formal paper (Politics of Economic)
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7TrendsintheGlobalEconomyTheLiberalInternationalOrder.zip7 Trends in the Global Economy The Liberal International Order/Colgan Keohane Liberal Order is Rigged.pdf
JEFF D. C OLGAN is Richard Holbrooke Associate Professor of Political Science and International Affairs at Brown University. Follow him on Twitter @JeffDColgan. ROBERT O. KEOHANE is Professor of International Affairs at Princeton University.
36 f o r e i g n a f f a i r s
The Liberal Order Is Rigged Fix It Now or Watch It Wither
Jeff D. Colgan and Robert O. Keohane
Prior to 2016, debates about the global order mostly revolved around its structure and the question of whether the United States should actively lead it or should retrench, pulling back from its alliances and other commitments. But during the past year or two, it became clear that those debates had missed a key point: today’s crucial foreign policy challenges arise less from problems be- tween countries than from domestic politics within them. That is one lesson of the sudden and surprising return of populism to Western countries, a trend that found its most powerful expression last year in the United Kingdom’s decision to leave the eu, or Brexit, and the election of Donald Trump as U.S. president.
It can be hard to pin down the meaning of “populism,” but its cru- cial identifying mark is the belief that each country has an authentic “people” who are held back by the collusion of foreign forces and self-serving elites at home. A populist leader claims to represent the people and seeks to weaken or destroy institutions such as legisla- tures, judiciaries, and the press and to cast off external restraints in defense of national sovereignty. Populism comes in a range of ideo- logical flavors. Left-wing populists want to “soak the rich” in the name of equality; right-wing populists want to remove constraints on wealth in the name of growth. Populism is therefore defined not by a particular view of economic distribution but by a faith in strong leaders and a dislike of limits on sovereignty and of powerful institutions.
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Such institutions are, of course, key features of the liberal order: think of the un, the eu, the World Trade Organization (wto), and major alliances such as nato. Through them, the Washington-led order encourages multilateral cooperation on issues ranging from se- curity to trade to climate change. Since 1945, the order has helped preserve peace among the great powers. In addition to the order’s other accomplishments, the stability it provides has discouraged countries such as Germany, Japan, Saudi Arabia, and South Korea from acquiring nuclear weapons.
This peace-building aspect of the liberal order has been an ex- traordinary success. So, too, is the way in which the order has al- lowed the developing world to advance, with billions of people rising out of crippling poverty and new middle classes burgeoning all over the world. But for all of the order’s success, its institutions have become disconnected from publics in the very countries that created them. Since the early 1980s, the effects of a neoliberal economic agenda have eroded the social contract that had previously ensured crucial political support for the order. Many middle- and working-class voters in the United Kingdom, the United States, and elsewhere have come to be- lieve—with a good deal of justification—that the system is rigged.
Those of us who have not only analyzed globalization and the liberal order but also celebrated them share some responsibility for the rise of populism. We did not pay enough attention as capitalism hijacked globalization. Economic elites designed international institutions to serve their own interests and to create firmer links between themselves and governments. Ordinary people were left out. The time has come to acknowledge this reality and push for policies that can save the liberal order before it is too late.
THE BOATS THAT DIDN’T RISE In 2016, the two states that had done the most to construct the liberal order—the United Kingdom and the United States—seemed to turn their backs on it. In the former, the successful Brexit campaign focused on restoring British sovereignty; in the latter, the Trump campaign was explicitly nationalist in tone and content. Not surprisingly, this has prompted strong reactions in places that continue to value the liberal order, such as Germany: a poll published in February by the German newspaper Die Welt found that only 22 percent of Germans believe that the United States is a trustworthy ally, down from 59 percent
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just three months earlier, prior to Trump’s victory—a whopping 37-point decrease.
The Brexit and Trump phenomena reflect a breakdown in the social contract at the core of liberal democracy: those who do well in a market- based society promise to make sure that those disadvantaged by market forces do not fall too far behind. But fall behind they have.
Between 1974 and 2015, the real median household income for Americans with- out high school diplomas fell by almost 20 percent. And even those with high school diplomas, but without any college education, saw their real median house- hold income plummet by 24 percent. On the other hand, those with college degrees saw their incomes and wealth
expand. Among those Americans, the real median household income rose by 17 percent; those with graduate degrees did even better.
As political scientists such as Robert Putnam and Margaret Weir have documented, such trends have led to different sets of Americans living in separate worlds. The well-off do not live near the poor or interact with them in public institutions as much as they used to. This self-segregation has sapped a sense of solidarity from American civic life: even as communications technology has connected people as never before, different social classes have drifted further apart, becoming almost alien to one another. And since cosmopolitan elites were doing so well, many came to the conclusion—often without realizing it—that solidarity just wasn’t that important for a well- functioning democracy.
Elites have taken advantage of the global liberal order—sometimes inadvertently, sometimes intentionally—to capture most of the income and wealth gains in recent decades, and they have not shared much with the middle and lower classes. Wealthier, better-educated Americans have pushed for or accepted regressive tax policies, trade and investment agreements that encouraged corporate outsourcing, and the under- funding of public and higher education. The result of such policies has been to undermine what the political scientist John Ruggie once called “embedded liberalism”: a global order made up of free-market societies that nevertheless preserved welfare states and labor-market policies that allowed for the retraining of people whose skills became
The Brexit and Trump phenomena reflect a breakdown in the social contract at the core of liberal democracy.
