Globalization and Its Discontents Revisited

by Joseph E. Stiglitz

  The Asian Infrastructure Investment Bank

  Perhaps the most dramatic development was the founding in 2016 of the Asian Infrastructure Investment Bank (AIIB) under the leadership of China. As of May 2017, AIIB had fifty-seven members and twenty prospective members, and was expanding. The Americans strongly (and foolishly) opposed the founding of the AIIB, worried about the increased influence that it might give China—especially with the lack of willingness of the United States to recapitalize the World Bank so that it could keep growing in tandem with the needs of the developing countries and emerging markets. One lesson of geopolitics is simple: don’t oppose something that is inevitable, and don’t make a big deal of something that you are going to lose, unless a matter of principle is at stake. Here, the principles were on the other side: surely the countries in Asia should decide for themselves. And the United States had nothing to offer in return. It was reminiscent of what happened during the East Asia crisis when the U.S. Treasury opposed Japan’s generous offer to help the crisis countries by providing the funds for the creation of an Asian Monetary Fund.

  In both cases, America was so worried about the possible diminution of its own influence that it was willing to let the countries suffer rather than get help from elsewhere. It was selfish and shortsighted. In the case of the AIIB, even the United States’ longstanding ally, the United Kingdom, broke ranks. The result, in the end, was what the Obama administration feared—the marginalization of American diplomacy. The bank benefits from China’s resources. In 2016, the first full year of its operation, it made $1.73 billion in loans.53

  New Trading Arrangements

  Trump has made it clear that, if he has his way, he will move away from the multilateral system to a bilateral one. He’s right that in these bilateral negotiations, the United States may have more power. But he’s wrong that such a system is better from a global perspective, or even an American one. As I explained earlier, what matters is the multilateral trade deficit. Bilateral deficits—for example, the deficit between China and America—do not matter. Money was created to avoid the necessity of barter—to avoid the necessity of having trade between any two countries (or people) being balanced.

  Moreover, in a globalized world, bilateral agreements can get horribly complex. For example, is a good still Mexican if a fraction of it is made in Asia? What is the critical fraction? And what happens if part of what comes from Asia is itself made in Mexico? Or in the United States? Such agreements distort the global economy and lead to a lowering of standards of living.

  As America threatens to withdraw into itself in its protectionism, China is already stepping into the void. Not only is it the convener and largest contributor to the AIIB, it is, for instance, also successfully pushing the Regional Comprehensive Economic Partnership as an alternative to the Trans-Pacific Partnership (TPP),54 from which China was excluded. China won’t put the same emphasis on human rights, labor rights, or perhaps even the environment as Democratic administrations have in the United States; nor will it push the interests of Big Pharma or attempt to circumscribe regulation. It’s more likely to stick to its view that trade agreements should be about trade, and countries should be allowed in other areas to do as they please.

  But with China the largest economy (in terms of purchasing power parity), the largest saver, the largest trading economy, and the largest manufacturing economy, it is inevitable that the world will move to a more multipolar system, and that China will have a large voice in the global system of the future. No single country will be writing the rules. No single country will be dominant.

  Elsewhere, the countries of Latin America are also likely to be advancing new agreements and strengthening old ones, especially with Trump openly expressing such bigotry and hostility toward America’s neighbors to the South. There are already moves afoot to strengthen the Pacific Alliance, a trade bloc that brings together Chile, Colombia, Mexico, and Peru. With the United States absent, a new Free Trade Agreement of the Americas might actually occur.

  The irony is that Trump’s simplistic, shortsighted protectionism, with its focus on bilateral agreements, will have just the opposite of its intended effect. As he tries to pursue an “America First” policy, America’s influence in the world—including the world of trade—will only wane. And he will fail in his seemingly55 most immediate objective, reducing the trade deficit and improving the plight of those in U.S. manufacturing. As I explain in chapter 3, the multilateral trade deficit is set to increase under his policies, and jobs in manufacturing exports to decrease.

  GLOBALIZATION IN THE AFTERMATH OF TRUMP

  Even as I finished GAID at the very beginning of this century, it was clear that globalization would change, and so too would the way globalization is managed and governed. There are five underlying drivers of this change: (a) the demographic shift, with Africa having, by 2050, 26 percent of the world’s population;56 (b) the power shift, with the share of global GDP in the advanced countries shrinking markedly, as I have already noted;57 (c) the structural transformation of the economy, specifically the move from manufacturing to a service sector economy that has already occurred in most advanced countries and will be part of the future in the rest of the world in coming decades; (d) the change, especially in the manufacturing sector, but in other sectors as well, to a “winner take all” model, where the winner (with globalization) is more likely than not to be in one of the rich advanced countries; (e) ideological shifts and divides—in particular, the weakening of a common belief in the virtues of a rules-based global system, and the growth of nationalism and nativism.

