Globalization Faces Challenges

By: John Browne


For much of the second half of the 20th Century, and even into the new millennium, "Globalization" was the dominant theme used to describe the drift of the world economy. It was widely considered both natural and inevitable that the world economy would continue to integrate and that national boundaries would become less constraining to commerce and culture. And with the exception of the eternal "anti-globalization" protesters, who robotically appeared at large gatherings of world leaders, the benefits of globalization were widely lauded by politicians, corporate leaders and rank and file citizens alike. But a casual glance at the world headlines of 2016 suggests that the belief in globalization has crested, and is now in retreat. What are the consequences of this change?

International trade has existed for millennia. But few modern historians would characterize the trade caravans that crossed the Himalayas and the Sahara as sources of international conflict.

Rather, they are widely seen as a useful means to bring goods that were plentiful from one region to other regions where they were scarce. Along the way, routes like the Silk Road in Asia created a great number of positive secondary benefits in culture and politics. But relatively modern developments such as ocean-going sailing ships, modern navigation, and steam and diesel power, have greatly increased the size and scope of trade. Globalism was also boosted rapidly by technological advances in communications, including intercontinental jet travel, fax machines, satellite telephones, the Internet, real time money transfers and massive investment flows to international and emerging markets.

Since the end of WWII, the establishment of international reserve currencies and the rise of supranational organizations, such as the United Nations, The World Bank, and International Monetary Fund, has saddled trade with more political baggage. The rise of bi-lateral and multi-lateral trade negotiations, which are often shadowy and bureaucratic affairs conducted behind closed doors, have further eroded support for trade. Oftentimes these efforts have resulted in deals that clearly favor politically connected players and have given rise to justified accusations of cronyism. By opening larger markets and reducing costs, certain corporations have amassed shocking wealth. The benefits to workers are far more diffuse and difficult to quantify.

The Harvard Business Review of May 13, 2016 published an article by Branko Milanovic about the unequal distribution of wealth generated by globalism. Milanovic comments that, since the mid-1980s, globalism has resulted in the "greatest reshuffle of personal incomes since the Industrial Revolution. It's also the first time that global inequality has declined in the past two hundred years." Milanovic points to two main conclusions. First, he highlights the massive percentage gain in wages in Asia, particularly among the middle classes. In some cases, percentage wage gains in the Asian middle class have eclipsed the percentage gains experienced by the top one percent in the richer Western economies.

In stark contrast, the U.S. and Western lower and middle classes have enjoyed almost no percentage wage increases, while their top one percent was the only group to experience significant income gains, based on available household surveys from 1988 to 2008. A recent unpublished paper by John E. Roemer, a political scientist at Yale, suggests that the diminishing of global inequality made possible by trade is far less potent politically than the relative increases in national inequality. In other words, the benefits of globalism are obscured while the costs are highly visible.

The agricultural revolution that occurred in the United States in the early 20th century greatly diminished the need for farm workers. But the change spanned two generations and allowed time for migration and adaptation for factory jobs. The globalism that we have seen in the last 20-30 years has been even more rapid and transforming.

Enabled by their wealth and past successes, the developed nations have, over the past few generations, adopted labor policies that have made them less able to compete against lower cost manufacturers in the developing world. This has widened the divide between white collar and blue collar workers. Long-term unemployment among normally hard-working people can lead to the loss of a sense of worth, depression and to dangerous dependencies on drugs and alcohol, even to suicide. It poses risks to social and political stability. These concerns are now expressing themselves politically.

Nowhere has globalization been championed harder than in the European Union. Lingering devastation from two world wars led many to look to greater integration, both within Europe and without, as a means to achieve lasting peace. However, the creation of the EU super state has trampled the local autonomy of once proud nations, and has convinced voters there that globalization is fundamentally undemocratic. This erosion of trust in government elites, and the free trade they promote, has led to a backlash. The successful Brexit vote was the clearest manifestation of this trend. But it is likely not the last.

More recently, a high profile trade agreement negotiated by 27 governments over seven years (that would have theoretically benefited 500 million citizens of the EU and 35 million Canadians) was killed by the objections of 3.5 million Belgian Walloons (B. McKenna, The Globe and Mail, 10/25/16). Notably, the Belgians' reluctance did not appear to stem from their desire to protect a specific domestic industry but from their general views about how globalization supposedly punishes workers. The New York Times had reported last Friday the Canadian International Trade Minister, Chrystia Freeland, as saying, "...the EU is not capable now to have an international deal, even with a nation with such European values like Canada."

Much will depend upon how the EU adapts to the new political climate precipitated by Brexit.

If it fails to do so adequately, its euro currency could become suspect. As the world's second currency, this would have serious implications for the international monetary and investment communities.

A similar populist angst has evolved in the U.S. giving rise to the unanticipated voter appeal of Presidential candidates like Bernie Sanders and Donald Trump. Ominously, anti-trade rhetoric is on the rise on both the left and the right of the political spectrum. Even the Clintons, once the standard-bearers of the free trade center, have turned against the principles of Globalism. As a candidate, Hillary Clinton has turned against the Trans Pacific Partnership that she backed as Secretary of State, and has even fallen into criticism of NAFTA, one of the signature achievements of her husband's presidency.

The recent episodes with Apple Computer and Deutsche Bank also offer potentially dark previews of how anti-globalization forces could impact corporations and economies. While they remain separate issues on paper, the government confrontations that currently embroil the two companies have led many to determine that they are linked.

In September, Apple Computer, perhaps the U.S.' premiere technology and industrial company, was fined a staggering $14 billion by the European Union for having supposedly transferred taxable income, derived throughout the European Union, to the low tax jurisdiction of Ireland, thereby evading taxes that should have been paid to many other EU nations.

Although the tax structures had been created by the Irish government (that fought hand in hand with Apple against the EU), Brussels nevertheless held Apple liable. The decision also invoked howls of condemnation from Washington, where many claimed Europe was capturing taxes that rightly should have been shipped back across the Atlantic.

Just two weeks after the broadside against Apple, the U.S. Department of Justice announced a $14 billion fine leveled against Deutsche Bank, Germany's premiere financial institution, stemming from "irregularities" in the bank's mortgage finance business in the years leading up to the financial crash of 2008. While many U.S. banks were hit with similar fines for similar conduct, the size of the Deutsche Bank fine was much larger than had been anticipated. The Bank claimed that it did not have the resources to pay and the German government has voiced its own displeasure at the heavy-handed treatment from Washington. Many have suggested a quid pro quo related to Apple. If so, such disputes in the future could threaten global economic cooperation.

Pressures on politicians likely will rise dramatically to ensure more equitable sharing of new national wealth, and the protection of traditional domestic industries. This will inspire them to suggest popular sounding protectionist policies, further exacerbating the economic stagnation on display in the West, and perhaps increasing global instability and mistrust.

Those countries that embrace free and fair trade with new technologies stand to reap great rewards.

Those who do not, and revert to trade protectionism, could experience economic recession and monetary adversity accompanied by serious social and financial upheaval. But like everything else in the world today, the trends do not look benign.

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