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obsolete, compensation for those who lost out from trade liberalization, and validation of the self-worth of all citizens, even if they were not highly productive in economic terms. Elites pushed for and supported the first part of this vision—free markets, open borders, and multi- lateralism—but in the 1970s and even more so in the 1980s, they began to neglect the other part of the bargain: a robust safety net for those who struggled. That imbalance undermined domestic support for free trade, military alliances, and much else.
The bill for that broken social contract came due in 2016 on both sides of the Atlantic. And yet even now, many observers downplay the threat this political shift poses to the liberal order. Some argue that the economic benefits of global integration are so overwhelming that national governments will find their way back to liberalism, regard- less of campaign rhetoric and populist posturing. But the fact is that politicians respond to electoral incentives even when those incentives diverge considerably from their country’s long-term interests—and in recent years, many voters have joined in the populist rejection of globalization and the liberal order.
Moreover, business leaders and stock markets, which might have been expected to serve as a brake on populist fervor, have instead mostly rewarded proposals for lower taxes with no accompanying reduction in government spending. This is shortsighted. Grabbing even more of the benefits of globalization at the expense of the middle and working classes might further undermine political support for the integrated supply chains and immigration on which the U.S. economy depends. This position is reminiscent of the way that eighteenth- century French aristocrats refused to pay taxes while indulging in expensive foreign military adventures. They got away with it for many years—until the French Revolution suddenly laid waste to their privi- lege. Today’s elites risk making a similar mistake.
CAREFUL WHAT YOU WISH FOR Some portion of the blame for the liberal order’s woes lies with its advocates. Policymakers pursued a path of action favored by many academics, including us: building international institutions to promote cooperation. But they did so in a biased way—and, for the most part, we underestimated the risk that posed. Financial firms and major corporations enjoyed privileged status within the order’s institutions, which paid little attention to the interests of workers. Wto rules
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emphasized openness and failed to encourage measures that would cushion globalization’s effects on those disadvantaged by it, especially workers in the traditional manufacturing sectors in developed countries. Meanwhile, investment treaties signed in the 1990s featured provisions that corporate lawyers exploited to favor big business at the expense of consumers. And when China manipulated trade and currency arrange- ments to the disadvantage of working-class Americans, Washington decided that other issues in U.S.-Chinese relations were more impor- tant, and did not respond strongly.
Working-class Americans didn’t necessarily understand the details of global trade deals, but they saw elite Americans and people in China and other developing countries becoming rapidly wealthier while their own incomes stagnated or declined. It should not be surprising that many of them agreed with Trump and with the Democratic pres- idential primary contender Bernie Sanders that the game was rigged.
Much ink has been spilled on the domestic causes of the populist revolt: racism, growing frustration with experts, dysfunctional economic policies. But less attention has been paid to two contributing factors that stemmed from the international order itself. The first was a loss of national solidarity brought on by the end of the Cold War. During that conflict, the perceived Soviet threat generated a strong shared sense of attachment not only to Washington’s allies but also to multilateral institutions. Social psychologists have demonstrated the crucial importance of “othering” in identity formation, for indi- viduals and nations alike: a clear sense of who is not on your team makes you feel closer to those who are. The fall of the Soviet Union removed the main “other” from the American political imagination and thereby reduced social cohesion in the United States. The end of the Cold War generated particular political difficulties for the Republican Party, which had long been a bastion of anticommunism. With the Soviets gone, Washington elites gradually replaced Commu- nists as the Republicans’ bogeymen. Trumpism is the logical extension of that development.
In Europe, the end of the Cold War was consequential for a related reason. During the Cold War, leaders in Western Europe constantly sought to stave off the domestic appeal of communism and socialism. After 1989, no longer facing that constraint, national governments and officials in Brussels expanded the eu’s authority and scope, even in the face of a series of national referendums that expressed opposi-
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tion to that trend and should have served as warning signs of growing working-class discontent. In eastern Europe, anti-Soviet othering was strong during the 1980s and 1990s but appears to have faded as memo- ries of the Cold War have become more distant. Without the specter of communist-style authoritarianism haunting their societies, eastern Europeans have become more susceptible to populism and other forms of illiberalism. In Europe, as in the United States, the disap- pearance of the Soviets undermined social cohesion and a common sense of purpose.
The second force stirring discontent with the liberal order can be called “multilateral overreach.” Interdependence requires countries to curb their autonomy so that institutions such as the un and the World Bank can facilitate cooperation and solve mutual problems. But the natural tendency of institutions, their leaders, and the bureaucra- cies that carry out their work is to expand their authority. Every time they do so, they can point to some seemingly valid rationale. The cumulative effect of such expansions of international authority, however, is to excessively limit sovereignty and give people the sense that foreign forces are controlling their lives. Since these multilateral institutions are distant and undemocratic—despite their inclusive rhetoric—the result is public alienation, as the political scientist Kathleen McNamara has documented. That effect is compounded whenever multilateral institutions reflect the interests of cosmopolitan elites at the expense of others, as they often have.
