pointed to the dangers of a race to the bottom in national labour regulations and the need for international standards. [9] Not only is the conventional wisdom surrounding economic globalisation starting to readjust, but the process of globalisation is still understood in very different ways by those involved in the process.

The US has until now relied mainly on bilateral deals and been sceptical of multilateral approaches and global institutions. Europe, on the other hand, has attempted to create overarching rules for the global economy as part of a doctrine of ‘managed globalisation’ that would supersede US power. [10] Not only is economic globalisation understood and practised differently by the US and Europe, but the emergence of the 'BRICs' (Brazil, Russia, India and China) and other fast developing economies means that consensus over economic globalisation or the ability of any one power to impose its will globally is becoming increasingly unlikely. [11]

While the BRICs are "changing the way the world order is organised," the outlook of these powers is hardly unanimous when it comes to economic globalisation. [12], [13] In the coming years, the BRIC powers are thought to be lilkely to “behave more like traditional big states, and will try to shape globalisation rather than simply accepting it as an inevitable process.” [14] Increasingly influential within this process will be “powerful and conflicting interest groups,” whether Asian peasants or Latin American farm labourers, [15] resulting in shifting transnational alliances of interests from the Group of 20 [16] to the Group of 33. [17]

The foundations of globalisation - the free flow of capital, trade in goods and services, and free movement of labour - are all shaped by the prevailing political climate, which currently suggests a preference for a more closed model. In recent times, there have been increased restrictions on the flow of investment between countries, [10] while the collapse of the Doha round in 2008 highlights the deepening divide between rich, developed countries and poor, developing countries, and the limited power of the WTO. [10] Furthermore, the number of regional and bilateral trade agreements has increased markedly in recent years as global trade deals continually run into trouble. [18] The free movement of labour is a source of persistent tension and political difficulty, especially in the US and Europe. The current era of economic globalisation may not reach the level of openness that characterised previous phases of globalisation given the potential for the re-regulation of Western finance and the increasing influence of emerging economies on global trade. [19]

Economic globalisation is also a source of considerable popular dissatisfaction. Many in Europe and the US are losing faith in globalisation. UK citizens are the most pessimistic about the effects of globalisation on their country among G8 countries. [20] The growth of public scepticism [21], [22], [23] towards economic globalisation and popular dissatisfaction with the distributional inequalities of globalisation’s benefits as the lower and middle classes experience income stagnation have shaped a more protectionist political outlook.

Implications bullet

There are currently competing visions of economic globalisation: what it should look like and how it should progress. These visions will be shaped by attitudes to openness in the global economy. This may in turn depend on the distribution of the benefits of globalisation, and the political management of public perceptions of economic globalisation.

The "weak popular legitimacy" of global markets as a result of "weak governance" structures [1] may have to be remedied at both a domestic and international level. Domestic focus would be on inequality, and international focus on the "interests of working people in all countries" [9] which may in turn require shared global economic leadership. [24]

Global economic integration could deepen further if key politicians in the developed world, particularly the US, are able to build popular support, strengthening social safety nets that allow the expansion of globalisation without provoking strong domestic opposition. [25] These safety nets may take the form of wage loss insurance schemes, [26] lifetime income products, [27] an increasing reliance on flexicurity arrangements, [28] expanded and improved Trade Adjustment Assistance programmes or their equivalent, [21], [29] greater adherence to international standards such as International Labour Organisation (ILO) core labour standards, [21] and more progressive modes of taxation [29] extending perhaps to global cooperation in the international tax arena.

Changing attitudes to the free movement of labour could significantly redistribute incomes on a global scale by allowing migrants from very poor countries to see huge leaps in wages when allowed to move to wealthy countries, helping to change more protectionist [30] attitudes to economic globalisation. Successful immigration programmes may also increase the potential for innovation [31] and economic success, perhaps resulting in a new liberalisation of migration rules.

The technological revolution that has driven the current wave of globalisation is likely to continue. Communication will become still cheaper and easier, allowing corporations to spread their operations - research and development, design, and manufacturing - around the planet. An effectively organised global network free market structure could spark new waves of innovative and collaborative behaviours that provide solutions to major problems such as cures for diseases or the global food crisis, through a second green revolution. [32]

A process of disintermediation may see traditional distribution channels disappear and customers dealt with directly as a result of vastly improved communication technologies. Consumers in the West may be able to buy goods directly from Asian manufacturers. Markets may be further integrated as the distinction between real and virtual worlds becomes increasingly blurred, eroding physical borders. [33]

A popular consensus around the positive possibilities of benevolent globalisation as a result of political attention on the losers could breathe life into global trade agreements. Widespread prosperity and greater opportunity for profitable exchange as a result of globalisation may translate into greater international policitcal stability. [34]

However, global economic integration may be constrained by the rise of barriers to the free movement of capital, goods and labour. Economic globalisation may slow and increasingly become a process of simple cross-border exchange and ‘internationalisation’, [35] creating a "world of regions" rather than a unified, global economic regime. [36] The possibility of the creation in the next ten years of an East Asian free-trade area led by China could provoke a "sharp backlash" from the US, EU and other developing countries. A world of regions could "create a tripolar global economic regime - a configuration that could threaten existing global arrangements and multilateral cooperation." [24]

Academic and public opinion may shape a new consensus that is sceptical of the advantages of open markets and liberal economic policy. Rodrik suggests that deep economic integration, national sovereignty and democracy are mutually incompatible. [37] Therefore the new consensus on what viable economic globalisation might look like could mean the design of a global architecture “sensitive to the needs of countries - rich and poor alike - for policy space.” This would mean moving away from a fundamental belief in open markets to a "second-best global economy" that may conflict with the free movement of capital, goods and labour.

