The Levelling

by Michael O'sullivan

  As it stands, many people like to place blame for the ills of specific countries at the door of globalization. Radical political leaders—such as Nigel Farage, formerly of the United Kingdom Independence Party (UKIP); Marine Le Pen, formerly of France’s National Front; and the Five Star Movement in Italy—and media pundits like Sean Hannity of Fox News have spoken out loudly against globalization. The notion that everything is the fault of globalization is very convenient. It makes for an expedient culprit, and it is so pervasive that we have lost sight of its meaning and implications. In some respects, the world is now so well connected in its financial and information flows that globalization is everywhere, so much so that we have become much less conscious of it.

  Globalization has few defenders, as it is now unfashionable and politically unprofitable to show support for it. It has no outright owner, though some international research bodies and thought leaders like the Organisation for Economic Cooperation and Development (OECD) and the World Economic Forum (WEF) are closely associated with it. Similarly, many economic, political, and social stresses, such as inequality, poverty, and the decline of agriculture, are ascribed to the evils of globalization, regardless of the true origins of those stresses (in fact, during globalization the world poverty level has collapsed from 35 percent of the world population in 1990 to 11 percent in 2013).4 In addition, the public understanding of globalization is not strong. Understandably, few people take the trouble to sift through trade reports or examine the flow of labor around the world. Thus, as with the issue of “Europe” in British politics, where few politicians have said or can say anything positive about Europe, globalization is vulnerable to becoming a catchall for the negative aspects of economic growth and so functions as a sort of political doormat.

  There is, however, a strong case to be made that globalization, the most powerful economic force the world has witnessed in the past twenty years, has been a force for good. It is now so pervasive in its effects and has produced so many startling outcomes—for example, the rise of Dubai, the successes of small states like Singapore, growing wealth in emerging economies (from 2000 to 2010 wealth per adult in Indonesia increased sixfold), the emerging-market consumer, and fast-changing consumer tastes (as I write this in late 2018, yoga mats are replacing smartphones as a must-have item)—that we risk taking it for granted. What is material today is that globalization is slowing, and in many instances its side effects are now more obvious.

  Good-Bye to All That

  In 1929 the English writer Robert Graves published his book Good-Bye to All That, with which he achieved acclaim and some notoriety. The book deals largely with his experiences as an officer in the First World War (during which he was injured so badly that his family were incorrectly informed of his death). More broadly, the book is a wry reflection on the passing of the British Empire, a very specific way of life and moral framework. Its title keeps coming to mind today, and it seems a good starting point from which to reflect on a period marked by Brexit, policy mishaps over world trade, and the disintegration of the world order.

  These events are just a few of those leading us to say good-bye to globalization. A growing number of stress points—trade, political, institutional, and corporate—now undercut globalization. Unfortunately, there is not yet a deep debate on the future of globalization. Many writers and periodicals such as Foreign Affairs seem fixated on the choice between slightly different flavors of globalization “as we know it” rather than a radical departure from it. This is an enormously complacent error. Many of the success stories of the last thirty years have been driven by globalization. If it halts, then so too will many of the things people have come to rely upon and enjoy.

  Yet data relating to many of the trends underlying globalization warn that an inflection point has been reached. We can see this in various ways. The component parts of globalization—flows of trade, finance, ideas, services, and people—have ebbed since 2015,5 and while some of them (i.e., services) are still at historically high levels, it is hard not to have the impression that globalization is on the verge of a downward path, especially once we consider some of the underlying dynamics such as trade protectionism and regional exceptionalism.

  The most basic representation of globalization is trade, which after plateauing in recent years is now dipping. From 2011 onward trade had rebounded from the relative lows of the global financial crisis and had again attained the level reached in 2008–2009, which historically is the highest level in at least fifty years. However, from 2016 to today and in the context of an upturn in broad economic activity, the openness of the world economy (ratio of trade to GDP) has fallen sharply, and this measure is back down to the level seen in 2011. Indeed, in late 2018 the OECD reported that the level of trade between G20 nations had dipped sharply.6

  Another way to consider the pace of globalization is to look at the aggregate activity in the world’s most open, globalized economies. If we add together the GDP for the likes of Ireland, Switzerland, Belgium, Singapore, and the Netherlands—small, open economies that in many respects are the canaries in the coal mine of the world economy, in the sense that they are the first to pick up a new trend—we see that their trend growth is slowing and is below the average level of growth enjoyed over the past twenty years.

  Trade Wilting

  There are several reasons why trade openness has diminished. For example, a shift in economic structure in China means fewer capital-expenditure-driven goods are traded. In addition, habitually weak demand from the eurozone has removed an important support for world trade. The rise of new technologies in manufacturing and supply-chain management has meant that many goods require less capital investment, and the trade dispute between the United States and China is fracturing international supply chains. Here technology has enabled some Western companies to relocate operations back to their own countries.