SYSTEM UPDATE Derigging the liberal order will require attention to substance but also to perceptions. The United States has made only feeble attempts to sustain something like Ruggie’s embedded liberalism, and even those attempts have largely failed. Germany, Denmark, and Sweden have done better, although their systems are also under pressure. Washington has a poor track record when it comes to building gov- ernment bureaucracies that reach deep into society, and the American public is understandably suspicious of such efforts. So U.S. officials will have to focus on reforms that do not require a lot of top-down intervention.
To that end, Washington should be guided by three principles. First, global integration must be accompanied by a set of domestic policies that will allow all economic and social classes to share the
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gains from globalization in a way that is highly visible to voters. Second, international cooperation must be balanced with national interests to prevent overreach, especially when it comes to the use of military force. Third, Washington should nurture a uniquely American social identity and a national narrative. That will require othering authoritar- ian and illiberal countries. Fostering U.S. opposition to illiberalism does not mean imposing democracy by force, but it does require more than occasional diplomatic criticism of countries such as China or Saudi Arabia. A willing president could, for instance, make it clear that although the United States may have an interest in cooper- ating with nondemocratic countries, it identifies only with liberal democracies and reserves its closest relationships for them. Done properly, that sort of othering could help clarify the American national identity and build solidarity. It might at times constrain commercial relationships. However, a society is more than just an economy, and the benefits of social cohesion would justify a modest economic cost.
Developing policies that satisfy those principles will require innova- tion and creativity. Some promising ideas include tax credits to busi- nesses that provide on-the-job training for dislocated workers and earned-income tax credits for individuals. Progressives have pursued such policies in the past but in recent times have retreated or compro- mised for the sake of passing trade deals; they should renew their commitment to such ideas. Officials should also require that any new trade deals be accompanied by progressive domestic measures to assist those who won’t benefit from the deals. At a minimum, Congress should avoid regressive tax cuts. If, for example, the Trump administration and its gop allies in Congress decide to impose a border adjustment tax on imports, the revenue raised ought to benefit the working class. One way to make that happen would be to directly redistribute the revenue raised by the tax on a per capita basis, in the form of checks to all households; that would spread the wealth and build political support for the combination of economic openness and redistribution. Another way to benefit the working class would be to stimulate job creation by lowering employers’ payroll tax burden. Such ideas will face an uphill battle in the current U.S. political environment, but it is essential to develop plans now so that, when political opportunities emerge, defenders of the liberal order will be ready.
Like it or not, “America first” is a powerful slogan.
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The more difficult task will be developing a national narrative, broadly backed by elites across the ideological spectrum, about “who we are”—one built around opposition to authoritarianism and illiber- alism. The main obstacle will likely be the politics of immigration, where the tension between cosmopolitanism and national solidarity surfaces most clearly. Cosmopolitans argue (correctly) that immi- grants ultimately offer more benefits than costs and that nativist fears about refugees are often based more on prejudice than fact. The United States is a country of immigrants and continues to gain energy and ideas from talented newcomers. Nonetheless, almost everyone agrees that there is some limit to how rapidly a country can absorb immigrants, and that implies a need for tough decisions about how fast people can come in and how many resources should be devoted to their integration. It is not bigotry to calibrate immigration levels to the ability of immigrants to assimilate and to society’s ability to adjust. Proponents of a global liberal order must find ways of seeking greater national consensus on this issue. To be politically sustainable, their ideas will have to respect the importance of national solidarity.
Like it or not, global populism has a clear, marketable ideology, defined by toughness, nationalism, and nativism: “America first” is a powerful slogan. To respond, proponents of an open liberal order must offer a similarly clear, coherent alternative, and it must address, rather than dismiss, the problems felt keenly by working classes. For Demo- crats, “the party of jobs” would be a better brand than “the party of increasing aggregate welfare while compensating the losers from trade.”
Without dramatic change to their messages and approach, estab- lished political parties will fade away altogether. An outsider has already captured the Republican Party; the Democrats are cornered on the coasts. In Europe, the British Labour Party is imploding and the tra- ditionally dominant French parties are falling apart. To adapt, estab- lishment parties must begin to frame their ideas differently. As the social psychologist Jonathan Haidt has argued, progressives must learn to speak of honor, loyalty, and order in addition to equality and rights.
To derig the liberal order and stave off complete defeat at the hands of populists, however, traditional parties must do more than rebrand themselves and their ideas. They must develop substantive policies that will make globalization serve the interests of middle- and working-class citizens. Absent such changes, the global liberal order will wither away.∂
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7 Trends in the Global Economy The Liberal International Order/Hu Spence Why Globalization Stalled (1).pdf
FR ED HU is Founder and Chair of Primavera Capital Group. MIC HAEL SPENC E is William R. Berkley Professor in Economics and Business at New York University’s Leonard N. Stern School of Business. He received the Nobel Prize in Economics in 2001.
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Why Globalization Stalled And How to Restart It
Fred Hu and Michael Spence
For many decades after World War II, a broad range of countries shared a fundamental economic vision. They endorsed an increasingly open system for trade in goods and services, sup ported by international institutions; allowed capital, corporations, and, to a lesser extent, people to flow freely across borders; and encour aged the rapid spread of data and technology. As trade expanded, global living standards improved dramatically, and hundreds of millions of people escaped from poverty.
