International trade

Managing Winners and Losers in Globalizing Economy

Globalization has produced winners and losers, which has soured many Americans and US policymakers on the undisputed benefits of free trade. The problem may not be trade, but the failure of US policy to keep pace with demands in a more competitive global economy.

Globalization has produced winners and losers, which has soured many Americans and US policymakers on the undisputed benefits of free trade. The problem may not be trade, but the failure of US policy to keep pace with demands in a more competitive global economy.

Based on the 2016 election, Americans seemingly soured on international trade. But that may not be an entirely accurate perception.

The election focused on workers dislocated by globalization. Less attention went to the benefits of trade, such as low-cost apparel and year-round fruits and vegetables. Foreign-sourced clothing has enabled American families on average to reduce spending on clothing from 7 percent to 3 percent of total household budgets.

Right or wrong, trade policies produce winners and losers. The losers received the attention in 2016, not inappropriately. US policies to compensate dislocated workers have been inadequate and, at times, non-existent. But that oversight does not override the everyday benefits that freer flowing international trade has brought to a broad swath of Americans.

Innovation Hub, an NPR program airing over the weekend, carried an interview with Edward Alden, author of “Failure to Adjust: How Americans Got Left Behind in the Global Economy.” Alden argues that America at large has benefitted from trade, but at the expense of some Americans who lost their jobs. The impact was predictable, as far back as 1971, but US policymakers have by and large dodged responsibility for finding ways to compensate trade losers, unlike many foreign contemporaries.

That responsibility, Alden says, includes both showing respect for dislocated workers and preparing the next generation to compete in a global economy.

Pete Peterson, an economic adviser to President Nixon, wrote a prescient paper in 1971 citing the upside of international trade and the dangers lurking in the future. He accurately predicted that some American workers would be left behind by globalization and implored for policies to prepare Americans for intensified global competition. You can’t say we weren’t warned.

“A program to build on America’s strengths by enhancing its international competitiveness cannot be indifferent to the fate of those industries, and especially those groups of workers, which are not meeting the demands of a truly competitive world economy,” Peterson wrote. “It is unreasonable to say that a liberal trade policy is in the interest of the entire country and then allow particular industries, workers, and communities to pay the whole price.”

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Today, trade has become a four-letter word. Republicans and Democrats have made protectionist arguments for border taxes, punitive penalties for US corporations moving manufacturing overseas and dumping or renegotiating trade agreements such as the Trans-Pacific Partnership. Nobody cried when President Trump withdrew from the TPP, even as China quietly stepped in to fill the void left by the United States.

That is exactly the point Peterson made in 1971. Much closer to World War II, Peterson could foresee the rise of a new generation of industrial leviathans, starting with Germany and Japan, which the United States helped to resuscitate. It may have been harder back then to project the economic rise of China, let alone Vietnam, India and Brazil.

Alden’s view aligns with Peterson’s. You can’t stop the ineluctable move toward globalization, but you have to adapt. Clinging to the past is like playing poker without ever looking at your cards. It also ignores the fundamentals of why globalization has advanced – trading partners are less likely to engage in war and free trade rewards the economy of advantage, whether it is technological innovation or low wages.

Trade pacts are intended to create rules that sufficiently even out advantages and disadvantages in bilateral or multilateral arrangements, but not necessarily to erase all disadvantages. Those disadvantages can be groups of workers or communities dependent on businesses on the decline.

Automation can amplify the perceived effects of globalization on job losses. Factories may remain in the United States, but employ fewer people because assembly lines are manned by robots. Remaining jobs are for people with different skills, such as running sophisticated machine tools or designing computer programs.

Digital technology has led to greater international integration, generating a flood of information flows that is reaching all corners of the globe. Information has become less proprietary and in many cases the cost of entry into business sectors has been significantly or totally erased, creating new waves of competition, such as outsourced tax preparation in India. There is evidence to suggest that cross-border data flows are becoming the most dominant form of international commerce.

One of the ironic twists of a more competitive global economy is the investment in the United States by foreign-owned companies. Asian and European auto makers manufacture vehicles in the United States, both to sell here and export elsewhere. Taiwanese-based Foxconn announced plans to build what it called a multi-billion-dollar manufacturing facility to produce Apple iPhones. It also has plans for an R&D facility in Michigan for self-driving cars. Chattanooga Tennessee sports two dozen foreign-owned companies that have helped lower the state’s jobless rate to 3.6 percent, a record low.