  These changes are, of course interrelated: the growth of nationalism and nativism in America can be directly related to the weakening of U.S. global economic power and the economic well-being of large fractions of its population, itself a consequence of the structural transformation in the United States, the decline in manufacturing (as we saw in chapter 1).

  In this final section, I want to trace out the major implications, both direct and indirect, of these changes in globalization of the future.

  Shifting Power

  America and Europe have to cede power to the fast-growing emerging markets. I had hoped that the United States would do it more gracefully and constructively than it had under Clinton; but Obama was little, if any, better. (Their actions were, of course far better than the imperial attempts to extend U.S. power through the threat of military might that marked Bush and the neocons.)58 I had not expected the “America First” policy, the flight to the past, of Trump—though I worried that if the extremes of inequality, related in part to the mismanagement of globalization, were not addressed, America would be prey to a Trump-like demagogue. But Trump’s arrival on the scene could not have come at a worse time. For even before the 2016 election, America was on the defensive, fruitlessly pushing back against China’s efforts at expanding its influence by trying to persuade others not to join AIIB and establishing its own corporate-driven trade agreement across the Pacific that excluded the major player, China, an effort that was one of the first acts to be scuttled by Trump.

  Post-Trump Globalization

  Whatever happens during the Trump administration, globalization after Trump will be different. America has lost its position of leadership as well as its status as a source of aspiration and inspiration: if the failures of Bush showed the limits of “hard” (military) power, Trump has eviscerated America’s soft power—its influence arising out of admiration or respect, though sometimes out of fear of its economic power.

  Trump was brazen in his call for American selfishness. His stand on protectionism made it clear: if the United States didn’t get what it wanted, it would (to use that old metaphor) take its marbles and go home. But to ensure that it got the good deal—the America First deal—that Trump demanded, he would not bargain with the developing countries and emerging countries as a group, but one by one, bilaterally, in which case it was clear where the balance of power lay, especially in the case of the poorer c
ountries. And yet, as our earlier discussion made clear, what the United States most cared about, its overall trade deficit, would be unaffected by these power plays. The trade deficit, determined by the country’s macroeconomics, including its budget deficit, was set to get worse.

  Still, America had held itself up as a model of good governance; but here was a president who would announce that there was no such thing as a conflict of interest within the presidency. The conflicts of interest in his plutocratic cabinet were obvious—but the country did nothing about them.

  Around the world, Trump has served as a source of humor and media entertainment. In Italy, I hear, “Trump has made Berlusconi look good.” In Africa, “Trump has made even our dictators look good.” Leadership matters. We would not have the rules-based global system that we have, that for the most part has worked so well to maintain peace and prosperity, were it not for American leadership. But for any country to exercise that leadership, it has to be seen as not just serving its own interests, but also as having a vision that sees the benefits of cooperation, without the use or threat of force.

  An International Rule of Law

  America’s role in the world will have changed as a result of Trump: the damage done will be long-lasting. The United States will no longer be seen as the trusted partner that it has been. But there are long-term consequences for the world too. Earlier, I described how important the rule of law was for any economy—and how important a rule of law was for the global economy. Trump has announced that he would not even honor past deals—he would ignore WTO rulings. The United States publicly announced that it was, in effect, walking away from the rule of law, so important for the functioning of society, but especially for the protection of the weak. It was going to use its military and economic power to get what it wanted. What good was a rules-based international system—that America was pivotal in creating—if the strongest country announces: by the way, the rules are for you, but not for us. If and only if the rules are working for us will we obey them. Whether his “bark is worse than his bite” is not yet clear: as this book goes to press, in some areas, he has been as bad as he promised he would be in his campaign for the presidency, or worse, while in others he has backed off from some of his extreme positions.

  Borders Matter

  Trump too has reminded us that, in a highly interdependent world, without global government, borders still matter. America (or any other country) can elect an aberrant leader, and there are many things short of war that one country can do to another. The more the interdependence, the more the harm that can be inflicted. And governments can be led by irrational leaders who can cause the country itself to be hurt by the policies undertaken.

  As I noted earlier in this book, the world has been proceeding with economic globalization as if borders didn’t matter. Global supply chains were constructed, with goods moving back and forth across borders. Countries were told not to worry about energy and food security, the ability to produce these essentials within one’s borders; one shouldn’t strive for that. That’s inefficient. It ignores the principles of comparative advantage. But that critique of policies aimed at energy or food security ignored risk, as countries are now learning.

