So too the other contentious aspect of recent trade agreements concerns the investment agreements discussed earlier, sometimes embedded within a trade agreement (for example, chapter 11 of NAFTA), sometimes an explicit agreement between two countries. I noted that though the agreements are sold on the notion that they just protect property rights—ensuring that one country doesn’t expropriate the assets of a foreign corporation—they really do far more. They have had, for instance, a chilling effect on regulations. Such agreements have been high on the agenda of the leaders of the multinational corporations—and, with the risk of expropriation virtually disappearing, it is precisely these broader benefits that they sought. Early on in the Obama administration there was an effort to redesign these agreements in ways that would satisfy the multinational corporations and representatives of civil society concerned about health, the environment, or other important arenas affecting society. As I noted, it would be easy to rewrite these provisions in ways that address the alleged business concerns, such as discrimination against foreign firms, without inhibiting necessary regulations, and that would have a fairer system of adjudicating disputes than the current arbitration system, in which the corporations play a central role in appointing judges. But the business leaders would have none of this, making it clear that their real intent indeed was discouraging environmental, health, safety, and economic regulations.
In short, the kind of globalization that we got—hurting workers and helping multinational corporations—was the kind of globalization the corporations wanted. It was not an accident. This shouldn’t come as a surprise, once one understands who was at the table as the rules of the game were being made, and who was not.
The Failure of the Left
The right’s opposition to aiding those hurt by globalization was consistent with the influence of these large corporations on the parties of the right and with an agenda of keeping government small. Helping those hurt by globalization would have entailed raising taxes, something to which they are deeply allergic.
The puzzle was why the parties of the center-left, which simultaneously believed in markets and in social equity, didn’t take a more active stance against this unbalanced globalization. Too many on both sides of the Atlantic succumbed to market ideology—influenced no doubt by the easy flow of funds from those whom these ideologies served so well. This led them to almost blindly follow the globalization agenda of the right. It seemed like there was a national consensus, at least among the elites—but it was a consensus from which a large number of those that were being left out were excluded. The progressives asked for trade assistance. They worried about what was happening to those in the middle. With muted voices, they even sometimes talked about what was happening at the bottom—but they didn’t talk too loudly, lest the middle think they were too focused on the poor.
With no one seemingly defending the interests of the working class, a vacuum was created. But nature abhors a vacuum. And so demagogues and would-be despots, the New Protectionists—Trump in the United States, Marine Le Pen in France—rushed in to fill the vacuum. If the establishment parties support globalization without compensation, leaving large segments of the population worse off, we should expect those hurt by globalization to look for alternatives to defend their interests.40 In the end, as I have already explained, it doesn’t really matter if the source of the problem is technology, or globalization, or something else: if there are large numbers of people who are not doing well and are being left behind—as we saw was the case in the advanced countries—those that have lost their jobs or have had their wages decline will support someone who shows empathy with their plight and promises to do something about it. And it’s especially attractive if the diagnosis entails shifting the blame to outsiders, to foreigners who are mistreating “us” and taking advantage of “us.” Indeed, such distinctions between “us” and “them” are a traditional part of the toolkit of demagogues.
Interestingly, some political analysts suggest that it’s not even important that the policies advocated by the anti-globalization parties work. Voters—especially in countries where the government has been berated for years—don’t really expect the government to be able to solve society’s problems. They want to be convinced that the government has their interests in heart, and, when the time comes for critical decisions, it will make the decisions that move things in the right way. The establishment parties, so closely associated with the elites and with much of their financial support coming from banks and other corporate interests, have been losing their credibility. And the disparity between the promises of globalization and the reality has been part of this loss of credibility.
If globalization is to be preserved, its advocates must be able to explain not only why the protectionism that Trump, Le Pen, and others on that side of the debate will only make them worse off, but how globalization can be reformed in ways in which all will benefit. But to do that, we have to understand why globalization, as it has been managed, has failed.
Markets on their own won’t ensure that globalization will increase the size of the national pie—it won’t do so, for instance, if job destruction outpaces job creation, because financial markets are dysfunctional and don’t provide the finance required for those who want to take advantage of the opportunities afforded by globalization. And even when it increases the size of the national pie, markets on their own won’t ensure that there aren’t large numbers who are worse off. And if globalization is not managed well—and it has not been well managed—the losses of the losers will be all the greater.
Under these circumstances, to avoid a backlash against globalization, government must come forward with macroeconomic policies that push the economy toward full employment, adjustment policies to help workers and firms adapt to the new circumstances, and social protection policies to protect them against losses to the standards of living that they may face in the process of adjustment. I discuss these policies in chapter 4, but first, I take a closer look at the alternative: what I call “the New Protectionism,” being advocated around the world by Trump, Le Pen, and politicians in other countries taking advantage of the “New Discontents.”
