Globalization in the Crosshairs, Again...

Globalization is once again under fire.  In the past, developing nations often complained that the benefits of increased global trade flowed disproportionately to the developed world. Today the shoe is on the other foot. Wide swaths of the American public are reacting favorably to Donald Trump and Bernie Sanders’s proposals to reign in free trade while the recent Brexit vote highlights the growing anger over greater economic integration in Europe.

The most recent anti-globalization movement comes at a curious time. Unemployment levels in the U.S. are at record lows and wage growth is starting to pick up. Global trade too is hardly swamping local trade, with international trade volumes having grown at less than 3% in each of the last four years.

So what is fueling the latest change in sentiment? The anemic economic recovery from the 2008-2009 financial crisis is certainly one factor. For as long as most of us in the developed world can remember, economic growth chugged along at about 3% per year. But since 2008, GDP growth has been more than cut in half (see chart below). This difference is significant. A 3% growth rate is fast enough to both support rising standards of living for existing citizens AND absorb new ones. A 1% growth rate is not. Continued low interest rates inflated the prices of stocks, bonds and real estate – a boon to the wealthy but hardly much help to those with limited financial assets.

In the midst of vast social, technological and economic change, the idea of turning inward can certainly seem appealing. But the costs of moving in this direction can be large indeed. To appreciate why, you need to understand the concept of comparative advantage - a basic tenet of any Econ 101 class. The idea here is that economic growth is maximized when each country produces the things that they are best able to at the lowest cost. The reverse of this approach typically involves implementing high tariffs to protect uncompetitive domestic industries from lower cost imports. The U.S. adoption of such protectionist policies in the wake of World War I and retaliatory measures by our trading partners resulted in an estimated 66% reduction in world trade between 1929 and 1934 and contributed to the Great Depression.

To suggest that free trade is only beneficial, however, is inaccurate. The benefits of global trade – mostly in the form of lower priced goods- are widely dispersed, but the costs are often painfully concentrated in specific industries and communities. Further, comparative advantage is not a static concept; changes in the prices of key inputs as well as technological innovation create a constantly changing list of winners and losers. China is ceding its low cost manufacturing role to Vietnam and Thailand, while here in the U.S. new robotic technology is luring back some previously lost manufacturing jobs. Recent trade policies have clearly not paid enough attention to those on the losing side of the equation. Better support and retraining for displaced workers as well as improving access to university and vocational education would be steps in the right direction.

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The global economy is more interconnected today than at any time in history. Even though global trade has slowed somewhat recently, the flow of digital information between countries - everything from videos to web searches - grew 45 times between 2005 and 2014 according to the McKinsey Global Institute. Efforts to reverse the overall trend toward greater integration would not only be bad economic policy but likely unsuccessful. Better to jump on the bandwagon and focus on making the ride smoother for all involved.