Traded goods are just a part of international commerce. The movement of capital, supported by financial services, plays a significant role. That’s why large banks are closely watching the details of Great Britain’s exit from the European Union, which could create barriers to service free-flowing capital. Data indicates financial flows have more than doubled since the beginning of the 21st Century.

Alden concludes that opposition to trade deals and globalization is the result of ignoring advice Peterson gave Nixon almost half a century ago. A more competitive world demands American keep its competitive edge, promoting innovation, investing in modern infrastructure, ensuring top-notch education and getting serious about retraining workers who suffer dislocation caused by trade (or by automation).

Today’s disillusionment with trade is linked to growing economic inequality, itself a reflection of a nonchalant attitude toward global competitiveness. People frustrated with their economic lot often blame immigrants. A better focus for their anger might be US policymakers who have failed to do what’s necessary to keep America competitive.

Restricting Free Trade to Save Free Trade

Globalization has come under sharp scrutiny in the 2016 presidential election, exposing deepening political fault lines. Harvard professor and author Dani Rodrik offers ideas for how to save international trade by giving individual nations a license to restrict trade to protect domestic economic and political institutions. (Illustration by Andrew Holder/New York Times)

Globalization has come under sharp scrutiny in the 2016 presidential election, exposing deepening political fault lines. Harvard professor and author Dani Rodrik offers ideas for how to save international trade by giving individual nations a license to restrict trade to protect domestic economic and political institutions. (Illustration by Andrew Holder/New York Times)

Globalization has gotten a black eye in the 2016 presidential election and in the Brexit vote in the United Kingdom, but populist opponents have offered few tangible alternatives other than a trade war, rejecting the Trans Pacific Partnership or trying to renegotiate existing trade deals.

Dani Rodrik, a Harvard professor and author, offers suggestions in a New York Times op-ed that will annoy populists, labor unions and globalization cheerleaders. He says to preserve free-flowing trade – and the democracies the engage in it – will require giving individual nations the autonomy to protect their own interests. 

“Globalization has deepened the economic and cultural divisions between those who can take advantage of the global economy and those who don’t have the resources and skills to do so” Rodrik wrote. “Nativist politicians like Donald J. Trump have channeled the resulting discontent as hostility to outsiders: Mexican or Polish immigrants, Chinese exporters, minorities.” 

Rodrik’s solution is to cap “hyper-globalization” and replace it with a form of globalization with increased national autonomy. For example, he says nations should be able to place restrictions on cross-border transactions that involve worker or environmental rights violations.

That sounds eerily similar to the kind of trade restrictions that globalization and free-trade agreements have sought to eliminate. Rodrik claims some trade trimming will be necessary to salvage the basic idea of free trade, which he notes has “pulled 700 million people out of poverty." “Globalization,within limitations,” he says, “has been good economics. Globalization, within limits, can be good for our democracies, too.”

In his op-ed, Rodrik offers four specific suggestions:

  • Give individual nations the autonomy to choose trade-related institutions that best represent their interests and reflect their risk-tolerance.
  • Countries should be able to prevent “regulatory arbitrage” whereby corporations circumvent national labor or environmental laws by moving operations to offshore locations.
  • International economic negotiations should pivot on domestic policy autonomy combined with increased trade transparency to ensure both sides keep their commitments.
  • Global governance should focus on enhancing democracy, not globalization.

“Global governance cannot overcome major problems like inequality, social exclusion or low growth,” Rodrik says. “But it can help by devising norms that improve domestic policy transparency, public deliberations, broad representation, accountability and use of economic evidence in domestic proceedings.”

Interesting by its omission is mention of reforms to trade adjustment assistance, which has drawn criticism for being inadequate and training dislocated workers for jobs that don’t exist in their community – or at all.

The fundamental question raised by Rodrik’s call for a “little-less-free trade” is whether a little would turn into a lot. Nations already file actions alleging unfair trade practices that range from “dumping” products at low costs to self-serving tariffs that make imported products noncompetitive. The license to protect domestic economic interests could embolden industry, labor and environmental advocates to push for greater protections, which could trigger what amounts to trade wars between nations or international regions.

Rodrik also doesn’t address the issue of globalization of financial markets, which dwarf the movement of goods and services across national boundaries. Restricting the flow of money is considerably more complex and can be tied up with another international bugaboo – concessionary tax policies and tax havens.

None of this discounts the value of the conversation Rodrik’s op-ed started, which highlights the many moving pieces that must be addressed to find a balance that benefits consumers without unduly exposing workers to economic discoloration and ultimately posing a challenge to democratic governance.