Chapter 3
The New Protectionism
THE DISPARITY BETWEEN what was promised from globalization and what was delivered has angered many and led to a growing distrust of the elites—in politics, in the media, and in academia. Some of this criticism is misguided, some deserved. Economic theory did explain that globalization would hurt unskilled workers in the advanced countries. The dishonesty arose not from the academics, but from the politicians and those in the corporate and financial world who benefited from globalization but didn’t want to face up to its darker sides and didn’t want to do anything about its adverse effects.
Most worrying is the collateral damage: because the statements of some of the elite—the advocates of globalization, for instance—turned out to be so wrong, some in the Trump camp are claiming that anyone can just make up his own theory, make his own assertions about what is true. Everyone even gets to pick his “alternative facts.”
We may not know anything for certain, but we know something. We may not precisely know the number of people who turned up for Trump’s inauguration, but we can be almost certain that the number he alleged was wrong.1 All scientific findings are tentative, held only with a certain degree of confidence, open for refutation—science is an open quest for truth. But this complicated message does not open the door to a world where all beliefs are of equal weight. Some can be refuted by the evidence with almost a 100 percent degree of confidence.
The irony, of course, is that what has made possible the enormous increases in standards of living over the past two and a half centuries is the advances in science and technology—and none of this would be possible without the Enlightenment and the scientific method, which Trump and his followers have been attacking so fiercely and effectively.
We take our current standards of living so much for grante
d that we forget that for centuries standards of living stagnated. It was not until the mid to late eighteenth century, less than 250 years ago, that they began to rise. What happened? There is a broad consensus among historians and economists about the answer: it was the scientific revolution of the seventeenth and eighteenth centuries, the origin of the modern rational frame of mind, bound up with the Enlightenment. The new frame of mind brought with it not only the idea of progress and that change was possible, but also the scientific method, of how we go about learning the “truth.” Science has progressed enormously since then, and so too have the benefits, with standards of living today that would have been unimaginable then. Life expectancies have been greatly increased by advances in our knowledge of health.2
As demagogues like Trump question science and how we distinguish truth from fiction, they threaten the basis of our continued progress.
THE GLOBAL GROWTH OF THE NEW PROTECTIONISM
The high level of inequality, the low level of equality of opportunity, and the struggles facing those in the middle class, evident in the United States and so many other countries, have contributed to a sense that the economic and political system isn’t serving the interests of large swaths of society; that the system is unfair; that democratically elected governments cannot be trusted to serve the interests of those who elect them; that the so-called wisdom and knowledge of the “elites” (including academics) cannot be trusted; and that the media, in particular, should be questioned.
The precise unfolding of events that gave rise to these doubts differs across countries, and though there are still many countries in which faith in democratic institutions and appropriately regulated markets remains strong, in a disturbingly large number of countries, Trump-like politicians have been faring well.3
The strengthening of this distrust in the aftermath of the 2008 financial crisis is not an accident. The crisis was caused by the excesses of the financial sector. But then the U.S. government—and what happened in other countries was not much different—appointed the very people who were responsible for the crisis to sort it out.4 Not surprisingly, they put the bankers’ interests ahead of the rest of society—ahead of those losing their jobs and homes. They claimed, falsely, that the only way to save ordinary citizens was to save the bankers. The “recovery” was focused on the bankers, not on ordinary citizens: in the first three years of the so-called recovery, 91 percent of the gains went to the top 1 percent;5 and this happened in a Democratic administration supposedly representing the interests of working individuals.
The economic and political system seemed rigged. And among the focal points of the attacks against the establishment is the establishment’s belief in globalization. The distrust for globalization had long been simmering beneath the surface. In the 1992 presidential campaign, a third-party candidate, Ross Perot, criticized NAFTA by saying it would take jobs from the United States: there would be a “giant sucking sound.” Even if globalization is only a part of the distress in which so many people find themselves, electoral politics means that they may be able to do something about this source of their travails—by electing politicians committing to changing the rules of globalization.
Protectionist and nativist demagogues have arisen around the world and met with considerable success—including attaining the presidency of the United States. They now have the power to follow up their protectionist rhetoric with protectionist policy.