Today, every aspect of this globalized economy is under assault. A popular backlash against free trade and unrestricted crossborder movements of capital has picked up momentum. The ideal of freely flowing information has clashed with growing calls for privacy rights, the protection of intellectual property, and increased cybersecurity. Across the developed world, sentiments have turned strongly against immigration, especially as waves of Middle Eastern refugees have flooded Europe. And after several successful rounds of multilateral trade negotiations in the postwar years, new agreements have become much rarer: the World Trade Organization (wto) has not completed a single full round of successful negotiations since its creation in 1995.
Last June, the United Kingdom voted to leave the eu, sparking the worst political crisis in the union’s history. Meanwhile, in the United States, President Donald Trump has vowed to put “America first.” In his first week in office, Trump withdrew from the TransPacific Partnership (tpp), the 12nation freetrade deal orchestrated by Trump’s predecessor, and he has pledged to renegotiate the North American
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Free Trade Agreement, which he has called “the worst trade deal maybe ever signed anywhere, but certainly ever signed in this country.” The Transatlantic Trade and Investment Partnership, a deal currently being negotiated by the United States and the eu, also faces an uncertain future, bogged down in strong opposition on both sides of the Atlantic.
As the United States loses interest in nurturing the international order that it played the lead role in building, the future of globalization will depend in large part on China. So far, Beijing appears committed to preserving an open global system. But for now, China will struggle to replace the United States as the sponsor of an open, multilateral order. In an era of rapid and disruptive technological change, politicians and policymakers all over the world will need to push for reforms that can preserve the achievements of globalization—and fix its flaws— before it’s too late.
PITCHFORK POLITICS Over the past seven decades, and especially since the end of the Cold War, globalization has accelerated steadily. For much of this period, most countries accepted the open global trading system. But govern ments often erected barriers to manage the pace of change. Developing countries, for instance, frequently delayed opening certain sectors of their economies to foreign trade to protect socalled infant industries, and they imposed capital controls to avoid destabilizing their financial systems. Although developed countries generally accepted the costs of the open economic system, they, too, sometimes intervened to reduce the disruption caused by trade. In a largely unsuccessful attempt to help the domestic auto industry, for instance, the Reagan administration imposed restrictions on car imports and pushed Japanese automakers to build plants in the United States.
In the past two decades, however, developed countries have failed to mitigate the negative side effects of international trade and rapid technological change. Western publics have blamed free trade for the decline in manufacturing jobs and for widening income inequality, and antitrade sentiments in middle America helped catapult Trump into the White House. Among the traditional cham pions of globalization—the United States, the United Kingdom, and continental Europe—support for economic openness has declined precipitously. In November 2016, a YouGov/Economist poll found
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that less than half of Americans, Britons, and French believed that globalization was a “force for good.”
Such attitudes are hardly limited to the grass roots; antiglobalists have come to power or have grown closer to achieving it. And they are finding common cause: on the day after the United Kingdom voted for Brexit, Steve Bannon, now Trump’s chief strategist, invited Nigel Farage, then the leader of the uk Independence Party, onto his radio show. “The European Union project has failed,” Farage announced. “It is doomed, I’m pleased to say.” “It’s a great accomplishment,” Bannon said. “Congratulations.” Ahead of France’s recent presidential election, Trump expressed support for the National Front leader Marine Le Pen and her protectionist agenda.
Although Trump’s unorthodox tenure in Washington has dominated headlines, in Europe, too, the globalized economy is facing intense challenges. The United Kingdom, home to Europe’s most important
capital market, is about to exit the eu; the terms remain unclear, but there is no question that Brexit represents a victory for antiglobalization, nativism, and nationalism. Meanwhile, much of the rest of Europe is plagued by low
growth and high unemployment, factors that, alongside the refugee crisis, have fueled support for populist parties across the continent. Europe is trapped in a failing economic system that has too few adjustment mechanisms. Growth and inflation remain too low to reduce high unemployment and debt levels, and debt restructuring would be almost impossible without breaking up the eurozone. The euro’s exchange rates with other major currencies are too low for Germany and some other countries in the north, driving up their trade surpluses, but too high for those in the south, which remain far less competitive.
In the current political environment, as nationalism rises across the continent, sensible economic reforms, such as increased fiscal inte gration, are unlikely to gain traction. But the British vote to leave the eu and Trump’s election might serve as a wakeup call for European elites, triggering real reform. Nonetheless, with a new and inexperi enced president in France and with elections looming in Denmark, Germany, and Italy, Europe will remain preoccupied with its internal political and economic challenges for the foreseeable future.
Brexit represents a victory for antiglobalization, nativism, and nationalism.
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Multilateral institutions that have played a key role in the post– World War II order will also struggle to provide global leadership. Institutions such as the International Monetary Fund and the World Bank have had trouble adapting to the rise of the emerging economies: the United States and Europe still dominate them, eroding their credibility and influence among developing countries, especially in Asia. Yet neither the United States under Trump nor the eu, which has been embroiled in a conflict with the imf over Greece’s debt, is likely to invest many resources in these organizations in the coming years. As the multilateral institutions are marginalized, the global economic system will become more vulnerable to local and systemic financial crises.
