Globalization and Its Discontents Revisited

by Joseph E. Stiglitz

  In short, people feel that at least some of their travails are due to globalization—the way it’s been shaped by our political system. They feel they don’t have to put up with it, and they shouldn’t put up with it.

  Besides, whether true or not, it gives little comfort to those in the middle who have seen their incomes stagnate to say that only part of their suffering is due to globalization, or even that most of the decline of the middle class is due to technological change. That this may be so only increases their resolve to do what they can to preserve their standards of living through “reforming” globalization.

  There are politicians who are willing to give voice to their anger, to tell those people what they want to hear: America can and should use its economic power; on its own, with protectionism, it would be stronger than it is now. Their jobs would be restored and their wages returned to levels they haven’t seen in years. This is the promise—a promise that will inevitably be broken, as I show in chapter 3.

  A Thought Experiment

  In short, even if globalization is only part of the reason for the decline of the middle class, if citizens feel that it is something they can do something about, then it is natural for them to want to take action. It might not “solve” their problems, but it could make things better.

  In fact, technology and globalization are inextricably linked. Without advances in communication and transportation, the kind of globalization we have today would not have been feasible. We couldn’t have had outsourcing to the extent that we do.

  Nonetheless, it’s instructive to engage in a thought experiment. What would have happened if there had been no changes in technology, but globalization had gone forward apace, with the stripping away of barriers to the movement of goods, services, and firms. The standard theory to which I have already alluded gives a clear answer. Wages of unskilled workers would have plummeted, converging toward levels in the emerging markets. Of course, markets never work quite as perfectly as they do in economists’ models, so the decline would not be instantaneous. Yet, no one believing in markets and globalization has provided a cogent reason why these wages wouldn’t have fallen and by a great deal.38

  THE ROLE OF TRADE AGREEMENTS

  The discontent with globalization has focused on trade agreements, like NAFTA. In exploiting the discontent with globalization as much as he could, Trump called NAFTA the “worst deal ever,” blaming ­America’s trade negotiators, even though it was negotiated by former president George H. W. Bush of his own party.39 In the negotiations, Mexico brought down its tariffs, on average, by 10 percentage points, the United States by only 4 percentage points—and the United States was allowed to keep in place its corn subsidies, which by some accounts did damage to the poorest in Mexico, its corn farmers. American corn farmers receive a substantial portion of their income from Washington rather than from the soil. Mexican farmers might be able to compete against American farmers, but it’s hard to compete against Washington—against such subsidies.40

  Today, the American and Mexican economies are intertwined. While America lost jobs as factories moved to Mexico, jobs were also created; and the new export-related jobs typically paid more than the jobs that were lost. An estimated 5 to 6 million American jobs depend on exports to Mexico.41

  While the U.S. trade deficit with Mexico (the gap between U.S. exports to Mexico and its imports) is large, $63 billion in 2016, it is small compared to that with China ($347 billion) and roughly the same as that with Germany ($65 billion).42 The fact that Germany has not experienced Trump’s wrath to the same extent as Mexico has never been adequately explained—it may be just racism and bigotry.

  In any case, as I’ve explained, one shouldn’t really look at the deficits or surpluses between two countries—the focus should be on the multilateral trade deficit. The United States has a trade deficit with Mexico but a trade surplus—when we include services—with Canada.43 Selling education, health, or tourist services creates jobs just as selling automobiles does. It appears that some in the Trump administration are enamored with the idea of selling goods but not services. There is no economic basis for this. The fact that the United States has a surplus with Canada does not mean that the country has been engaging in “unfair trade” with Canada, or that NAFTA is unfair.

  A Loss of Sovereignty?

  Trade agreements do mean that a country gives up certain rights—a free trade agreement means that the country gives up the right to impose a tariff. But it’s a reciprocal action: the other country makes a similar agreement. The benefits of this slight loss of sovereignty, through such reciprocity, can be large relative to the cost. And it means that when there are disputes about one party or the other honoring the agreement, both sides agree to respect the outcome of the dispute resolution mechanism. The world is far short of an international government, but these are small steps toward creating an international rule of law. In the absence of such an international rule of law, there is a jungle, with might making right.44

  Economists have long noted the importance of the rule of law for growth and efficiency—the modern market economy couldn’t exist without a modicum of the rule of law.45 As the world has globalized, there is an imperative for creating an international rule of law. So far, we’ve fallen short. But our international trade agreements are a step in the right direction. This is especially important for smaller countries. The United States, the EU, and China might be able to bash it out, as each struggles to do better for its exporters but keep out imports. The rest of the world—some 38 percent of global GDP—would especially suffer as collateral damage. Interestingly, with Trump announcing a U.S. retreat from globalization and the global rule of law, China has stepped forward as its defender.46 China has every reason to do so: its remarkable growth would not have been possible without globalization. It has been explicit that it will defend a rules-based system, which is of such importance to developing countries and emerging markets. It’s not just about cutting deals that are of benefit to itself, even though that kind of negotiating is precisely what Trump loves.

