What's next for our age of globalization?

Globalization has been an undeniable success for multinational corporations but a dilemma for the American economy, blamed for job losses, low wages, and slow growth. There are various reasons for the declining popularity of global trade, including the “asymmetric perceptions among winners and losers from trade,” the “big implications for the distribution of income within economies,” and the “dichotomy in incomes between sectors open to trade competition and those sectors where international competition is limited or non-existent”.

Paterson’s interview with foreignpress.org is within the scope of AFPC-USA’s partnership with the Hinrich Foundation. The AFPC-USA is solely responsible for the content of this interview. 

The following conversation has been condensed and edited for clarity.

What are the reasons behind the declining popularity of global trade in key parts of the world, particularly in the US?

Firstly, the benefits of trade tend to be thinly spread. The costs to a worker are highly concentrated—often binary in that he/she loses her job to import competition. This leads to asymmetrical perceptions among winners and losers from trade.

Fourthly, as China has gained share in manufacturing, productivity growth elsewhere in the world has fallen. Manufacturing is rightly viewed as being an area where productivity growth can be high due to technological advances and where it is relatively easy to measure. Agriculture and services sectors tend to have lower levels of productivity growth and hence an economy biased towards these sectors will tend to grow less slowly. 

How have large corporations and elites benefited from trade and globalization, and how has it affected industrial belts and job opportunities?

Large corporations have benefited from globalization in three ways:

1. Labor arbitrage has been used to lower costs and augment profits.
2. Tax arbitrage has been facilitated by transfer pricing. Consider for example the amount of IP owned by Irish subsidiaries and Ireland's consequent rapid growth in GDP.
3. Larger markets make for economies of scale and augmented profits.

What are the implications of the disproportionate amount of responsibility falling on the US to ensure sufficient demand in the world, and what can be done to encourage a more balanced global economy?

The major implication for the US being the "consumer of last resort" has been that both fiscal and monetary policy have been easier than would otherwise have been the case for a number of decades now resulting in perennial current account deficits in the US. This in turn has been at least partly responsible for:

• Increased levels of government debt.
• An increasing reliance on financial leverage in the private sector.
• Inflated financial and real asset prices,
• Falling levels of home affordability and hence property ownership.

What can be done about it?

How have the World Trade Organization (WTO) and the multilateral trading system contributed to or hindered the promotion of global trade, and what are the potential consequences of their "fraying at the edges"?

The contribution of the General Agreement on Tariffs and Trade (GATT)/WTO has been manifold but primarily:

• By providing a forum for negotiating market access.
• By providing a rules-based system for trade.
• By providing a system of redress for infringement of rules.
• By reducing tariffs.

Its success can be measured by the growth in trade and the growth in the number of countries that have wanted to participate in the system (from 23 to 164). 

By its nature, the WTO oversees a "light " level of international engagement. It does not set out to harmonize environmental standards or labor standards for example. As a consequence, it has not prevented countries from running exchange rate policies that are advantageous to their trade position for example, or intervened in industrial policy (although countervailing duties are available as an option to address dumping).

A return to trade anarchy—a break with the rules based order—seems likely. The result will likely be a gradual fragmentation of global trade along ideological lines. The loss of economic welfare could be considerable, with global GDP being 5-10 percent smaller than would otherwise be the case. 

Larger countries will be hit least hard by this—they are less dependent on trade. The hardest hit countries will be the smaller, open economies and these countries will fight hardest to maintain the multilateral system.

***

Adapted from the original article by ForeignPress.org.

© The Hinrich Foundation. See our website Terms and conditions for our copyright and reprint policy. All statements of fact and the views, conclusions and recommendations expressed in this publication are the sole responsibility of the author(s).