Despite Reports of its Demise, Globalization is Alive and Well, But It's Changing a Bit

With the election of Donald Trump and the rise of Populism, again at the beginning of the Covid pandemic, and most recently when Russia's invasion of Ukraine, many political pundits declared the end of globalization, predicting that the new nationalism, Covid-related supply chain issues, and a war in Europe would dramatically reduce international trade and bring on a period of de-globalization and protectionism. Thankfully, those pundits were wrong.

After a dip during Covid-era business shutdowns in 2020, international trade snapped back in 2021 and 2022 despite the war in Ukraine. When everything is tallied, global trade in goods and services will hit a new record of about $32 trillion in 2022. The numbers may decline a bit in 2023 because of a global economic slowdown, but not because nations are giving up on trade. Quite the opposite; nations are still looking for ways to expand free trade across national borders.

Late in 2020, members of the Association of Southeast Asian Nations and five regional partners signed the Regional Comprehensive Economic Partnership [RCEP], one of the largest free trade agreements in history. In January 2021 the African Continental Free Trade Area (AfCFTA) came into force. And, after the fiasco of Brexit, the United Kingdom is seeking trade agreements with about anyone that will listen. Free trade is expanding, not contracting.

Globalization is alive and well because "a reduction of tariff and non-tariff barriers to trade results in greater efficiencies for the domestic economy as a result of comparative advantage and specialization," as British economist David Ricardo explained back in 1817. Since 1947, when the General Agreement on Tariffs and Trade (GATT) was created, trade liberalization has lowered consumer prices, increased global economic activity, and raised living standards around the world. That impact has been especially pronounced over the last 40 years.

The Toronto Star: "Since 1980, enhanced global trade and investment has pulled well over a billion people, mainly in China and India, out of desperate poverty to provide them with life-sustaining work. In other words, globalization has alleviated the suffering of hundreds of millions of our fellow human beings."

Ourworldindata.org: "Globalization has also been a key driver of unprecedented economic growth and as a result, we now live in a world with much less poverty .... In the period in which international trade expanded, the average world income increased substantially and the share of the population living in extreme poverty went down continuously."

Wealthy countries like the United States have also benefited greatly from trade liberalization in goods and services.

GlobalEurope.eu: "when measured in terms of real gross domestic product (GDP) per capita, industrialized countries continue to be the biggest winners of increasing globalization."

Cato Institute: "A 2017 Peterson Institute for International Economics study calculated the payoff to the United States from globalization between 1950 and 2016 to be $2.1 trillion ($2.4 trillion in 2021 dollars), increasing GDP per capita and per household by around $7,000 and $18,000 ($7,900 and $20,400 in 2021 dollars), respectively. These benefits, again, accrue disproportionately to households in the bottom income decile" [in the form of lower prices on goods and services].

There are other reasons that globalization isn't going away. Advances in technology have made it easier and cheaper for businesses to operate globally, and consumers in developed countries have become accustomed to a wide variety of relatively inexpensive goods and services made available through globalization. This demand for diverse products will continue to drive global trade and investment. Globalization also promotes political stability by reducing poverty and promoting economic growth, which reduces the likelihood of social unrest and conflict in the developing world.

However, those who oppose globalization make valid points about the challenges that accompanied trade liberalization, including increased income inequality in many Western nations. Multinational corporations and their investors profited mightily from access to new markets and by taking advantage of lower labor costs in developing countries. Highly educated workers, especially those in the finance and technology fields, experienced much greater gains than those without a college education.

Addressing the Challenges Posed by Globalization:

The answer to this isn't to destroy the international trading system and ramp up protectionism.

Brookings: "Protectionism is not the cure for trade’s shortcomings. Manufacturing firms are not coming back to the U.S.; even if they do, they will do so with a completely different technology of production, employing a small fraction of the low-skill workers compared to 40 years ago. Perhaps more important, protectionism will increase prices, from avocados made in Mexico to iPhones produced in China, reducing the purchasing power of consumers, particularly those with low incomes who tend to consume more of the cheap goods produced abroad."

America and other western nations must do more to address the income inequality caused by globalization and help workers adjust to a changing world. By providing better education, apprenticeships, and career training, policymakers in developed economies can help their societies adapt to the pressures of globalization and technological advance. Training workers for the 21st century will be more successful if our educational institutions, such as community colleges, are upgraded and well-funded. And, no young person that wants an education should be turned away because of their lack of resources.

Retraining for experienced workers should be delivered quickly, efficiently, and through a wider variety of learning pathways, including paid apprenticeships by employers. Governments must also strengthen labor protections and workers' rights to ensure that workers are able to negotiate for fair wages and working conditions. Finally, we must update social safety net programs to ensure that workers have access to basic necessities in case of job loss or other economic hardship.

Changes to Globalization; Risk Management:

Even before Covid, globalization was already changing to address environmental and labor concerns in the developing world. But now risk management is the buzzword in international commerce. The pandemic and the war in Ukraine highlighted the fragility of global supply chains, as many countries struggled to secure essential goods. Corporations and governments are now working to diversify supply chains and reduce dependence on any one country or region. That means locating multiple suppliers abroad or rebuilding domestic sources of essential goods like semiconductors as the United States did with the CHIPS and Science Act in 2022.

Brookings: "For starters, organizations promoting regional economic integration must strengthen the development of regional value chains for strategically important goods – not only electronic chips, but also basic necessities such as food. Avoiding future shortages of essential goods will require firms to shift from just-in-time production to a “just-in-case” model that prioritizes security of supply over optimal cost efficiency."

Conclusion:

International trade will continue to adapt to a changing global business environment. It always has. Wars, global pandemics, and populist politics can slow it down for a time, but policymakers and business leaders understand that a return to protectionist policies would impoverish both rich and developing countries. However, the companies that will flourish in the future will be those that are attentive to geopolitics and other threats and develop multiple supplier relationships in different global regions.

#politics #economics #trade #globalization

By: Don Lam & Curated Content