Meanwhile, the early optimism about the Internet and the free flow of information, another central element of globalization, has faded. The disclosures by the National Security Agency leaker Edward Snowden regarding U.S. surveillance programs, Russia’s alleged cyber attacks during the U.S. presidential election, the rise of “fake news,” and terrorist organizations’ use of digital communications to recruit followers and plan attacks have made clear that information technology can subvert the globalized liberal economic order as well as support it.
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Protectionist in chief: Trump at a factory in Indianapolis, Indiana, December 2016
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The Internet faces a much more complicated, regulated, and frag mented future than the one imagined by many in the 1990s. In China, stringent regulations have built a sort of digital Great Wall that par tially seals off Chinese Internet users from the rest of the world, and the eu has taken strong positions on privacy, attempting to constrain the practices of some Webbased platforms created by Facebook and Google through legal action. In the next few years, other governments are also likely to restrict the free flow of information, data, and knowl edge in the name of security.
WHERE IT ALL WENT WRONG Many of the global economy’s current challenges have their roots in the years around the turn of the millennium. In 1999, the euro was launched, setting the stage for Europe’s recent economic woes. Nearly three years later, in December 2001, China joined the wto, opening its domestic markets to imports and gaining full access to the global economy. Meanwhile, the economic impact of automation and digital technology began to accelerate.
In the United States, manufacturing jobs had been declining for two decades, but they dropped sharply in the early years of this century: between 2000 and the present, the number of U.S. manu facturing jobs fell by between six million and seven million. As the number of jobs in the socalled tradable sector, which produces goods and services that can be consumed anywhere, barely grew, the nontradable sector absorbed around 25 million new entrants to the job market, in addition to the displaced manufacturing workers. It was a buyer’s market for medium and lowskilled labor, and as a result, wages stagnated.
For many years, automation has been eliminating bluecollar jobs and some lowerpaying whitecollar jobs. But recent breakthroughs in sensors, machine learning, and artificial intelligence have left even more jobs vulnerable. In almost every developed economy, middleincome jobs are decreasing while lower and higherpaying jobs are increasing.
Countries have responded in different ways. Some have acted to reduce inequality by redistributing wealth through the tax system, expanding social security programs and other safety nets, and increasing support for education and job training. These efforts have proved successful in countries such as Denmark, Germany, and Sweden, where
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organized labor wields strong bargaining power, businesses and unions trust each other, individual and corporate wealth have limited influence on politics, and egalitarian cultural norms prevail. In all three of these countries, inequality remains below the average for the Organization for Economic Cooperation and Development, a group of mostly rich countries.
But in countries where these factors are absent—especially the United Kingdom and the United States—disparities of income, wealth, and opportunity have widened dramatically. The absence of a meaningful policy response, and the apparent lack of concern among these countries’ elites, has aroused deep anger among those who have lost out in the changes wreaked by globalization and technological progress.
The rejection of the old order was not immediate. For a while, people believed that their economic woes were a temporary result of the global financial crisis of 2008. But over time, they began to suspect that disappearing jobs and stagnant wages had become lasting features of the economic landscape. They turned against the elites they held responsible, including business leaders, academics, and the political establishment. And as they watched powerful economic and tech nological forces buffet their countries—forces over which policymakers at the national level appeared to exert little control—they sought to regain ownership of their destiny and reassert national sovereignty. This has played out most dramatically in Europe, where real and per ceived erosions of sovereignty, above all concerning immigration, played a major role in the British vote to leave the eu. Even privileged citizens who had thrived in an open global system voted for Brexit, believing that doing so would allow them to take greater control over their lives.
GLOBALIZATION WITH CHINESE CHARACTERISTICS As the United States and Europe turn inward, much of the respon sibility for maintaining a globalized liberal economic order will fall to China. In his address at the World Economic Forum, in Davos, in January, President Xi Jinping reaffirmed China’s commitment to globalization. By sponsoring numerous economic initiatives, includ ing the Asian Infrastructure Investment Bank (aiib), the Belt and Road Initiative, and the New Development Bank (formerly known as the brics Development Bank), and by making substantial overseas
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investments, Beijing has signaled that it intends to support an inclu- sive, multilateral form of globalization.
As the world’s second-largest economy, China will undoubtedly help shape the future of the global economy. But for now, it remains unclear whether China can replace the United States as the primary champion of globalization. China is in the middle of a challenging
domestic structural shift, as it transi- tions from an economy led by exports and investment to one based more on consumption and services, and its econ- omy faces strong headwinds, including excess capacity and high corporate debt. Should the United States with- draw from its leadership role, China
would not be able to supply the world economy with a large and ac- cessible market for other countries’ exports, deep capital markets, or the kind of strong institutions, such as the Federal Reserve and the imf, that have allowed Washington to stabilize the global financial system for decades. And China has recently tightened its capital con- trols in an effort to stem capital flight—backtracking, at least for now, from its attempts to internationalize the renminbi.