  Other indicators of globalization paint a more negative picture: cross-border flows of financial assets (relative to GDP) have continued downward from their pre-financial-crisis peak, probably because of the effects of regulation and the general shrinking of the banking sector. Foreign direct investment has recovered in the past two years, but it too is now well below the levels reached in 2009, according to the World Bank. Restrictions on foreign (mostly Chinese) investment in the United States and Europe, together with capital controls in China, have also sharply curtailed cross-border investment flows.

  Similarly, the profits of multinational companies—which, though not strictly an indicator of globalization, are a useful gauge of the health of the actors who have driven globalization—now look as if they have peaked. Profit margins for large US companies are very high historically, at close to 10 percent, but are now slowly contracting. In China, profit margins are not as grand as those in the United States and are also contracting, and furthermore, they are vulnerable to an economic correction.

  At this stage, proponents of globalization might well conclude that it is pausing for breath or that it is in a transitional phase while new technologies and new economic actors emerge. This may prove to be the case. But data suggest that we should be more worried by rumblings in the engine room of globalization, which hint that the plateauing in globalization may be more structural than cyclical, and to an extent these rumblings are reminiscent of some of the behaviors seen in the early twentieth century.

  The sense that globalization and trade have stopped growing is bolstered by a narrative claiming that the globalization pie has stopped expanding. The rise of protectionism means that the debate on globalization taking place today is really about who gets the slices of the globalization pie and how large and tasty those slices need to be. Some of this concern not to be left with too small a piece is justified, but it does introduce a beggar-thy-neighbor element to the conversation on globalization. It may also help explain why politicians who vocally stand up for their constituencies or “corners” in trade-related debates are being rewarded by electorates. For example, in the
United States, senators approaching an election tend to take on a more protectionist stance on trade and immigration, especially where they are not certain of being reelected.7

  What is troubling about the current narrative on globalization is that instead of proposing ways it can thrive or can grow in a more sustainable way, many countries, politicians, and commentators propose ways in which to borrow, reclaim, or take over somebody else’s slice of globalization. Trade policy is becoming the proving ground for this hypothesis, and the trade dispute between the United States and China, a dispute that has also embroiled most of America’s allies, is emblematic.

  Few genuine trade agreements have been struck over the past ten years (the United States–Mexico–Canada Agreement [USMCA] is simply a cosmetically scrubbed-up version of the original North American Free Trade Agreement [NAFTA]), and in some cases, opportunities for better trade relations between countries have been spurned. Neither the original Trans-Pacific Partnership (TPP) deal between the United States, Japan, and a group of Asian countries (notably, China was not included) nor the Trans-Atlantic Trade and Investment Partnership (TTIP) between the United States and the European Union (effectively a partner deal to the TPP) gained approval, which means that there has not been a major international trade agreement since the General Agreement on Tariffs and Trades (GATT) Doha Trade Round in 2001. Before that, the 1990s were replete with trade-friendly agreements: the establishment of the WTO, the European Union single market taking effect in 1993, and the creation of the euro.

  From an American point of view, the TPP would have been an ideal starting point strategically, as it would have presented China with a united front made up of the United States and a number of Asian economies. Its aim was to construct a trade alliance between the United States and a group of Latin American and Asian countries, notably Japan. Besides lowering trade tariffs between those countries, the objective of the deal was to create a trade alliance around and excluding China. Negotiated during the administration of Barack Obama, the partnership was rejected by the Trump administration.

  Against this backdrop, the Trump administration’s haphazard and ill-thought-out approach to trade relations with its neighbors, allies, and China has for the first time in decades elevated international trade to the top of the economic policy worry list. The administration’s handling of trade relations has sowed distrust, suspicion, and risk aversion on the part of America’s many trade partners. The uncertainty created by trade-related rhetoric has already had an economic impact, on inflation, profit margins, and investment.

  There are other concerns for trade. In areas where there is scope for gains in efficiencies of scale under the auspices of existing trade agreements, some countries are holding back on implementation. There is also a creep toward more overt, traditional protectionism. One of the authorities on the matter, the Global Trade Alert center, launched in 2009 to monitor the extent to which cross-government policies liberalize and restrict trade in the aftermath of the global financial crisis, notes that trade-defense measures and bailouts or state aid are by far the most popular measures implemented to “protect” trade, followed by import tariffs and trade finance.8 Trade liberalization has been declining since 2009 and is now at its lowest level since then (for example, in 2018 there were over three times as many trade-discriminatory as trade-liberalizing measures announced internationally).