While globalisation could "permanently increase" job insecurity for workers by making employers more vulnerable to external shocks, it may be that fears of losing jobs to foreign countries are overblown. [38] Aspects of economic globalisation such as increased trade, outsourcing and offshoring do not necessarily create unemployment and may boost the number of jobs in advanced economies because they tend to sweep away job-destroying rigidities in labour markets. [39], [40]
However, developed nations will have to focus on the design of welfare states. Developed nations such as the UK may increasingly adopt ‘flexicurity’ measures as in Austria and Denmark, and focus more on vocational training and wage insurance. This might even be extended to new forms of income redistribution to spread the gains from trade. [29]

A lack of certainty around what constitutes desirable economic policy might lead to more ad-hoc and even populist economic policy formulations shaped by emerging and powerful interest groups, whether Indian peasants [15] or ‘global super unions.’ [41] It may be that highly developed protest cultures, as seen in South Korea, emerge in response to economic globalisation and significantly influence the economic policy direction of certain nations. [42]

Any move to a more protectionist stance in the global economy as a whole may come as the result of extreme interventions such as war or trade embargos or more gradually as demographic and resource challenges slow the economic development of emerging economies. At the same time, global trade may slow as transportation costs increase. Sluggish growth in emerging economies could mean the possibility of global stagflation. [33] Global resources, notably energy, may become the object of increasing ‘resource nationalism’ and create conditions for great power conflict of the future. [43]

The shape of conflict around trade may take the form of protectionism on the basis of regional blocs, or it may fluctuate given the multiple, competing levels of power present in a nonpolar world. The UK may find itself part of a European trading bloc or having to completely reconfigure economic alliances as the influence of the US wanes. [44]

It is unlikely that the diffusion of “knowledge, skills, technology, management systems” [45] to emerging countries can be prevented, but we may see the emergence of a protectionist era if the distribution of the benefits of globalisation are perceived to be significantly unequal. Global inequalities are thought to be mainly due to the “impact of technological change” [46] and financial openness, particularly in the shape of foreign direct investment (FDI). [46], The ability of different countries to equip their populations with the skills necessary to take advantage of the opportunities for globalisation, most obviously through effective provision of education and skills training, will to a large extent determine their ability to engage with a global economy, which in turn will decide the extent of openness in the global economy. Some suggest that the US could "miss out" on the next 50 years of economic globalisation in the same way that India did after World War 2, [9] but the ability to engage with economic globalisation in the future will depend on a variety of different forces including changing attitudes to technology, the decline of unions and changing social attitudes to inequality. [21] A more protectionist world would be likely to lead to a world of much slower growth, but a more ‘sustainable’ world. GDP might be replaced by Gross National Happiness as the most appropriate indicator of national performance in such a scenario. [33]

Early indicators bullet

Increase of tariffs, perhaps initially on specific commodities but extending to a more general rise.
Failure of trade talks (e.g. US - Colombia FTA, Doha round of WTO).
Public protests against Free Trade Agreements (e.g. in Korea, Colombia, or against NAFTA or EPAs).
Demands on countries like China to revalue their currency. [5]
Formation of domestic lobbies to protect embattled industries.
Increasing EU trade restrictions.
Intervention to prevent western companies being bought by foreign multinationals. [47]
Permanent taxes and bans imposed on food exports in response to a rapid increase in prices.
'Nationalisation' of financial institutions by OECD governments.
2010 Survey of American Economists showing decline in the support for economic openness.

Drivers & Inhibitors bullet

Drivers:

High unemployment and decline of many traditional industries leading to calls for restricted imports.
Rising trade deficits in UK and USA. Increasing number of companies acquired by overseas-based multi-nationals or Sovereign Wealth Funds.
Strategic importance of certain sectors provoking government intervention.
Global economic recession.
Rising food and fuel prices.
Consensus among economists about the negative aspects of deeper economic integration.
Exposed vulnerability of rich countries to unregulated movement of capital recognised by policy makers.
Public support for globalisation at historic lows including middle classes and highly-skilled employees in service sectors.
Concerns over foreign penetration of strategic sectors (banking, energy).
Increasing economic and potentially political influence of Sovereign Wealth Funds from China, Singapore or Middle East countries.


Inhibitors:

Power of multi-national companies and trade organisations (e.g. WTO) to advocate free trade.
Consensus of policy-makers and influential academics behind liberal trade policies.
Pressure from multinationals and Small and Medium-sized Enterprises (SMEs) dependent on free movement of goods and services.
Need to preserve friendly relations with influential states.
Warning from historical experience with inward-oriented economic regimes.
Institutional path dependence.

Parallels & Precedents bullet

Corn Laws (1815-46) in Great Britain.
Raising of tariffs in the 1930s during the Great Depression.
Selected re-imposition of capital controls (e.g. Malaysia 1997).
EU Common Agricultural Policy.
Bretton Woods regime as a form of global economic regulation.
The previous era of globalisation (from about 1870 to 1914) once seemed as unstoppable as the current one but ended disastrously.

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Sources bullet

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