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Can globalization be reversed (wonkish)

Summary:
The term “globalization” came into widespread use in the 1990s, about the same time as Fukuyama’s End of History. As that timing suggests, globalization was presented as an unstoppable force, which would break down borders of all kinds allowing goods, ideas, people and especially capital to move freely around the world. The main focus was on financial markets, and the assumption was that only market liberal institutions would survive. The first explicit reaction against globalization to gain popular attention in the developed world[1] was the Battle of Seattle in 1999, but the process, and the neoliberal ideology on which it rested, didn’t face any serious challenge until the Global Financial Crisis of 2008. The Crisis destroyed Neoliberalism as a political project with positive

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The term “globalization” came into widespread use in the 1990s, about the same time as Fukuyama’s End of History. As that timing suggests, globalization was presented as an unstoppable force, which would break down borders of all kinds allowing goods, ideas, people and especially capital to move freely around the world. The main focus was on financial markets, and the assumption was that only market liberal institutions would survive.

The first explicit reaction against globalization to gain popular attention in the developed world[1] was the Battle of Seattle in 1999, but the process, and the neoliberal ideology on which it rested, didn’t face any serious challenge until the Global Financial Crisis of 2008. The Crisis destroyed Neoliberalism as a political project with positive appeal, but its institutions have remained in place through inertia.

Now, however, globalization is finally facing serious threats, most immediately from the nationalist[1] right, seeking to restrict movement of people and goods across national borders. There hasn’t yet been any serious challenge to financial globalization, but faith in the wisdom and beneficence of financial markets has disappeared.

An obvious question here is: can globalization be reversed? My short answer is: within current political limits globalization can be reversed least partially in the case of trade, but can only be slowed in the case of movements of people. I’m still thinking about financial flows.

Starting with trade, the reaction to Trump’s various trade wars has shown that the 21st century system of world trade based on complex supply chains involving many different countries is quite fragile. An across-the-board tariff rate of 10 per cent, the level that prevailed in 1960, would render supply chains with multiple border crossings uneconomic. The more likely pattern, again as illustrated by Trump, would involve a lot of unpredictable variation.

If Trump’s tariffs are maintained, and met with retaliation, the obvious response will be to return to the simplified supply chains of the 20th century. Manufactured goods would be produced in a single jurisdiction (maybe using imported raw materials, which are rarely subject to tariffs) either for domestic consumption or for export as finished products.

Moderate tariffs won’t, however, be enough to produce substantial import replacement of the kind needed to make (for example) American manufacturing great again. The force of comparative advantage is too strong for that. A return to something like Smoot-Hawley tariff scales (up to 60 per cent) would be needed. This seems to be outside the limits of what could happen political, given the increase in consumer prices that would result. However, any judgement about political limits has to be taken with a grain of salt these days.

What should we think about the costs and benefits of such a transition? Breaking down complex supply chains involves some obvious losses in efficiency. It’s hard to estimate how large they are on a continuing basis, but there would certainly be some big economic losses in the transition.

The current system enables US companies to hire subcontractors with exploitative labor practices, they can, as Naomi Klein pointed out in No Logo, be put under pressure to fix things. If most production was undertaken by firms in poor countries, there would be less of an opportunity for such pressure.

Complex supply chains also facilitate tax evasion through transfer pricing. However, this problem is due at least as much to the operations of the financial system as to the organization of physical production.

A lot depends on the specifics of tariff structures. Trump’s moves so far have been largely random, and the responses have been targeted at causing political pain for Trump rather than as part of a coherent strategy. In these circumstances, the reversal of globalization in trade is likely to cause more harm than good.

fn1. Nationalism in this context means something like “dominant identity nationalism” where dominant identity is a placeholder for those considered to be “real” members of the nation concerned,for example, white Christians in the US case. I plan to write more on this, but may not get around to it for a while.

fn1. A commenter at Crooked Timber points out that the Zapatista rebellion in Mexico (1994) was prompted by the signing of NAFTA

John Quiggin
He is an Australian economist, a Professor and an Australian Research Council Laureate Fellow at the University of Queensland, and a former member of the Board of the Climate Change Authority of the Australian Government.

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