  Interestingly, it is the United States that implements the greatest number of trade-protectionist measures (outnumbering trade-liberalizing measures by a factor of nearly nine to one), followed by Russia and India. It is also worth commenting that the United Kingdom, Spain, Germany, and France have each implemented more traditional trade-protection measures than China, though China does have more discreet ways of tipping trade relations in its favor.

  Luddites Awaken

  With the growth of trade so limited, it is inevitable that trade, its consequences, and its side effects will be live political issues. Trade in goods, in particular, is an attractive target for politicians, conjuring tangible images of cars, fridges, and phones crossing borders—unlike financial transactions and data flows. Reflecting this, in the first televised debate of the 2016 US presidential race, the words “trade” and “NAFTA” were used twenty-four times. The current sensitivity of American politicians to trade with China may reflect the fact that as China develops its own goods and consumer brands (China crafted a “Made in China 2025” plan to produce its own high-end consumer goods and technologies and to effectively become self-sufficient in these areas), it becomes a tougher market to sell into, and at the same time, the barriers to trade with it, such as technology sharing, remain high. At a deeper level, there is of course now a realization in Washington and beyond that China is drawing level with the United States as a geo-economic player.

  That China or other countries can apparently supplant American manufacturing capacity must be bad for American jobs, or so the logic goes. There is some evidence to support this. For instance, a leading academic on the intersection of technology, trade, and labor markets, David Autor at the Massachusetts Institute of Technology, has undertaken work on how falling wages and rising joblessness in parts of the United States are linked to the inflow of goods from China. He and his colleagues have produced wonderful graphics that show the areas of the American economy (mostly the Southeastern states) that, according to their analysis, have been negatively affected by the switch in manufacturing capacity toward China.9

  Similarly, Peter Schott and his colleagues find that economic areas of the United States that are subject to greater competition from China via a change in US trade policy tend to be more politically “agitated.”10 Those areas exhibit relative increases in voter turnout, increases in the share of votes cast for Democrats, and a higher probability of being represented by a Democrat. The researchers point out that the historic tilt toward Democrats (over Republicans) is consistent with the fact that Democrats have been more likely than Republicans to support legislation limiting import competition or favoring economic assistance. This historic bias has now changed, perhaps as a result of the perception, or even the cultivation of the view, that American jobs have been exported and that Democratic politicians have allowed it to happen. President Trump exploited this view through 2018 in the run-up to the midterm elections, not to mention during the 2016 presidential race, notwithstanding the costs of the tariffs to the US economy.

  Academic studies, however thorough, will only tell part of the story about the link between competitiveness, trade, and politics. To add greater color here, I highlight J. D. Vance’s book Hillbilly Elegy, which does a superb job of synthesizing the forces and influences that have led many lower-middle-class Americans to change their allegiance from the Democratic Party to politicians on the right. I find myself recommending his book to anyone interested in American politics today. It is honest and charming, though I am somewhat suspicious of the way it was received and lauded by Washington, DC, elites for apparently showing that large segments of the American population were “falling behind” and that traditional Democratic voters turned toward Donald Trump. Accounts of the demise of the white lower-middle-class and lower-class population are plentiful in social science, literature, and music in the United States, but few policy makers and corporate leaders appear to have paid attention to this demise.

  In his book, Vance tells how he turned his life around through enlisting in the Marines, seeking an education (Ohio State and then Yale Law School), and playing golf (his grandmother had advised him that playing golf would help him understand how wealthier people socialize and do business). Importantly, he also lays out the reasons why relatively poorer white Americans feel neglected economically and politically. In my view, what his book achieves in this regard is to show the socioeconomic decay associated with small government and, to a degree, with the regional and distributional economic consequences of globalization. In that respect, the risk for America is that globalization will be replaced by something far
less bountiful, and far less prosperous, so that the social problems outlined by Vance go neglected. To step back and take the long view, globalization has been the driver of high growth for the last thirty years and has recently lost momentum. My sense is that globalization is beginning to eat itself as countries and companies compete for what they now perceive to be a fixed pie of economic growth. The narrative on globalization is dominated by two, perhaps three positions.

  The first is what could lazily be termed the position of the global elite, who rightly point out the dangers of protectionism but, in my view, refuse to recognize that globalization may simply have run its course and, in the course of geopolitical change, will be replaced by something else. The second position is that of a vocal commentariat that strives to underline the downsides of globalization and, mischievously or deviously, gives it as the cause of more everyday economic ills.

  And third, though the vast majority of people understandably have no fixed, clear, or explicit position on globalization itself, they will feel the detailed ways in which it touches them in their everyday lives (e.g., the price of coffee, the attractiveness of global brands, and the ways in which employment is changing). It is very difficult to synthesize all of globalization’s component parts in a balanced way without the benefit of a few hours’ study of the websites of the likes of the OECD, which contain reams of data on trade, employment trends, and education quality.