Can globalization be reversed (wonkish)

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

22 thoughts on “Can globalization be reversed (wonkish)

  1. Two additional points.

    1. Current hypertrade partly results from the unpriced externality of carbon emissions from shipping and long-distance trucking. A fair carbon tax would reduce trade, with welfare benefits all round.

    2. The energy transition under way will dramatically reduce trade in physical fuels. There is no doubt about this, and it’s a good thing for world peace as well as the climate.

    This collapse will only be compensated to a limited extent by growth in cross-border electricity trading. The modest extra costs of energy self-sufficiency will very often be seen as worth paying. See the collapse of the ambitious Desertec plan to supply Europe with gigawatts of electricity from Saharan solar farms. More modest schemes, like a canle from Morocco to Portugal, are moving ahead: interconnectors offer savings in rarely-used reserve capacity.

    Even Denmark plans to limit its reliance on the limitless cheap hydro electricity from Norway, a pacific and civilised neighbour very unlike Saudi Arabia, Russia or Trump’s USA. It’s a safe bet that in debates within the Vietnamese leadership over energy policy, the national security guys are pushing for renewables against imported coal.

  2. It is interesting that the case for free trade has been attacked from both the idiot right and the socially-concerned left. Presumably this case will re-emerge as the current developing countries become developed and effects on the functional distribution of income become less pronounced and as the gains from free trade diminish. The transition from underdevelopment will be slowed as a consequence of abandoning free trade ideas. HC.

  3. It is interesting that the case for free trade has been attacked from both the idiot right and the socially-concerned left. Presumably this case will re-emerge as the current developing countries become developed and effects on the functional distribution of income become less pronounced and as the gains from free trade diminish. The transition from underdevelopment will be slowed as a consequence of abandoning free trade ideas. HC.

  4. Back to the 1970s when tariff walls were as high as 150 percent. That is what the world may face if this antiglobalisation trend.

  5. It’s a great shame that section 92 of the constitution prescribes free trade between the states. Australian-isation, which allows free movement of goods, capital, ideas and people between the states, has been a force for no good ever since Federation. Just think, if Tasmania could put tariffs on Queensland bananas, it could have its own banana industry! It’s an affront that someone who lives in NSW can buy shares in a company that is based in Victoria!


  6. I fully concur with James Wimberley. The real resource costs of negative externalities is not included in the theory of comparative advantage.

    I recall having read a study – at 25 years ago – on the millage (in kms of course) of transportation involved in the production of yoghurt with fruit content within the EU. It impressed me immensely. Parts of the containers are produced in different countries, milk is transported all over the place, strawberries come from somewhere else and eventually the lid is put on top. Then the the products are distributed by trucks, big and small.

    This type of supply-chain production method causes air pollution, clogged up roads and demand for more roads, overland and within urban areas, and noise pollution.

    It seems to me the message of saving kms travelled has been understood by many in the EU as is reflected in the buy local produce campaigns.

    There are also campaigns in the EU to return to longer lasting and better quality clothing, shoes and furniture, even though it is more expensive at the time of purchase. The throw-away life-style is no longer ‘cool’. Recycling, second-hand stores, etc are ‘in’.

    In short, there are signs of cultural changes due to the ‘green’ movement in many EU countries, which is not only separate from the nationalistic right but opposed to it.

    IMO, globalisation is not so much about trade as understood in international trade theory and as treated in the national accounts, but rather about multinational corporations. They are involved in the production of physical things, the provision of human services, banking and finance and, ultimately even international trade in commodities, except when such trade is organised between governments.

    The concerns about disrupting supply-chains brings to the surface the international network of multinational firms.

  7. Ernestine

    The reductio ad absurdum of your critique is that it would be best if we all have a cow in our backyard and grow our own strawberries so we can make our own yoghurt.

    The problems of pollution and congestion don’t seem terribly difficult to solve. Add a tax so there’s only the right amount of transport of goods, not a kilometre too much and not a kilometre not little and, hey presto, problem solved.

  8. “Capitalist globalization is not unwinding: TNCs continue to increase their power and profits.” – Martin Hart-Landsberg.

