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Rebooting globalization

The American Enterprise Institute yesterday hosted a panel discussion entitled “Rethinking Globalization: How do we Rebuild Support?” to kickstart a joint project by AEI and Brookings about “Reconceptualizing Globalization.” The panelists were Jared Bernstein (Center on Budget and Policy Priorities), Daniel Drezner (Tufts University), Stephen Hadley (RiceHadleyGates), and Merit Janow (Columbia University). Neena Shenai (AEI) and Joshua Meltzer (Brookings) moderated the discussion.

Shenai highlighted the timeliness of the initiative and stressed the critical importance of understanding globalization’s flaws, which have led to the populist discontent that precipitated the rise of Trump and other leaders whose rhetoric and trade policies threaten the institutional foundations of the post- World War II international order. Shenai asked each of the panelists to identify key factors that have led to the current hostility towards globalization and to propose possible solutions to the issue.

Bernstein began by pointing out that the benefits of comparative advantage-based trade are such that the winners can compensate the losers and still come out ahead. But political realities in the US mean that this does not occur. Instead, the benefits of trade accrue to corporate leaders, who use their political capital to negotiate trade agreements that are advantageous to them, and not necessarily their workers. Thus, the benefits of globalization, a positive sum game, have remained with elites, causing widespread dissatisfaction among the working class, many of whom lose their livelihoods due to trade-associated job destruction.

Further, Bernstein pointed out that wages increased with productivity from the 1940’s until the 1980’s. Since then, wages have stagnated, even as productivity continued to increase. The globalization backlash arises from workers not being fairly compensated for the gains from trade. Globalization needs to be reset in favor of the worker. US workers should be better represented in trade negotiations, and US policymakers should give domestic manufacturers tax cuts. On a monetary policy level, the US should also take aim at currency manipulators.

Hadley traced the origins of current discontent with Western international institutions to the elites’ decision to ignore their deficiencies following the 2008 financial crisis. This refusal resulted in the Tea Party’s political success in 2010, as well as the rise of Trump in 2016. Internationally, US dominance of the Bretton Woods system led new economic powers, like China, to create their own banks, institutions, and trade alliances. The legitimacy of Bretton Woods is thus threatened by domestic pressures within countries in the US bloc, as well as by international pressures.

The solution to the problem, however, does not lie in the destruction that Trump has wrought on global institutions and US alliances since his election. Hadley believes that the US would be better served by reforming Bretton Woods to appease populist discontent, and adjusting these institutions’ leadership structure to better reflect the current, multipolar global political and economic landscape.

Janow agreed that international institutions are a major part of the globalization problem, using her time at the WTO as an example. She argued that the WTO is weak and ineffective. The international trade body should generate its own work program to address its deficiencies instead of relying on the activity of member nations to solve its shortcomings.

In spite of these, Janow emphasized that policymakers should place more weight on what gave birth to multilateralism in the first place as they evaluate its benefits and drawbacks. Global institutions have contributed immensely to world peace and security by significantly raising the cost of war and conflict between trading partners. Further, globalization has reduced the negative externalities associated with individual countries not thinking beyond bilateralism in their approach to international economics. The global system is doomed if people do not believe these basic points.

Drezner questioned whether a globalization backlash was even occurring. The narrative that the 2008 financial crisis inspired a populist groundswell against elite-promulgated globalism is not supported by public opinion polls. In fact, 70% of Americans have supported globalization over the past 10 years, while 75% of Americans favor preserving US alliances over getting better terms on a trade deal. Further, even if there is a backlash, Drezner believes that the domestic economic damage Trump’s aggressive trade policies will cause will provide a strong incentive to not vote anti-globalists into office in the future.

The Bottom Line: Globalization is flawed. Significant portions of the US population have been left behind by current US trade policies. But the bellicose approach president Trump is taking provides no cure. The post-World War II economic order should not be destroyed. It needs to be rebooted, with US workers gaining their fair share of the benefits.

PS: apropos