Listening to Reason
While the elites—including those economists who claimed too much for globalization—clearly don’t have all the answers, they can explain with some degree of confidence why certain policies are likely to fail. Trump probably doesn’t want to hear why the protectionist policies that he’s put forward almost surely won’t work. That’s perhaps why Trump has decided not to have any economists in his cabinet and to rely instead on businessmen who purportedly know how things really work. But businessmen know how to do business and make deals, and in the case of people like Trump, how to take advantage of others. Their business experience doesn’t give them a clue about how a complex system like the economy works.6
Before turning to what Trump would hear from almost any economist—were he to ask—about why the new protectionism is likely to fail, I should pause to note one of the important lessons that emerges from the overselling of globalization: economists as public servants have, of course, a responsibility to tell those that they advise of the consequences of alternative policies. But their responsibility goes further: they have to understand and explain the limits of their models and of our knowledge; to articulate what we know and what we don’t know. Economists might, in the end, decide that the distributive effects are outweighed by or outweigh the aggregative effects, that is, the impact of total output. But it would have been wrong not to explain the potentially large distributive effects, the potential effects on employment in certain locales, the consequences of imperfect risk markets and imperfections in competition, the implications for dynamic comparative advantage. And when economists oversell—as globalization has been oversold—they put at risk both their own reputation and the well-being of those whom they, as public servants, are supposed to serve.
And when politicians oversell—even if they believe that what they’re saying is just a white lie to ensure that what they know is good policy is undertaken—they put at risk their credibility and that of the democratic political process.
America will pay a price for the deglobalization which Trump and his protectionism are instigating. In pursuing his America First policies—in not pursuing a set of policies entailing an enlightened American self-interest—Trump is actually putting America second, behind the fulfillment of his narcissistic needs. In the following pages, I explain why this New Protectionism will fail—it will even worsen the plight of the Trump supporters who have been left behind by globalization.
WHY THE NEW PROTECTIONISM WILL FAIL
Before Trump arrived on the scene, capturing and enflaming anti-globalization sentiment in the United States, the major worry about globalization was about its mindless, unmanaged advance, with corporate interests prevailing over the well-being of society. My concern, and that of most other serious critics of globalization, was to reform globalization to make it better serve all citizens. It was almost inconceivable that the pendulum would swing too far the other way, with anti-globalization forces so prevailing that there might be a threat of a mindless, unmanaged retreat from globalization.
Trump has, however, redefined the globalization debate, arguing for bilateral agreements and threatening that unless we get a “better deal,” he’ll slap high tariffs against Mexico (20 percent) and China (45 percent).7 He even has considerable support from many billionaires and their companies, especially those that compete with imports. Everything the government does has distributive consequences, and there are many firms (and their owners) that would benefit from protectionism—even if others, including exporters, would lose. Of course, the businesses that would be helped seldom ask for protectionism on the grounds that it would increase their profits. They always claim to be selfless entrepreneurs, asking for government assistance to protect them against unfair competition on behalf of their workers—even as they do everything they can, in other forums, to oppose measures like unionization and regulations ensuring basic working conditions that would really make a difference for their workers.
Trump sees trade through the lens of a zero-sum game in which one country’s gain comes at the expense of another’s loss. Trade, however, is not a zero-sum game—it was never the case that the developing countries were the only winners, the only ones to benefit, as their increased exports of manufactured goods not only created jobs, but also helped transform their economies and societies through industrialization. Their growth thus fueled more demand for goods in developed countries, and their inexpensive products raised living standards. We should have expected the advanced countries to have gained too. After all, it was the United States along w
ith its partners in Europe that designed the game. They wouldn’t have designed a game in which they would lose. The problem was that there were losers within the advanced countries, and the corporate winners had no interest in sharing the gains: they liked it that their workers had lost all bargaining power.
Turning the Clock Back Won’t Work
The New Protectionism is an attempt to turn back the clock—one of the reasons that it’s the wrong solution for dealing with the New Discontents, and impossible to do in any case.
The Glory Days of Manufacturing Are Over
No matter what Trump promises, American manufacturing jobs are not coming back. Global employment in manufacturing is on the decline—a hallmark of our achievement in increasing productivity at a faster pace than increases in demand. This means that if each country’s share in that global employment were to be unchanged, U.S. manufacturing employment would be decreasing. In fact, however, the U.S. share is likely to decline. Thus, with a decreasing share of the decreasing global manufacturing employment, the number of U.S. manufacturing jobs will fall.
The emerging markets have become an increasingly effective competitor in making even complex manufactured goods. Even high-end niche manufacturing jobs look increasingly precarious. Countries like Korea not only learned, they learned how to learn: in some areas, they joined the ranks of the innovators.
While those abroad have become more competitive, some of the advanced countries, and especially the United States, have become, in some ways, less competitive. The increase in social diseases—alcoholism, obesity, opioid addiction, and suicide—has its counterpart in a reduction in productivity.
Globalization and Its Discontents Revisited Page 11