  The World Trade Organization (WTO), created in 1995, was the critical step forward in creating a global rules-based system. It not only provided for a set of principles, including the most favored nation principle, ensuring that countries wouldn’t engage in discrimination against each other,47 but it also provided for a kind of international tribunal for adjudicating disputes. Its enforcement mechanism was limited—if a country violated its obligations, for instance, if the United States imposed a 45 percent tariff against China—then the injured country could impose duties in an equivalent amount on the offending country. The offending country could, of course, choose to continue to impose the tariffs. But there would be consequences. So far, this system has proven remarkably effective. It has, for instance, prevented, or at least limited, trade wars. There was considerable worry in the aftermath of the 2008 crisis that countries would attempt to reignite their economies by beggar-thy-neighbor policies, shifting demand away from imports and toward their own economy, as happened in the Great Depression.48 It didn’t happen, and the WTO is generally given credit.

  Trump has announced that he intends to upend this system, and that he will not honor adverse rulings. If he does as he says, the United States will pay a high price. If it ignites a trade war, the whole world will pay a high price.

  Other Goals beyond Promoting Growth

  Trade and other economic agreements are about trade, but they are also about other objectives. They are often an instrument of foreign policy—trying to bind countries together. When the United States signed a free trade agreement with Jordan in 2000, no one thought that it would have any significant effect on U.S. growth. The hope was that it would help one of America’s closest allies in the Middle East. When Obama argued for the Trans-Pacific Partnership (TPP) agreement, he often did so on the basis of extending U.S. influence in Asia. In his State of the Union address on January 20, 2015, he said, “But as we speak, China wants to write t
he rules for the world’s fastest-growing region. That would put our workers and our businesses at a disadvantage. Why would we let that happen? We should write those rules.” Though he talked about the TPP’s impact on the U.S. economy, it was clear that he saw it as an instrument to advance our political interests in Asia and the Pacific vis-à-vis China.49 But in suggesting that the United States would write the rules, he failed to state who within the United States would do so. In the secretive process that the USTR employed to negotiate the TPP, corporations were effectively at the table, but not ordinary citizens or civil society groups concerned about health or the environment. And so it was not a surprise that what emerged was an agreement that served corporate interests, with negligible benefits for the U.S. economy as a whole.50

  These non-trade-related goals of trade agreements are often coincident with the more traditional goals. NAFTA was intended to increase incomes in both Mexico and the United States; and one of the ancillary benefits would be that higher incomes in Mexico would reduce immigration pressure. As I have noted, that has in fact happened, though NAFTA may have played only a minor role in migration from Mexico diminishing to but a trickle.51

  If, on the other hand, the trade agreements are not well-designed, they may be counterproductive. Thus, the 2004 agreement with Morocco, again intended to help one of the more progressive countries of the Middle East and North Africa, actually had an adverse effect: restrictions in the agreement on access to generic drugs, so important for AIDS patients, gave rise to massive protests in the country.

  The New Trade Agreements: A Regulatory Race to the Bottom

  Globalization is as badly managed and untempered as it was when I wrote GAID, and in some ways it has become worse since then. Until this century, trade agreements entailed pitting producers of one country in one sector against those of another in another sector; the agreement would entail lowering tariffs on one good in one country in return for the lowering of tariffs against another good in another country. Consumers were the unambiguous winners. But this is not so for the new trade agreements of the last decade and a half. With tariffs very low, the focus of trade agreements has been on regulations. Now, producers in one country say that they could sell more in another country if the government only got rid of some regulation, for instance, on emissions of pollutants or safety. The producers of both countries can easily agree: let’s get rid of the regulations in both of our countries; and the trade ministers (in the case of the United States, the U.S. trade representative) can quickly agree too—these ministries are typically “captured” by producer interests. But while consumers in both countries gained when tariffs—and prices—were lowered, in this case, citizens in both countries lose from the weakening of important protective regulations, and the corporations gain. International trade becomes their ally in arguing for the kind of world that they, the corporations, had sought, but couldn’t get because domestically, within each country’s legislature, society balances the cost and benefits of these regulations. Provisions in recent trade agreements (going back to NAFTA) are designed to make it difficult if not impossible for new regulations to be imposed, no matter what the social benefit.52

  With only producers at the international “bargaining” table, only the costs of regulations are weighed. The TPP, advocated by the Obama administration but subsequently killed by Trump in one of his first acts, serves as a good illustration of this point. It was hailed by Obama as the largest trade agreement ever, embracing 40 percent of global GDP and one third of global trade, involving twelve countries around the Pacific Rim. Yet its economic impact was estimated by the government itself, after full implementation in, say, fifteen years, to be .15 percent of GDP—that is, its growth impact was negligible.53 Other studies, more independent, argued that even this small number was a gross exaggeration.54 (This didn’t stop Obama and other TPP backers from promoting it with language that suggested it would be a major boon to the growth of jobs and the economy. But the real objective, as suggested earlier, may have been in foreign policy: the role of the United States vs. China.)

