10 January 2017

We can still get globalisation right


“The world’s ideological divide isn’t left versus right, it’s globalist versus nationalist, and globalists have work to do.”

In a new essay in the Wall Street Journal, the paper’s chief economics commentator, Greg Ip, sums up the case that’s become increasingly fashionable.

As he puts it in his essay: “Supporters of these disparate movements are protesting not just globalization – the process whereby goods, capital and people move ever more freely across borders – but globalism, the mindset that globalization is natural and good, that global governance should expand as national sovereignty contracts… Their targets are such global structures as the EU, the World Trade Organization, NATO, the UN and the North American Free Trade Agreement.”

In other words, globalisation has not just been about economics, but about politics and governance too. And what we’re seeing now – in the shape of Brexit, Trump, Corbyn, Le Pen and all the rest – is an inevitable backlash against it.

But this is where Ip – and many others – get it wrong. Yes, scrapping borders and concentrating power at the supranational level have gone together recently. But there is nothing to say that they always have to.

As I’ve explained elsewhere, the EU could perfectly happily concentrate on scrapping national protectionism without also imposing continent-wide, harmonised, one-size-fits-all regulation, agreed at the EU level, for 500 million people.

The EU actually used to function more like this, but starting in the 1980s, many national decision-making vetoes were scrapped, so it became easier to harmonise. Politicians, meanwhile, were also keen to try to replace national protectionism with European protectionism – as were many crony-capitalist business lobbies.

Scrapping national protectionism is not just a good thing, but a fundamentally popular one. No one in France complains about the EU making sure Ryanair can operate there. They’ve even got used to McDonald’s.

Ip appears to disagree with this. “Globalists,” he writes, “would be wise to face their own shortcomings. They have underestimated the collateral damage that breakneck globalization has inflicted on ordinary workers, placed too much weight on the strategic advantages of trade and dismissed too readily the value that many ordinary citizens still attach to national borders and cultural cohesion.”

He does have a point that mass migration is not a popular thing. And that fewer barriers to trade can create disruption, especially in economic sectors that have been overprotected for years (think steel, or even the taxi sector, where ordinary taxi drivers who paid huge fees for their legally protected monopoly suddenly see Uber entering the market).

Yet such “collateral damage” should really be blamed not on free trade, but on the protectionism that preceded it – similar to how Russia’s suffering in the 1990s should be blamed on the preceding 70 years of extreme economic planning.

To deal with such collateral damage, Ip seems to suggest some kind of economic transfers (ie welfare): “If globalists are to regain the public’s trust, they will need to re-examine their own policies. The dislocation caused by past globalization casts doubt on the wisdom of prescribing more. That globalization’s winners can compensate its losers makes impeccable economic logic, but it rings hollow among those too old to retrain or move.”

But think of that taxi driver who’s just been driven out of business by Uber – while still having to pay back that huge loan he took out when he hoped to be able to enjoy a monopoly for years.

Do we really help this person by not “prescribing more” competition, which would result in more cheap imports from Asia? Of course not. Trade openness is particularly important for the worst off in society, as they spend a higher share of their income or savings on things like clothing and food, which have become cheaper thanks to lowered barriers to trade.

On this theme, Ip writes about how “a wave of Chinese imports wiped out two million American jobs… with no equivalent boom in U.S. jobs linked to exports to China”. Those lost American jobs could not have been simply replaced by jobs linked to exports to China. But they could have been replaced by jobs related to the savings made due to cheap Chinese imports.

When the typical American consumer can save $300 because Apple produces smartphones more cheaply in China, it means he has $300 more to spend in America, on American products, enabling American companies to survive.

Obviously, he may well spend the money on non-American products. But the fact that the savings were made in the US makes it more likely that the gains in terms of more investment will end up there too.

Ip does make some valid points, for example that China engages in “discrimination against foreign investors and products and an artificially cheap currency”. (Other trade powers do actually do this too, it’s just that China is a bit more aggressive.) But the answer is not to impose tariffs, which would hit Western consumers and importers equally hard.

Anyway, the real problem in the West isn’t so much that so many factories have shut down or moved or been undercut by China, but that not enough alternative businesses have been started to compensate. And given the West’s inexorable move towards high taxation, unpredictable and stifling regulation and greater public and private debt, is it any wonder people are reluctant to invest and create new companies?

We should also be wary of pinning everything on trade. While Ip’s analysis of the euro’s ills – which he blames on “German trade surpluses” – is certainly faulty (as I explain here), I certainly agree with his assessment that “much of the backlash against immigration (and globalism) is not economic but cultural” and that “globalists should not equate concern for cultural norms and national borders with xenophobia.”

Yet what has angered so many people is not the scrapping of trade barriers, but supranational power grabs over immigration policy or national budgets.

Yes, one can make a good case for EU freedom of movement and how it’s necessary to allow people to move permanently in Europe if one wants to really free up trade. But should the right to move to another EU member state really be unrestricted?

At the moment, seven million Spanish could move to France, if they wanted to (and one million British have actually moved to other EU states). Would it be so unreasonable to cap this at a “culturally acceptable level”? Or to put in place proper border protection, as Australia has, to curb the large ongoing flow of irregular migration from outside Europe?

The point, in other words, is that the opposite of globalism is not nationalism. It is globalisation done right – stripping away protectionism and trade distortions rather than erecting supranational structures that often serve to perpetuate them. Do that, and we’d see a lot less support for the populists who are keen to throw the free trade baby out with the migration bathwater.

Pieter Cleppe represents the independent think tank Open Europe in Brussels.