Still, Beijing’s support for multilateral structures represents an im- portant step forward. A world based on bilateral relationships might work for the most powerful countries, but multilateralism has built a big tent in which the smaller, poorer countries can participate and prosper. They will suffer if they have to fend for themselves. China’s embrace of multilateralism has already enhanced its stature among countries with smaller economies. Despite strong opposition from Washington, 57 countries joined the Chinese-led aiib, many of them long-standing U.S. allies, such as Australia, France, Germany, Israel, Saudi Arabia, South Korea, and the United Kingdom. In the first quarter of 2017, another 13 countries agreed to join, including Afghanistan, Belgium, Canada, Hungary, Ireland, and Peru.
But if Washington retreats into bilateralism and Beijing wants to fill the void, the Chinese economy must keep growing and other emerging economies must increase their access to the Chinese market. Among the members of the aborted tpp, the vast majority, including Australia, Japan, and South Korea, already depend on exports to China, by far their largest trading partner, as do emerging economies
The early optimism about the Internet and the free flow of information has faded.
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all over the world. But if the United States turns toward protectionism, the $12 trillion Chinese economy is still not large enough to support global growth alone.
The new U.S. administration has blamed trade deals for manu facturing job losses and trade deficits and has threatened to impose sanctions on some of the United States’ top trading partners, such as China, Germany, Japan, and Mexico. In the short run, the U.S. government may introduce targeted hikes in tariffs on, for instance, steel imports, as well as aggressive antidumping penalties and broader trade restrictions justified by the alleged currency manipu lations of China, Germany, and Japan. The Trump administration may also try to browbeat companies, urging them to set up factories in the United States. So far, aside from tearing up the hardwon tpp agreement and sharply criticizing trade deals and trading partners alike, Trump has refrained from launching more aggressive actions. But if his domestic agenda runs aground, a frustrated Trump admin istration could turn toward more strongly protectionist policies and, in the worstcase outcome, ignite fullscale trade wars with other countries.
But there is a more optimistic scenario. Tax reform, public invest ment in infrastructure, and deregulation—all goals of the new administration—could stimulate private investment and boost U.S. growth and, with it, global growth. But to achieve this outcome, Trump must avoid becoming bogged down in unnecessary and divisive fights with the media and the courts and must firm up congressional support in his own party. In the meantime, policy makers and businesses in other countries should hope for the best but prepare for the worst.
THE AGE OF AUTOMATION For all the focus on globalization, in the long run, the most im portant force shaping the labor market and income inequality will be not trade or politics but technological change. Automation has already transformed the economies of the developed world and the nature of employment there, and almost all experts believe that the scope for expanding automation is enormous. As costs fall and the pace of innovation accelerates, the impact of automation will spread to middleincome countries and, eventually, to lowerincome ones, as well.
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As capitalintensive technology replaces laborintensive manufac turing, early stage developing countries across Africa and Southeast Asia will cease to enjoy the comparative advantage offered by lower wages and production costs. Overall trade in goods will probably decline as the price of labor no longer determines where goods are produced, allowing production to move closer to consumers and cutting the costs of transportation and logistics.
Of course, no one knows with certainty how quickly such changes will occur, and every country should invest in education, technology, and infrastructure so that it can anticipate them better. For now, trade will continue to play a crucial role in allowing developing economies to grow rapidly. Although trade in physical goods may decline, trade in services will probably rise, as more and more services can be carried out remotely. As a result, developing countries should seek to grow their service sectors, especially in the tradable sector. They should also invest in innovation hubs, which can help replace lost manufacturing jobs.
As developing countries advance into middleincome status, they can no longer offer cheap labor. Such places should follow China’s lead by investing heavily in the hightech sector. Doing so has helped China transition away from traditional manufacturing and leapfrog over some of its competitors in a number of promising new industries, such as robotics, renewable energy, mobile messaging, and ecommerce.
As the history of technological change has demonstrated, technology displaces only specific kinds of jobs; it does not displace labor, at least not in the longer term. But in the short term, automation renders certain kinds of human capital redundant. This can cause difficult and sometimes lengthy transitions, both for individuals and for whole economies. In the end, however, machines raise human pro ductivity and increase incomes and prosperity. As the economists Erik Brynjolfsson and Andrew McAfee have explained, economies shift from creating jobs for which machines are substitutes to creating those for which they are complements.
Smart investment in job training can accelerate and ease these transitions. Policymakers should learn from the Nordic countries, where governments have combined training programs with various forms of income support and redistribution. Governments should not offer training only to the unemployed. Displaced middleincome
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workers, who often end up in lowerpaying service jobs, can benefit from retraining that will help them compete for higherwage work.
SAVING GLOBALIZATION Predictions that the era of globalization will soon end are too pessi mistic. To be sure, the rapid expansion of trade, rising crossborder capital flows, and, above all, the spread of new technologies have transformed the global economy. They have created difficult chal lenges, and countries will continue to struggle to increase growth and productivity, while reducing inequality and creating good jobs. But there are also enormous opportunities. Turning back the clock to restore the old frameworks is impossible. The challenge is to build new ones that work.
Waving the banner of protectionism and nationalism may attract popular support, at least temporarily. But history has shown that, ultimately, it may well threaten global peace and prosperity. The United States, China, and the world at large would be far better off if they could find a path to a more sustainable globalization, reforming the existing global order rather than tearing it down completely.∂
JA17_issue.indb 63 5/16/17 6:55 PM
The contents of Foreign Affairs are protected by copyright. © 2004 Council on Foreign Relations, Inc., all rights reserved. To request permission to reproduce additional copies of the article(s) you will retrieve, please contact the Permissions and Licensing office of Foreign Affairs.
