The Bank for International
Settlements (BIS), the international body based in Basel, Switzerland that
represents the world’s central banks, claims in its latest annual report that
globalization is a “scapegoat” for rising inequality, as it launches a defense
of closer cross-border ties and integration.
You didn’t
get a copy and read every word of it? Well, the news might have been tucked
away on the back pages of your local newspaper. It certainly didn’t make it to
the big screen in your living room.
Here’s the
gist: the bankers are worried. Very worried.
Truth is,
globalization is ebbing while economic and political populism is surging.
Globalists no longer provide the accepted set of rules for the political and
economic order. Transnational, multilateral, and supranational organizations
and their networks, experts, and regulators are everywhere on the defense.
Cosmopolitan and globalist values are not ascendant.
As a matter
of fact, national sovereignty is back and growing stronger, week by week, month
by month. We see it most clearly in President Trump’s principled realism,
called “America First.”
Like the
19th century version of populism that rallied against the gold standard,
today’s economic populism is similarly anti-establishment, anti-elitist, and
opposed to all forms of globalization and globalist governance.
Economic
history and economic theory both provide strong reasons to
suggest that the advanced stages of globalization are proof statements for the
populist backlash, in both its right- and left-wing variants, and everywhere
from Brexit and the Trump election to current European politics and unrest
throughout Latin America.
Whether
along ethnocultural cleavages or along income-class lines,
these forms of populism are a predictable and logical result. It should
surprise no one, including globalists, that the pendulum has swung so far in
this direction.
In fact,
analytically there are two sides to populism: demand and supply.Economic
anxiety generates a base for populism but does not determine its particular
political narrative—that storyline is left to various populist politicians and
movements, which are on the rise today, worldwide. National greatness in one
place does not diminish it in another place. There is no reason why all nations
cannot articulate their individual greatness and in their self (national)
interest interact in the world in a more peaceful and benign fashion.
Actually,
it is the economics of trade and financial integration that provide the
politically contentious backdrop to all globalization. Trade theory, such
as the well-known Stolper-Samuelson
theorem, shows that there are sharp distributional implications for
open trade—in other words, free trade is not a “win-win.” Losers are
inevitable.
And those
who lose are generally low-skilled and unskilled workers. Trade liberalization
raises the domestic price of exportables relative to importables. Go to any
Walmart, if you want to check out this phenomenon first hand. Where is
everything made?
There is an
inherent form of redistribution at work here—the flip side of the benefits of
trade. Overall as globalization advances, trade agreements themselves become
more about redistributing and less about expanding the economic pie. The
political fallout is clear: globalization, the opposite of national interest,
has become more and more contentious, if not unsustainable.
The
empirical evidence bears this out. From NAFTA, which has cost the United States
some $3.5 trillion over the last decade, to the widening U.S.-China trade
deficit, the American economy has enjoyed few overriding efficiency gains from
globalization. What we have, instead, are large trade imbalances, income
stagnation among middle earners, and other nasty social side-effects. Talk to
any middle-class family or visit any town or factory in the affected dire areas
and you can gain first-hand knowledge, up close and personal.
The overall
benefits of globalization are zero to negative. Trade was supposed to be based
on reciprocity and growth, but it turned out to be a sham.
Have those
“left behind”—the “forgotten silent majority,” in Trumpian terms—been
compensated from the clear effects of globalization? No, not really.
The
benefits of international trade as originally argued by Adam Smith and its
subsequent canonization ignores important historical differences. A displaced
worker in our modern technological age (unlike a day-laborer or farmer in the
18th century) already has a home mortgage, car payments, tuition for his
children, and lots of other overhead. Merely switching careers or retraining is
not so simple for many people. Truthfully, it is more than difficult,
especially for middle-aged workers who have generally worked one job and in one
place.
The share
of U.S. imports in GDP went from less than 7 percent in 1975 to more than 18
percent in recent years, but the imbalance has provided little of what’s called
trade adjustment assistance.
Why?
Because it is very costly—and politicians on all sides of the
spectrum make a lot of promises they simply do not keep.
All
economists know that trade causes job and income losses for some groups. Those
same economists deride the notion of “fair trade” as a kind of fiction, but
that’s clearly not the case as we see with anti-dumping rules and countervailing
duties. These are dubbed “trade remedies” for a reason. And don’t forget what
might be called “social dumping”—where one country literally dumps
its unemployment potential elsewhere or subsidizes inefficient production
forever, regardless the cost.
But what
about operational mobility and the so-called benefits of financial
globalization? The distinction between short-term, “hot money” and financial
crises and long-term capital flows, such as foreign direct investment, is
significant. One is disruptive, the other enhancing. One is patient and the
other imprudent. So why is it that the timing of financial globalization and
the occurrence of banking crises coincide almost perfectly?
Recurrent
boom-and-bust cycles are familiar to less developed countries, but now appear
to have spread to the European Union and the United States. Financial
globalization has, like trade, exerted a downward pressure on the labor share
of income.
Has anyone
ever heard this line? “Accept lower wages, or we will move abroad!” The other
week, I met a gentleman in Ohio who ran a large battery-manufacturing unit
there and had recently moved, as the boss, to Mexico. I asked him about the
thousands of workers in Ohio. “They are gone,” he said. “We hired far cheaper
Mexican ones in Juarez at just a fraction of their hourly wage.”
Those with
lower skills or qualifications are the least able to shift or move across
borders and are most damaged by this sort of risk shifting. But soon, so too,
will be the accountants, architects, engineers, software developers, and every
other white-collar worker.
It has also
become harder to tax global mobile capital. That is because capital moves to
the lowest rate tax haven and uses transfer pricing to disguise profits. Taxes
on labor and consumption are much easier to collect, and they have gone
increasingly up and up.
Globalization,
we were told, had a big upside. This is the bill of goods the public has been
sold for decades. In fact, globalization has only helped the
few: exporters, multinationals, and the large international banks, as well as
certain professionals and the very top management.
It surely
helped some countries, such as China, which rapidly transformed peasant farmers
into low-cost manufacturing workers, thereby reducing poverty. But all those
jobs were at the cost of “old jobs” in America’s Rust Belt. In effect,
globalization was a definite and planned wealth transfer from one place to the
other, which has gone largely unreported.
There is
another side of the not-so-glossy globalization coin: increased domestic
inequality and exacerbated social division. The benefits and monetary flows
sold to the unknowing public turned out to be all one-sided and went exclusively to
the very highly skilled, to employers, to cities, to cosmopolitans, and to
elites—not to ordinary working people.
The United
States and Europe have been ravaged by financial crises, decades without a
raise in pay or the standard of living for the masses and by the effects of
austerity—while the few got richer. Globalization gutted the existing social
contract and ushered in a stigma of unfairness—in what is called “a rigged
system.”
The playing
field was hardly level. The winners took all and Goldman Sachs
bankers always seemed to come out on top, whether they were selling distressed
mortgage debt or shorting it (sometimes simultaneously).
In the end,
the economics of globalization and of globalist agency are, we have discovered,
not politically sustainable. Economic integration (in the EU or globally) has
definite and unacceptable real costs that the people cannot and will not bear.
This explains the rise of economic and political populism.
Economic
populism and its political cousin, political populism, are a necessary antidote
and a reality check to excessive globalization and globalist values and
institutions. BIS be wary.
About the Author: Theodore
Roosevelt Malloch
Theodore Roosevelt Malloch is a
scholar, diplomat, and strategist who was active in the Trump campaign. He
previously served in the Reagan State Department and the U.S. Senate Committee
on Foreign Relations, before taking the top American position inside the United
Nations in Geneva.
