Is a retreat from globalization possible? If not, what is the way forward? United States.
The Trajectory of Globalization
United Kingdom. Economic Indices. Throughout history, countries have used a range of protectionist measures to limit imports or promote exports. While many economic arguments favor free trade and trade liberalization, protectionism is still widely practiced by almost all countries for any or all of the following reasons: to protect their strategic and infant industries, deter competition that is perceived as unfair, safeguard jobs in certain industries or for specific workers, protect the environment, and political reasons. What has changed over the years is that industrialized nations have gradually moved toward using different deterrents to trade, such as non-tariff barriers, instead of resorting to more direct protectionist methods, such as imposing tariffs.
After the global financial crisis, G20 1 leaders signed a pledge in November to avoid protectionist measures in order to speed up economic recovery and boost growth through increased trade. Ironically, protectionism has witnessed a worrisome rise since then.
Several countries, including the G20 countries, were reported as increasing trade-restrictive measures. The year witnessed the traditional champions of open government and free trade—the United States and the United Kingdom—appeasing populists, while China staunchly defended globalization. With world trade growing at 1.
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Trade in emerging economies began to decline from due to slowing economic growth in China and a fall in commodity prices. During this time, trade in developed economies stalled as economic activity slowed in North America and Europe. The global trade volume turned positive for the first time in Q4 , after contracting for eight consecutive quarters figure 1. Weak trade growth also reflects a change in the structural relationships between economic activity and trade. This period of slow growth coincided with an increase in protectionist trade measures around the world. The total number of discriminatory protectionist measures implemented by the G20 increased over the past five years when reporting lags are taken into account , indicating that overall the G20 nations are resorting to more protectionism over time figure 2.
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However, the share of the G7 nations and Australia together also has grown markedly figure 3. Between and October , a total of 1, trade-restrictive measures were recorded for G20 economies figure 4. Since October, only about 24 percent of the total have been discontinued, leaving a new total of 1, figure 4. Over 50 percent of the trade-restrictive measures by G20 economies were in the form of initiation of trade remedy investigations, the majority of which were anti-dumping investigations.
German industry profits from globalisation
Several other distortive measures were also imposed, such as government support for sectors such as infrastructure, agriculture, and export-specific activities. Globalization has a long history, dating back to the trade routes developed in Asia and Egypt, which gradually integrated economies spread across continents. As the global marketplace expanded, the process evolved, resulting in rapid trade expansion, technology growth, and financial liberalization. However, it was not until the second half of the 20th century that globalization picked up pace; outward-oriented policies made economic performance more dynamic and brought greater prosperity, improving living standards for countries that were able to integrate with the global marketplace.
The global per capita GDP increased almost fivefold over the past three-and-a-half decades figure 5. However, a lit candle also casts a shadow. Rising income inequality has created profound changes in the workforce and society, leading to asymmetric access to knowledge and skills, and shrinking welfare safety nets have resulted in economic insecurity and social deprivation among those left behind in this whole globalization gala. In addition, globalization has interconnected global risks arising from volatile capital movements and social, economic, and environmental degradation created by poverty and inequality, leaving low-income nations vulnerable to shocks.
Consequently, people belonging to the less secure strata of society—those who feel they are losing their jobs to immigrants or foreign competitors, have been unemployed for a long time, are at the low end of the wage spectrum or are witnessing income stagnation, and are living on shrinking social benefits—are now raising their voice against the changes brought about by globalization.
The anxiety about immigration and trade is now translating into rising support for populism in several nations, including in the West, leading to policy uncertainty. Even mainstream politicians are directing their policies toward more restrictive immigration and imports. The rising clamor for protectionism around the world, together with slowing growth in trade, is impacting global business sentiment, investments, and, thereby, growth.
The questions that everyone is asking are, how big a threat are these sentiments to globalization and its impact on growth, and are we already seeing a reversal of the globalization process? To answer the first question, we go back in time to when a major trade war broke out in the early s, often argued to be the period when the world witnessed the largest reversal of globalization.
Is globalisation really fuelling populism?