7 Trends in the Global Economy The Liberal International Order/Hu Spence Why Globalization Stalled .pdf
FR ED HU is Founder and Chair of Primavera Capital Group. MIC HAEL SPENC E is William R. Berkley Professor in Economics and Business at New York University’s Leonard N. Stern School of Business. He received the Nobel Prize in Economics in 2001.
54 f o r e i g n a f f a i r s
Why Globalization Stalled And How to Restart It
Fred Hu and Michael Spence
For many decades after World War II, a broad range of countries shared a fundamental economic vision. They endorsed an increasingly open system for trade in goods and services, sup ported by international institutions; allowed capital, corporations, and, to a lesser extent, people to flow freely across borders; and encour aged the rapid spread of data and technology. As trade expanded, global living standards improved dramatically, and hundreds of millions of people escaped from poverty.
Today, every aspect of this globalized economy is under assault. A popular backlash against free trade and unrestricted crossborder movements of capital has picked up momentum. The ideal of freely flowing information has clashed with growing calls for privacy rights, the protection of intellectual property, and increased cybersecurity. Across the developed world, sentiments have turned strongly against immigration, especially as waves of Middle Eastern refugees have flooded Europe. And after several successful rounds of multilateral trade negotiations in the postwar years, new agreements have become much rarer: the World Trade Organization (wto) has not completed a single full round of successful negotiations since its creation in 1995.
Last June, the United Kingdom voted to leave the eu, sparking the worst political crisis in the union’s history. Meanwhile, in the United States, President Donald Trump has vowed to put “America first.” In his first week in office, Trump withdrew from the TransPacific Partnership (tpp), the 12nation freetrade deal orchestrated by Trump’s predecessor, and he has pledged to renegotiate the North American
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Free Trade Agreement, which he has called “the worst trade deal maybe ever signed anywhere, but certainly ever signed in this country.” The Transatlantic Trade and Investment Partnership, a deal currently being negotiated by the United States and the eu, also faces an uncertain future, bogged down in strong opposition on both sides of the Atlantic.
As the United States loses interest in nurturing the international order that it played the lead role in building, the future of globalization will depend in large part on China. So far, Beijing appears committed to preserving an open global system. But for now, China will struggle to replace the United States as the sponsor of an open, multilateral order. In an era of rapid and disruptive technological change, politicians and policymakers all over the world will need to push for reforms that can preserve the achievements of globalization—and fix its flaws— before it’s too late.
PITCHFORK POLITICS Over the past seven decades, and especially since the end of the Cold War, globalization has accelerated steadily. For much of this period, most countries accepted the open global trading system. But govern ments often erected barriers to manage the pace of change. Developing countries, for instance, frequently delayed opening certain sectors of their economies to foreign trade to protect socalled infant industries, and they imposed capital controls to avoid destabilizing their financial systems. Although developed countries generally accepted the costs of the open economic system, they, too, sometimes intervened to reduce the disruption caused by trade. In a largely unsuccessful attempt to help the domestic auto industry, for instance, the Reagan administration imposed restrictions on car imports and pushed Japanese automakers to build plants in the United States.
In the past two decades, however, developed countries have failed to mitigate the negative side effects of international trade and rapid technological change. Western publics have blamed free trade for the decline in manufacturing jobs and for widening income inequality, and antitrade sentiments in middle America helped catapult Trump into the White House. Among the traditional cham pions of globalization—the United States, the United Kingdom, and continental Europe—support for economic openness has declined precipitously. In November 2016, a YouGov/Economist poll found
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that less than half of Americans, Britons, and French believed that globalization was a “force for good.”
Such attitudes are hardly limited to the grass roots; antiglobalists have come to power or have grown closer to achieving it. And they are finding common cause: on the day after the United Kingdom voted for Brexit, Steve Bannon, now Trump’s chief strategist, invited Nigel Farage, then the leader of the uk Independence Party, onto his radio show. “The European Union project has failed,” Farage announced. “It is doomed, I’m pleased to say.” “It’s a great accomplishment,” Bannon said. “Congratulations.” Ahead of France’s recent presidential election, Trump expressed support for the National Front leader Marine Le Pen and her protectionist agenda.
Although Trump’s unorthodox tenure in Washington has dominated headlines, in Europe, too, the globalized economy is facing intense challenges. The United Kingdom, home to Europe’s most important
capital market, is about to exit the eu; the terms remain unclear, but there is no question that Brexit represents a victory for antiglobalization, nativism, and nationalism. Meanwhile, much of the rest of Europe is plagued by low
growth and high unemployment, factors that, alongside the refugee crisis, have fueled support for populist parties across the continent. Europe is trapped in a failing economic system that has too few adjustment mechanisms. Growth and inflation remain too low to reduce high unemployment and debt levels, and debt restructuring would be almost impossible without breaking up the eurozone. The euro’s exchange rates with other major currencies are too low for Germany and some other countries in the north, driving up their trade surpluses, but too high for those in the south, which remain far less competitive.