    This suggests to me that neoliberal corporate globalization will continue until resource limits begin to apply to limit it. At that point, more local production and consumption might well prove more viable once again. This is in itself would not necessarily reduce the relative power of TNCs. I suspect they could and would adapt again; moving capital at will (electronically) while re-jigging supply chains yet again to meet new exigencies. With ever greater automation, labor arbitrage (cheap labor) will mean less. TNCs could move production “back home” again to some considerable extent.

    The impact of resource limits will be to increase interest in autarky once again, meaning in practice the securing of domestic supplies first, especially for food and energy. Food and energy shortages will express themselves in patchwork fashion regionally. Some regions will go short. Other regions will survive by cutting exports to ensure domestic supplies. This presupposes no major wars which would, of course, throw all the straws of prediction into the wind.

  9. @Iko

    I have a challenge or you. See if you can write something – anything, on any subject – without using the word neoliberal. I don’t think you can do it. Prove me wrong.

  10. Smith9

    “The reductio ad absurdum of your critique is that it would be best if we all have a cow in our backyard and grow our own strawberries so we can make our own yoghurt.” [1]

    Your “best” does not follow from my critique. What would follow is that the market prices of a lot of things provide wrong signals. Indeed, as you also notice, changing these prices via taxes, is a theoretically justified measure.

    There are difficulties, however, in achieving your “hey presto” solution. Setting aside technical challenges, such as how to deal with more than one type of negative externality at the same location and at the same time, a major difficulty is the unequal income and wealth distribution. A further difficulty is finding taxation rates that are big enough to change the profit calculations for the polluting producers, without driving others out of business, ie avoid negative monetary externalities. The possible disruption of supply chains may increase the unequal income and wealth distribution via employment.

    [1] Ha, ha. Who wants to eat only yoghurt? The cow in the backyard can be slaughtered for meat only once. And now add another reasonably large number of dimensions.

  11. Ernestine

    yeah, I know, in practice you can’t tax your way out of this problem. But equally who is to say how far is too far for something to be transported? It’s easy to point to polluting trucks carrying stuff from point A to point B. It’s much harder to figure out what to do about it.

    Relatedly, I see Amazon is about to start delivering packages by drone.

  12. Smith9

    In the first instance I gave an example of what James W. called ‘hypertrade’. The yoghurt production study seemed good enough for this purpose.

    Yoghurt used to be produced in all EU countries I’ve been to (UK, Germany, France, Italy, Finland, and a few more) in regional creameries, where ‘regional’ implies a geographical size of say the local government area of Ku-ring-gai or Hornsby in Sydney.

    As for pollution pays taxes, I should think they have an important role to play (except not hey presto), together with taxation that make the income and wealth distribution a bit less concentrated. Consumer preferences matter too..

  13. ‘Regional creameries’ sounds like only a couple of steps removed from a cow in every backyard.

  14. A cow in every backyard sounds absurd, as are most tools of hyperbole (that is the intention) but certainly no more absurd to what’s going on in the Amazon or Indonesia or Malaysia or Africa or the Pacific Ocean where forests are being decimated, communities displaced and animal species are being brought to extinction – species that have taken hundreds of millions of years to evolve – all coz someone in comfortable suburbia can save a coupla bucks on a dining table they might replace in 5 years due it no longer fitting in with the vanity of their lifestyle.
    Globalisation has brought riches to the rich in developed countries and brought many poor out of poverty in developed countries, but at a cost. A cost to the communities impacted by land clearing, pollution in both air and water, displacement, exploitation and a suffocation of the resources such communities rely on.
    It’s been a hurried implementation (which is the core problem) and the common denominator is whatever is the lowest price. The only regulation has primarily been through consumer discretionary habits and choices which are fundamentally regulated by information flow and education. Information flow with much vested interest acting to inhibit right from the beginning of the supply chain through to the end retailer.

  15. America is the current home of global capitalism ,with a currency and the military to back it all up. There is more money to be made from trade than from any kind of war, however, they are right to worry that if they lost that status they would be treated as they have treated others .They need to deal with China while there is still time ,I think there is bipartisan consensus on that .Unsure what a Chinese one would look like ,the trans-national Capitalist class are not willing to let go of their American home . For less powerful countries on the edge ,or outside any empire ,the future will be like the past ; exploitation and misery . To me the worlds future looks like competing empires with their trading blocs ,massive surveillance and Fascism. Orwellian -yes.