  The corporations offer a weak justification for what they ask. They have said it is important to harmonize regulations, and that different regulations act as nontariff barriers to trade. But in fact, what they wanted was not harmonization itself, but the elimination, or at least weakening, of regulations. In most sectors, we simply don’t need to have full harmonization of regulations. Indeed, different states within the United States have different regulations. Within Europe, the notion that responsibility for setting regulations should be assigned to the lowest possible level of government—the level closest to the people—is called subsidiarity.55

  For example, regulation is not needed to set the percentage of heavy cream in ice cream. If different countries want to regulate this, it should be up to them. Of course, consumers should have the right to know the percentage in the product they are purchasing. Thus, what is important, in this case, is a regulation about information.

  Different countries may weigh different costs and benefits differently. Some countries may not care much that their citizens are torn to shreds in an accident by shards of glass; Americans may find this particularly distasteful, and so create regulations requiring shatterproof windshields. Just as cars can be ordered with different colors, so too they can be ordered with different kinds of windshields. The additional costs from lack of harmonization are negligible.

  We should be asking for the minimal level of harmonization required to make the global system work, not for the minimal level of regulation—the level of regulation that maximizes corporate profits.

  Though recent trade agreements have been designed to reduce prospects of future regulations and, where possible, to engineer regulatory rollbacks under the guise of harmonization, there was a broader, more invidious agenda: to develop a system of globalization under which countries competed in every way possible to attract business—lower wages, weaker regulations, and reduced taxation. Of course, corporations love this kind of competition. Globalization has become a race to the bottom, where corporations are the only winners and the rest of society, in both the developed and developing worlds, is the loser.

  But corporations do not exist in a vacuum. They have shareholders and executives, who, try as they might, cannot insulate themselves from what is going on. If our environment is polluted, if climate change accelerates, they too will suffer—though perhaps not as much as the rest of society, since the rich are usually more capable of finding ways to insulate themselves from problems. And if our democracies and societies are undermined by populist extremists—as seems to be happening now—even they, their families, their children and grandchildren will be touched.

  Chapter 2

  The Multiple Dimensions of Globalization

  TRADE GLOBALIZATION WAS problematic, but other forms of globalization—affecting the flows of capital, people, and knowledge across borders—were equally questionable. In each of these areas, the argument for globalization was simple: for instance, free capital markets would ensure that capital would go to where it was most productive. But often, freeing up capital markets doesn’t lead to higher output and faster growth. To the contrary, it can, if not well managed, lead to greater instability and more inequality.

  And there has been much hypocrisy in the position of the United States and in that of other advanced countries: even though the American government was telling other countries about the benefits of the globalization of finance—allowing big U.S. banks to open up in their countries, even if the consequence was squeezing out local banks—it was not until 1994 that the United States allowed American banks to open up branches freely anywhere they wanted within the country.1

  In each of these arenas, the criticisms of globalization have paralleled those of trade globalization—including that the advanced countries benefited at the expense of the developed countries and emerging markets. GAID discussed these issues largely from the perspective of the developing countri
es. This part of Globalization and Its Discontents Revisited, however, is about the new discontents—those in the advanced countries, such as the United States. But here too the arguments are parallel: the advocates of globalization had overestimated the benefits, underestimated the costs, and paid little attention to how globalization affected people—with the corporations getting a disproportionate share of the benefits and ordinary citizens bearing a disproportionate share of the costs—so much so that many, in some cases a majority, were worse off.

  In the following sections I describe how unbalanced and mismanaged globalization in these other arenas, such as in investment and in ideas, has contributed to the new discontent with globalization.

  INVESTMENT

  Some of the same principles that govern trade relate to investment.

  Foreign Direct Investment

  The investment of, say, an American firm in China is referred to as foreign direct investment. Different firms have different competencies. If an American firm has a comparative advantage in making, say, earth-moving equipment, it should be able to do that not just in the United States, but elsewhere. Similarly, if a foreign firm has a comparative advantage in making certain kinds of electronic equipment, it should be able to do so in other countries.