This week we want to offer you the reading of a surgery in the “Financial Times” by a very lucid and determined Martin Wolf. The intervention of one of the most influential observers in the world focuses on ongoing debate on globalization and its fortunes.
Against globalization, which in its current form could be started from China's entry into the WTO in 2001, powerful headwinds are blowing and undoubtedly we are moving towards an overall redefinition of world trade and of the same economic structures shaped on that model.
A process that is not like a glass of water and against which the most disparate and eccentric theories come forward.
Globalization is not dead writes Wolf. Maybe she's not even dying, but she's changing. In this process, the institutions that represent it, in particular the World Trade Organization (WTO), are also forced to change. We are going to a different and much more difficult world. But, in setting our new course, we have to avoid some mistakes. Here are at least seven.
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1. Focus on trading only
The first is to focus only on trade. As Maurice Obstfeld, former chief economist of the International Monetary Fund, has observed, the current fluidity of global capital markets has generated waves of financial crises, bringing few obvious benefits. Not enough attention is paid to this state of affairs, mainly because the interests in favor of free capital flows are very strong and their economic impact is very difficult for most people to understand.
2. Considering globalization a catastrophe
The second is the common perception that the era of globalization has been an economic catastrophe. It was not so. In a recent memo, Douglas Irwin of Dartmouth College notes that between 1980 and 2019 almost everyone countries have become substantially richer, global inequality has declined and the share of the world's population in extreme poverty has fallen from 42% in 1981 to just 8,6% in 2018. I make no apologies for advocating for policies that have delivered such results.
3. Link inequality to trade
Third is the idea that rising inequality in some high-income countries, particularly the United States, is the result of trade opening or, at least, a necessary consequence of that opening. Evidence and logic say otherwise. Indeed, this is a superfine example of “lamp post economy”, that is, the expedient of concentrating attention and blame where politics projects the strongest light. It's easy to blame foreigners and invoke trade barriers. But the latter are a tax on consumers for the benefit of all those who work in a specific sector. It would be better to tax e redistribute income in a less arbitrary way and fairer and more efficient.
4. Blaming lack of self-sufficiency
Fourth is the assumption that greater self-sufficiency could have protected economies from supply chain disruptions and bottlenecks, at affordable cost. Listen to the people of the country forced into a three-day week by a miners' strike in 1974. They will tell you that this supposition has never been plausible. The recent shortage of infant formula in the United States is another example. More diversification of the offer makes sense, even if it can be expensive. Investing in stocks can also make sense, even if it will be expensive. But the idea that we would have overcome Covid 19 and its aftermath if every country had been self-sufficient is ludicrous.
5. Believing that trade is optional
The fifth is the idea that trade is an economic optional. Here it is a trade policy paradox: the countries that matter most in trade are those for which trade matters least (see figure below). The United States is the only economy in the world that could conceive of being largely self-sufficient, even if that choice would be costly. Smaller countries depend on trade and the smaller they are, the more they depend on it. Denmark or Switzerland could not have achieved their current prosperity without it. But the big countries (or, in the case of the EU, the big trading blocks) determine the world trading system, because they have the biggest markets. Therefore, the trading system depends on those who have the least need. Smaller countries must try to balance this state of affairs.
6. To think that we are in an era of rapid deglobalization
Sixth is to assume that we are already in an age of rapid deglobalization. The reality is that the ratio of world trade to output is still close to historic highs. But it stopped growing after the 2007-2009 financial crisis. This is the result of decrease in new opportunities. Global trade liberalization essentially stalled after China joined the WTO in 2001. The world has now largely exploited the trade opportunities that had opened up. But, as pointed out by the World Development Report 2020 of the World Bank, this is a loss: the ability to participate in global value chains has been a driver of economic development. These orOpportunities need to be spread more widely, not less.
7. Considering the WTO superfluous
The latest mistake is the idea that the World Trade Organization is superfluous. On the contrary, both as a place for agreements and as a forum for global discussion, it remains essential. All trade involves politics (and therefore the politics) of more than one country. A country cannot "take back control" of trade. It can only decide the policies of its own side. But if companies are to make plans, they need predictable policies on both sides. The more they depend on trade, the more important this predictability becomes.
Here because international agreements are essential. Without them, the recent downturn would certainly have been greater. The WTO is also needed to ensure that regional or plurilateral agreements can fit into a set of agreed principles. Nor is it the place to discuss strictly trade-related issues, such as the digital economy, the climate or the biosphere. Some seem to think that such discussions can happen without an engagement with China. But China is too important for that to be possible.
As Ngozi Okonjo-Iweala, director general of the WTO, noted in April, the impact of new entrants, rising inequalities within countries, the global financial crisis, the pandemic and now the war in Ukraine “have led many to conclude that global trade and multilateralism – two pillars of the WTO – are more problems than opportunities. They argue that we should withdraw into ourselves, produce as much as possible on our own, grow as much as possible on our own." Would be a tragic madness: think of the economic damage that would be caused by reversing much of the trade integration of recent decades.
However, the upheavals of our age – especially the rise of populism, nationalism and conflicts between great powers – call into question the future of global trade. How should we try to reshape trade and trade policy?
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By Martin Wolf, The big mistakes of the anti-globalisers, “The Financial Times”, June 22, 2022
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Martin Wolf is chief economic commentator for the London-based Financial Times. He was awarded the CBE (Commander of the British Empire) in 2000 "for services rendered to financial journalism". In 2012 he also received the Ischia International Journalism Award. He is the author of many publications on globalization and finance.
