The phenomenon of slower world trade growth coincides with new protectionist sentiment and challenges to the view that globalisation is welfare-enhancing, fair, and consistent with national economic objectives. Public policy will need to adjust to these changes in the global economy and in the global dialogue.
As is widely reported by the IMF and others, global trade is growing at a far slower pace since 2012 than at any time in the previous 30 years. This is all the more worrying since economic growth itself has been anemic since the Great Recession and current forecasts are not terribly ebullient. Do these factors spell doom for globalisation as we have come to experience it? Is this further validation of the “Realpolitik” of more vigorous pursuit of national economic interest as noted by Prof. Dani Rodrik in his Globalization Paradox (2011)? Let’s first take a look at the slowdown in world trade.
According to IMF’s World Economic Outlook (October 2016), the fall-off in trade values can potentially be traced back to cyclical factors such as the slowdown in global investment as well as the re-balancing in China, if one looks at the demand side. The WEO claims that three-fourths of the trade slowdown can be attributed to weaker economic activity and a subdued investment picture. This may also include the indirect effects of a levelling off in logistics improvements. More interesting, however, is the claim that there has been a marked shift in Global Value Chains, namely, that the process of off-shoring may have reached its limits.
If we dig further than the recent global under-performance of economic growth as a result of near-recession in Europe, slower growth in China and other BRICS, and a reluctance of consumers to spend, businesses to invest and governments to pursue fiscal expansions, we need to look at the composition of trade itself. An important 2015 IMF working paper by Constantinescu, Mattoo, and Ruta (WP/15/6) seeks to find the roots of the trade slowdown in structural forces, concluding that at least half the recent slowdown stems from a now lower elasticity of trade to GNP than observed in the 2000s. Moreover, this follows a declining pattern seen in the first decade of the 2000s as compared with the 1990s, where in the US and even in China, the trade to income relationship has declined. The same researchers then attribute much of this decline not to a change in trade composition per se, but rather to a fall in the tradable component of manufactures.
If indeed, China’s rebalancing involves a re-retrenchment in its own import basket, and new and potentially disruptive technologies begin to offset the cost advantages normally associated with global value chains (GVCs), then the process of de-globalisation has already begun. This can only be further accelerated by populist rhetoric that blames trade for the majority of job losses in the US, still the most vibrant and open market, as well as the anti-centrifugal forces inside the EU that seem to be in play post Brexit.
What can be the logical consequences of these phenomena that seem to be moving in a singular direction? First, again drawing on Constantinescu et al, there is a sense that we have passed the peak in terms of trade driven by GVCs and that a retrenchment of production is already well underway. These authors present data showing a marked decline in the rate of growth of foreign value added to domestic value added in global exports, indicating that the expansion of global supply chains is faltering. This process implies that domestic sources of growth will become more important in future, which could provide some relief to industries that are struggling to compete; however, the great risk is that this will produce disguised protectionism. The only antidote to this phenomenon is vibrant competition and markets that are truly contestable and exhibit low barriers to entry.
We are already seeing signs of protectionism in various guises in the EU, whether actions against Uber or others; and market concentration in many sectors has arguably increased due to scale economies. The only way to counteract these forces is to allow for vigorous competition, such as that provided by new technologies. This disruption will cause greater stress in labour markets, however, and trade will not be the culprit. As we see from the work of Autor, Dorn and Hanson (NBER, 2013), job losses in the US can be ascribed much more to technological factors than to rising imports, although there is no doubt that some job displacement did occur. Public policy will need to come to grips with the problem through more effective active labour policies, more redistributive social policies, and greater opportunities to reskill and grab new employment opportunities. For globalisation to continue, albeit at a slower pace, we will need to see the income inequality that it produces and was presaged by Professor Joseph Stiglitz in his Globalization and Its Discontents (1999) dealt with by both business practices and public policy.
The business community will have to weigh the tradeoffs between policies that park profits offshore against the threats of protectionism that may be enacted to offset the financial tax losses and severely disrupt GVCs. Governments will have to weigh the benefits for their consumers of low-cost imports versus the costs of adjustment assistance policies or employment incentives to deal with those adversely affected. Imposing new protectionist measures is the worst option since tariffs are largely regressive, affecting the bottom of the income distribution the most. Nevertheless, since the benefits of more open trade involve widely dispersed and long-term welfare gains, whereas labour dislocation is narrowly focused and immediate in its negative impact, the policy dilemma is clear.
What is increasingly evident as well is that trade-related job losses may in the end be dwarfed by technology-induced employment disruption. The latest McKinsey Global Institute study (A Future that Works, January 2017) showing that about half the occupations involve tasks or activities that are at least 40% automatable should reinforce the public policy priority for re-skilling the workforce and dealing in a more pro-active way with declining industries and increasingly declining service industries. While this process will take time, we are already confronted by a populist backlash in the US, so that policy measures need to be addressed with a sense of urgency. This points the globalisation dial squarely at national policies.
The essence of the problem rests in my view in poorly designed, poorly articulated, and largely incoherent national economic policies. In the context of the argument put forward in Rodrik’s trilemma, where countries are obliged to choose among national goals, hyper-globalisation and democracy to pick two out of three objectives, de-globalisation will not solve this problem. Rather the solution lies in more enlightened and more effective national economic policies combined with a halt to the rampant abuse of globalisation by firms engaging in tax avoidance, creative transfer pricing and tax inversions. Without reforms in both corporate and public policies, we will witness a retreat from globalisation that will be costly to many.
We are already seeing aspects of de-globalisation in the trade slowdown precipitated by the lackadaisical response to the Great Recession, the slowdown and retrenchment occurring in China, and the end of the expanded logistics revolution. In the newer digital world in which products may not need to cross national borders so frequently and in which localised production techniques can be cost-effective, globalisation is already in retreat. If we add to this picture new increased protectionist measures, fuelled by growing concerns about joblessness and worsening income inequality, we may see that retreat accelerate.
It is for this reason that public policy and corporate policy need to be in better sync and why a more far-sighted view needs to be taken with respect to business decision-making. Since very few businesses will act in the long-run interest (Akerloff and Shiller, Animal Spirits, 2009), it will fall on public policies, namely, effective of incentives and dis-incentives, to deal with the effects of disruptive technologies, defences against protectionism, and a healthier perspective on globalisation.[/ms-protect-content]
About the Author
Dr. Leipziger is Professor of International Business and International Affairs at George Washington University, where he concurrently is Managing Director of the Growth Dialogue. A former Vice President of the World Bank and Vice Chair of the Spence Commission on Growth and Development, Dr. Leipziger is a prolific author of books, journal articles, and think-pieces on economic growth, development and finance. In his book with Prof. Antonio Estache, Stuck in the Middle (Brookings, 2009), he was early to recognise the plight of the middle class and the threats to globalisation if fiscal and social policies did not deal effectively with the growing income inequality in the US. Dr. Leipziger is a Member of the WEF Futures Council on Growth and Social Inclusion, and he is a frequent media contributor.
The Growth Dialogue is an independent think-tank, a voice dedicated to working on policies of inclusive and sustainable economic growth and aimed at providing support and advice to both governments and institutions. It is a successor to the Spence Commission on Growth and Development. Its recent work has focused on urbanisation and city-led growth, growth and inequality, and the impact of disruptive technologies on shared growth objectives. For more on its activities, see www.growthdialogue.org.