  16. Some pluses for global trade:

    Oil looks is looking like it will be cheap. Attempts to push its price up will result in the faster electrification of ground transport which will lower the price of oil. The ability to use electric trucks puts a ceiling on the cost of road freight. Electric flight also has the potential to lower the cost of air freight.

    The exchange of services between countries is huge and increasing. It is now considered normal for even tiny Australian businesses to have someone overseas doing work for them them, ranging from web design, to doing taxes, to Nepalese women making bespoke hats for the Melbourne Dog Food Cup. Since a lot of this is just ones and zeros its going to be hard to stop. Maybe if governments do crack down on it bitcoin will finally have a use? Gotta get that short story specifically written to appeal to my dinosaur fetish somehow.

  17. As does Tony, I agree that the reductio ad absurdum is indeed absurd. The flip side though is not much different from what we have now – we ship everything to where it’s cheapest to process or produce without regard to the externalities, and we include nonsense like “cost to buy laws and subsidies” in the cost to produce. That leads to situations like the “how will Adani make Carmichael profitable” where the answer is by buying political influence in order to get lawless zones and subsidies.
    It’s IMO hard to argue that bribery is a correct and useful part of a rational economic system, and that things obtained unlawfully can be regarded as genuinely beneficial. That way lies libertarianism and other non-free systems.
    A genuine economic analysis has to include all costs, not just direct costs, just as it has to include all benefits not just direct ones. Since much of the argument *for* free trade is those indirect benefits it seems grossly unreasonable to exclude the indirect costs.

  18. If I can paraphrase both Oscar Wilde and Joan Robinson. The only thing worse than being exploited by a multinational is not being exploited by a multinationa. By the way globalisation was at a pretty high point just before WW1 as one JM Keynes showed in admiration

  19. “globalisation was at a pretty high point just before WW1”

    Wasn’t it then called colonialism?

  20. Can globalization be reversed? Stopping inversions would be a start but better to overturn / detail Dodge vs Ford… detail in law “some of the doctrines, including corporate social responsibility, sustainability, and economics, that should be employed to protect society from the damage that tax avoidance can create.”

    “The Futility of Walls: How Traveling Corporations Threaten State Sovereignty

    “Inversions — mergers in which one firm merges with another abroad to avoid taxes in its home country — have spread as globalization has reduced many of the transactional costs associated with relocating. As firms acquire the power to choose the laws that govern them, they challenge the sovereignty of nation-states, who find their ability to tax and regulate firms depleted. States and firms compete in a game of cat and mouse to adapt to this new global reality. The subversion of state power by these firms reveals the futility of walls, both literal and regulatory. This Essay describes the phenomenon of these “traveling corporations” and analyzes several remedies that could limit future mergers. We conclude by arguing that inversions provoke deglobalization and yet may continue to flourish despite it as firms take the lead in dictating global norms.”
    Keywords: Corporate Law, Tax Law, Walls, Borders”


    “Corporate Tax Avoidance And Honoring The Fiduciary Duties Owed To Corporation And Its Stockholders
    “Directors and other corporate managers often look to the classic case of Dodge v. Ford, which is ubiquitous in corporate law from the classroom to the boardroom to the courtroom, as a North Star that guides them toward and defines their fiduciary duties to the corporation and its stockholders. In Dodge, the court held, “A business corporation is organized and carried on primarily for the profit of the stockholders. The powers of the directors are to be employed for that end.” This holding, which the authors of this article will refer to as the “Dodge mandate,” has been interpreted by many directors and other corporate managers not only as a decree to relentlessly seek profit, but as an absolute edict to maximize profits, even if it means hurting society, damaging the environment, or destroying anything standing in the corporation’s path.

    “The problem is that this interpretation of the Dodge mandate is wrong. This mandate requires only that directors and other corporate managers run the corporation “primarily for the profit of the stockholders,” which leaves room for other secondary considerations. “…

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