In addition, established trading partners increased trading with each other after the crash to compensate for the lack of trade with those with whom they had no prior trade relationship. While the past is not prologue, today the trade volume is too large and interconnectedness too complex, which means protectionism by any measure may not result in a substantial fall in global trade, or the fall might have no sustainable impact.
To answer the second question, we assess the impact of recent events on globalization by looking at the DHL Global Connectedness Index, which tracks international flows of trade, capital, information, and people. Undoubtedly, merchandise trade and investment were hit hard during the global financial crisis figure 6. They quickly recovered, but remained stagnant in the following years. Trade fell in , but it reflects the price effect, driven by plunging commodity prices and the rising value of the US dollar.
The latest data are not available at the time of writing this article, but rising asset prices and economic performances across the globe in indicate that globalization might have stayed flat. Advancements in transport, technology, and communications and an increasing pool of talent and skills post led to rapid economic integration through trade and financial flows. Greater integration, increased competition, efficient use of resources, and improved productivity benefited all economic entities: Nations benefited as economic growth accelerated; businesses profited from the access to cheap raw material, increased labor supply, and markets to sell finished products; consumers gained because of the availability of the wide variety and lower price of goods; and many workers got exposure to new jobs and skills.
An exaggerated perception of how much globalization impacts an economy often results in an overstatement of the adverse effects of globalization. Biased views based on such perceptions lead to increased support for public policies that restrict movement of goods and services, capital, and labor. However, a shift toward protectionism, which is lately being promoted by various policymakers across the globe, may not bode well for all nations, businesses, and consumers. There are instances in the past when a few nations pursuing protectionism suffered an economic slowdown and inefficiencies.
In the s and s, when globalization was gradually picking up in the rest of the world, several countries in Latin America and Africa pursued inward-oriented policies to protect strategic industries and jobs from competition. Subsequently, their economies stagnated or declined, poverty increased, and high inflation became the norm.
As these regions changed their policies and liberalized their economy post , their incomes gradually rose. Policy changes favoring localization are likely to impact several multinational corporates that have prioritized shifting their operations beyond their own countries to seek new growth opportunities and benefit from the advantages of scale, access to resources, proximity to the market, and arbitrage opportunities. For instance, several US technology, manufacturing, and life science and medical technology companies that have expanded in regions such as BRICS over the past several decades are likely to face operational and supply chain disruptions.
It is estimated that if a quarter of US multinationals shift jobs home at American wages and pay higher taxes on the revenue earned beyond US borders, their profits will likely drop This excludes the impact of rising costs due to shifting operations to the United States. That said, the impact of protectionism may not be uniform across sectors. For example, since the crisis, the metals, machinery, and chemical sectors have been affected the most 7 out of the top 10 most affected sectors , with their commercial interests hit more than times. The other sectors that were affected the most by G20 protectionism were the transport equipment and agricultural product sectors.
Together, these sectors account for more than a quarter of global trade. In the midst of relative economic stability, rising real wages, and low unemployment rates, grievances about the economic impact of economic globalisation are simply not that powerful. In the southern European countries, however, the enduring impact of the euro crisis makes populist economic arguments far more compelling. That is why it is left-wing populist parties that are winning the most support there, with promises of, say, tax credits for low-paid workers.
Once in power, of course, Syriza had to change its tune and bring its plans in line with reality.
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Calling the rise of populism in Europe a revolt by the losers of globalisation is not just simplistic; it is misleading. If we are to stem the rise of potentially dangerous political forces in Europe, we need to understand what is really driving it — even if the explanation is more complex than we would like. He gratefully thanks Karolien Lenaerts for her excellent research assistance.
The views expressed are attributable only to the author in a personal capacity and not to any institution with which he is associated. An earlier version of this Commentary was published by Project Syndicate , 6 May , and syndicated to newspapers and journals worldwide. It is republished here with the kind permission of Project Syndicate.
Home About us About us. CEPS Academy. Download Publication Downloads. Figure 1. Figure 2. College wage premium in the US The final nail in the coffin of the globalisation-based explanation for the rise of populism in Europe is the fact that the share of low-skilled workers who have not completed a secondary education is declining rapidly. More about this Topic Banking and other Financial services.
About the Author. Author Roberto Musmeci. Project Report. Author Silvia Tadi. Policy Contribution.