Globalization’s prospects, 2017

2016 was a rough year for globalization. And 2017 may get even rougher.

By globalization, I mean the growing interconnectedness between economies through cross-border flows of goods and services, money, and people.

The world has undergone two “eras of globalization” during the past century and a half. The first occurred during the 40 years or so before World War I. For most of the 19^th century, countries maintained high tariffs (import taxes) in order to protect their domestic economies from foreign competition. In 1846 Britain, faced with millions of starving people in famine-ravaged Ireland, unilaterally repealed tariffs on imported grain. The rest of the industrialized world soon followed by lowering tariff rates (see Figure 1). Concurrently, the spread of the gold standard made it easier to transact business across national borders, since the money that was being sent was not really francs, marks, or pounds sterling, but their equivalent in gold.

World War I was bad for globalization. Countries at war prefer to destroy their enemies’ goods than to trade for them. Typically, countries at war try to make themselves as self-sufficient as possible in consumer goods and war materiel. The war also led to the demise of the gold standard, reducing the ease with which money could cross borders.

If World War I wounded globalization, the Great Depression killed it. Countries in recession demand fewer goods and services than those that are prospering, and hence trade less. Further, the decline in economic activity led countries to try to increase demand for domestic goods by increasing tariffs on imports (see Figure 2). And, despite several attempts, the pre-war gold standard was never successfully resuscitated.

Following World War II, the leading industrialized countries tried to resurrect the pre-World War I trading system based on fixed exchange rates and lower tariffs. Fixed exchange rates were reestablished, although they only lasted until the 1970s. The General Agreement on Tariffs and Trade (GATT), established in 1948 with the goal of reducing tariffs across the board on a multilateral basis, has been more durable. From its establishment until recently, tariff levels have fallen and trade has expanded. In addition to the GATT (and its successor, the World Trade Organization), regional trade pacts—such as the European Union and North American Free Trade Agreement, have lowered trade barriers even further and promoted cross-border trade. These developments have been welcomed by economists, who believe with near unanimity that trade liberalization improves aggregate economic welfare, while recognizing that not all sectors of the economy and workforce benefit from it.

And then the Great Recession hit. Like the Great Depression before it, the Great Recession gave some people second thoughts about free trade, even though there were no explicit calls for a retreat from free trade in the aftermath of the subprime and European sovereign debt crises.

Fast forward to 2016. In June, the British voted to the leave the European Union, the world’s largest multinational free trade bloc. In November, the United States elected Donald Trump, who spent much of 2016 campaigning against existing trade deals, such as NAFTA, and  proposed trade deals, such as the Trans-Pacific Partnership (TPP) and the Transatlantic Trade and Investment Partnership (TTIP). In the wake of Trump’s election, Republican Congressional leaders have declared both the TPP and TTIP dead.

What can we expect for globalization in 2017?

The anti-globalization forces continue to gain strength. At the end of 2016, the constitutional reform referendum backed by Italian Prime Minister Matteo Renzi was soundly defeated—with the help of anti-globalization parties—leading to Renzi’s resignation. If his successor falters, new elections in Italy could result in anti-globalist parties coming to power and taking Italy out of the EU. In France, the anti-immigrant National Front’s Marine le Pen is expected to make it into the final round of the presidential election in the coming spring. Le Pen has campaigned for France to exit the European Union. Germany is also facing elections in 2017 and the right wing anti-EU Alternative für Deutschland party is expected to enter the Federal Parliament for the first time, although it is not seen as an existential threat to the pro-EU center-right Chancellor Angela Merkel and her pro-EU center-left coalition partners.

Economists believe that greater globalization increases overall economic opportunity, even though it may have a negative impact on certain sectors of the economy. Voters, on the other hand, are less concerned with aggregate national economic welfare than they are about their own economic situation. If trade is viewed as the enemy, they will take their anger out on globalization. Will this lead to a disintegration of the world trading system of the sort we saw during the Great Depression? Although the current high level of global inter-connectedness suggests that a complete collapse is unlikely, it is not impossible that we are witnessing the beginning of the end of the second era of globalization.

Featured image credit: globe earth travel by kaboompics. Public domain via Pixabay.