Globalisation loses its power as international markets meet huge political protest and become irrelevant. Some of the most noticeable pieces of evidence are Brexit and the results of the US elections. Critics around the world say the future of global commerce isn’t the brightest.
Some of the troubles of the international trade are described by different politicians, including Donald Trump, Bernie Sanders, and Nigel Farage. Very often global trading cuts the strength of domestic fields of industry, which affects not only the countries’ economies, but also the number of working places. However, the coin has another side, and economic nationalists say it will improve the situation and compensate the troubles. Free trade and openness of the economic are reported to have amazing benefits for the countries.
The strongest reason people still don’t get it is the financial crisis that has put international markets in danger. No one has yet found a convincing explanation but world trade volumes have grown by an average of only 3 per cent annually since 2009. That compares with an annual average growth rate of 6 per cent between 1980 and 2008.
Throughout the postwar era, with the brief exception of the early 1970s, trade has expanded faster than global GDP. The disappointing performance of trade since the financial crash is reflected in the painfully sluggish recovery throughout the advanced industrial economies. Weak growth and declining real incomes understandably make voters discontented. But globalisation is not the culprit and exiting the European single market or abandoning the two main trade agreements negotiated by the Obama administration is no route to prosperity.
This isn’t the first time that globalisation has fallen into disfavour. In periods of economic stress, bad policies gain superficial plausibility. Economic nationalism, in the form of tariff barriers, was not the cause of the Great Depression in the 1930s (historians blame instead the policy of the gold standard) but it had damaging effects. World trade volumes contracted by more than 50 per cent in only three years after the stock market crash of 1929. One much more recent example of economic stress is the decline of the British steel industry.
A collapse in world prices has caused thousands of job losses and closures at sites in south Wales and the north of England. Much of the reason for the price weakness, and hence big losses racked up in British steel, is a glut of supply from Chinese manufacturers. Steel workers’ livelihoods are threatened, which is doubtless why the allied causes of Brexit and Ukip have proved popular in previous Labour strongholds in south Wales.
It’s tragically misguided to withdraw from foreign trade and investment flows, even so. The political case for globalisation may be languishing but the economic case is strong. World trade is not a zero-sum game, in which there are relative winners and relative losers. Almost all economists conclude that, when two countries trade, the real incomes of both are generally raised. That’s because they can specialise in production; even if one party is more efficient in absolute terms in all tradable sectors, it’s still beneficial to both countries to trade.
Economic commentators have pointed apprehensively to Britain’s wide current account deficit, amounting to nearly 7 per cent of GDP in the first quarter of 2016. That’s definitely a risk and a weakness, given that our external imbalance needs to be funded and Britain’s future place in the international trading system is unknowable at present. But it’s not at all the case that our external deficit shows that we’re uncompetitive or that we’re losing good-quality manufacturing jobs and replacing them with poorly paid service jobs. Britain has economic weaknesses but the idea that our industrial base is being hollowed out by unfair international competition isn’t true. It would be more accurate to say that advanced industrial economies such as the US and the UK have seen job losses in some import-sensitive manufacturing sectors but job gains in higher-paid, higher-value sectors.
It’s hard to see this at a disaggregated level, though. A sector that has shrunk substantially in a generation is textiles (my home city of Leicester was once a world leader in it). Production has certainly shifted to other markets. One study of the US textile and apparel sector concludes that it lost nearly one million jobs between 1990 and 2014. The loss of these jobs, partly through technology and partly through trade, has been more than made up for in other sectors but laid-off textile workers are unlikely to find work in them. They won’t have the necessary skills to work in, say, aerospace. That will be a problem for steelworkers too.
Joseph Stiglitz, the Nobel laureate, summarises the issue neatly: “Economic theory does not say that everyone will win from globalisation, but only that the net gains will be positive, and that the winners can therefore compensate the losers and still come out ahead.” It’s the compensation that’s hard to agree on. Helping workers who are displaced is bedevilled by the problem of accurately measuring the effects of trade as opposed to, say, technological change or a permanent loss of industrial competitiveness. But the problem is pressing. Minimum-wage legislation, a strong social safety net and government investment in reskilling are all needed. Otherwise voters will turn — as some already have done — to snake-oil remedies that threaten their living standards even more.