  But Perhaps Trump Matters Less

  We should not, however, ascribe too much importance to Trump. The world was headed for multipolarization, and Trump may have only accelerated the process. It is likely that the developing countries and emerging markets will do better in this multipolar globalization than they did in the past, as some of the inequities are reduced. Still, the advanced countries will be slow to reduce the agricultural subsidies which hurt the poorest in the developing countries, and they may figure out ways of extending the life of some of their struggling manufacturing sectors.

  So too, everyone has always recognized that borders matter, and that in a moment of crisis or conflict, the United States will do as it pleases, little constrained by the agreements it signed. Still, it is also true that the rules matter, as we have seen during Trump’s time in office. The WTO rules almost surely circumscribed him from implementing the extremist protectionist policies he advocated during the campaign.

  A New Geography

  While the United States announced an inward-looking, America First strategy, China was creating a “new silk road initiative,” also called “One Belt, One Road,” encompassing some sixty countries in Asia, linking them to China. It is as grandiose in scale as the Great Wall of China, an attempt this time not to protect it from “outsiders,” but to tie the rest of the world to China. It seeks to overcome economic geography with man-made infrastructure that will lower the economic distance of all to China. Meanwhile, the construction projects are providing an economic boon to the previously moribund regions—a Marshall plan on steroids. China has understood what Western economists have been saying for decades: a world with zero percent interest rates is ripe for a massive infrastructure program. China will benefit, both from the increased influence, already palpable, and the increased demand for its steel and cement, which otherwise would be in excess supply. Rather than selling these products in the United States at low prices, which elicits condemnations of dumping, it sells or gives them to its neighbors, who extend profuse thanks.

  The Attractiveness of China’s Rhetoric

  In much of the world, China’s rhetoric resounds far better than either Trump’s America First or the “conditionality” which preceded it, in which we sign trade agreements with those who give in to our corporate interests, and we help very poor countries that follow the precepts of good government and market economics that we dictate through the IMF and the World Bank. Knowing the resentment that these stances had engendered, at the first assemblage of the leaders of twenty-nine of the countries on May 14, 2016, China’s President Xi talked about a world based on friendship and partnership, in contrast to the divisive alliances (like NATO). He repeated China’s call for each country to “respect each other’s sovereignty, dignity and territorial integrity, each other’s development paths and social systems, and each other’s core interests and major concerns.”59

  How Would a China-Led Globalization Differ?

  In diplomatic terms, these words take on certain meanings. China and developing countries have been highly critical of the conditionality that has accompanied Western assistance, with China being especially sensitive to those concerning human rights. Echoing back to the Cold War, China suggests that the massive inequalities built into the American economic system represents an abuse of human rights, and it believes that it is hypocritical for the United States to constantly criticize China’s human rights violations when there is such massive racial discrimination in America.

  This then is one of the critical ways that a China-led globalization would differ: there would be less pressure put on countries around the world to maintain political systems that guarantee human rights. The current system is admittedly weak: for instance, there have been few, if any, repercussions to Turkey as Erdog˘an took measures undermining basic freedoms. Still, the fact that the West constantly raises the issue has been a markedly positive force, and this is true even if the West is far from pure itself. The good news is that these ideas have been globalized in the decades after World War II, taking root around the world.

  Labor and environmental standards are also likely to take a less prominent place, though China’s population is demanding stronger environmental protection itself, and with the rise of incomes, labor standards have increased there too. Critics say that in any case, the weak standards included in recent agreements have never been enforced. In the important issues for American workers—like overtime pay—there is backsliding under Trump in the United States; an American Republican administration may thus be as much a threat to the creation of high global standards as China.60 Western boycotts of goods produced in substandard conditions—for instance, garments—will still have to be employed.

  With China committed to the Paris climate change agreement, there is ho
pe that the standards that will eventually be evolving for carbon emissions might be put into trade agreements they sign—they have an incentive to do so. And again, a Republican administration in the United States represents as much of a threat to this agenda as China does.

  These examples are illustrative of a general principle. Obama was right to say that who writes the rules matters. That’s why it’s important who is at the table. The very way the trade negotiations were structured gave little scope for civil society and representatives of any groups other than corporations to be at the table. The results reflected this.

  I noted how trade agreements have gone beyond trade to include investment protections—encouraging American firms to create jobs abroad by making investments more secure there and taking away one of America’s biggest comparative advantages, the rule of law affecting how disputes get settled, and replacing it with an adjudication process biased toward corporations. In chapter 2, I showed that the investment agreements could have been written in ways that would have provided the important protections that the United States says it sought, against discrimination, without threatening suits by corporations against governments over regulations to protect the environment, health, safety, and the stability of the economy. The resistance to this straightforward change by the business community showed that what they really wanted was to impair regulations. That was their agenda. It was only cloaked in language about fairness and nondiscrimination. (Indeed, as I note in chapter 2, these provisions gave foreign firms more rights than domestic firms. They had tilted the balance the other way.)