In the current political environment, as nationalism rises across the continent, sensible economic reforms, such as increased fiscal inte gration, are unlikely to gain traction. But the British vote to leave the eu and Trump’s election might serve as a wakeup call for European elites, triggering real reform. Nonetheless, with a new and inexperi enced president in France and with elections looming in Denmark, Germany, and Italy, Europe will remain preoccupied with its internal political and economic challenges for the foreseeable future.
Brexit represents a victory for antiglobalization, nativism, and nationalism.
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Multilateral institutions that have played a key role in the post– World War II order will also struggle to provide global leadership. Institutions such as the International Monetary Fund and the World Bank have had trouble adapting to the rise of the emerging economies: the United States and Europe still dominate them, eroding their credibility and influence among developing countries, especially in Asia. Yet neither the United States under Trump nor the eu, which has been embroiled in a conflict with the imf over Greece’s debt, is likely to invest many resources in these organizations in the coming years. As the multilateral institutions are marginalized, the global economic system will become more vulnerable to local and systemic financial crises.
Meanwhile, the early optimism about the Internet and the free flow of information, another central element of globalization, has faded. The disclosures by the National Security Agency leaker Edward Snowden regarding U.S. surveillance programs, Russia’s alleged cyber attacks during the U.S. presidential election, the rise of “fake news,” and terrorist organizations’ use of digital communications to recruit followers and plan attacks have made clear that information technology can subvert the globalized liberal economic order as well as support it.
M I
K E
S E
G A
R / R
E U
T E
R S
Protectionist in chief: Trump at a factory in Indianapolis, Indiana, December 2016
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The Internet faces a much more complicated, regulated, and frag mented future than the one imagined by many in the 1990s. In China, stringent regulations have built a sort of digital Great Wall that par tially seals off Chinese Internet users from the rest of the world, and the eu has taken strong positions on privacy, attempting to constrain the practices of some Webbased platforms created by Facebook and Google through legal action. In the next few years, other governments are also likely to restrict the free flow of information, data, and knowl edge in the name of security.
WHERE IT ALL WENT WRONG Many of the global economy’s current challenges have their roots in the years around the turn of the millennium. In 1999, the euro was launched, setting the stage for Europe’s recent economic woes. Nearly three years later, in December 2001, China joined the wto, opening its domestic markets to imports and gaining full access to the global economy. Meanwhile, the economic impact of automation and digital technology began to accelerate.
In the United States, manufacturing jobs had been declining for two decades, but they dropped sharply in the early years of this century: between 2000 and the present, the number of U.S. manu facturing jobs fell by between six million and seven million. As the number of jobs in the socalled tradable sector, which produces goods and services that can be consumed anywhere, barely grew, the nontradable sector absorbed around 25 million new entrants to the job market, in addition to the displaced manufacturing workers. It was a buyer’s market for medium and lowskilled labor, and as a result, wages stagnated.
For many years, automation has been eliminating bluecollar jobs and some lowerpaying whitecollar jobs. But recent breakthroughs in sensors, machine learning, and artificial intelligence have left even more jobs vulnerable. In almost every developed economy, middleincome jobs are decreasing while lower and higherpaying jobs are increasing.
Countries have responded in different ways. Some have acted to reduce inequality by redistributing wealth through the tax system, expanding social security programs and other safety nets, and increasing support for education and job training. These efforts have proved successful in countries such as Denmark, Germany, and Sweden, where
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organized labor wields strong bargaining power, businesses and unions trust each other, individual and corporate wealth have limited influence on politics, and egalitarian cultural norms prevail. In all three of these countries, inequality remains below the average for the Organization for Economic Cooperation and Development, a group of mostly rich countries.
But in countries where these factors are absent—especially the United Kingdom and the United States—disparities of income, wealth, and opportunity have widened dramatically. The absence of a meaningful policy response, and the apparent lack of concern among these countries’ elites, has aroused deep anger among those who have lost out in the changes wreaked by globalization and technological progress.
The rejection of the old order was not immediate. For a while, people believed that their economic woes were a temporary result of the global financial crisis of 2008. But over time, they began to suspect that disappearing jobs and stagnant wages had become lasting features of the economic landscape. They turned against the elites they held responsible, including business leaders, academics, and the political establishment. And as they watched powerful economic and tech nological forces buffet their countries—forces over which policymakers at the national level appeared to exert little control—they sought to regain ownership of their destiny and reassert national sovereignty. This has played out most dramatically in Europe, where real and per ceived erosions of sovereignty, above all concerning immigration, played a major role in the British vote to leave the eu. Even privileged citizens who had thrived in an open global system voted for Brexit, believing that doing so would allow them to take greater control over their lives.
GLOBALIZATION WITH CHINESE CHARACTERISTICS As the United States and Europe turn inward, much of the respon sibility for maintaining a globalized liberal economic order will fall to China. In his address at the World Economic Forum, in Davos, in January, President Xi Jinping reaffirmed China’s commitment to globalization. By sponsoring numerous economic initiatives, includ ing the Asian Infrastructure Investment Bank (aiib), the Belt and Road Initiative, and the New Development Bank (formerly known as the brics Development Bank), and by making substantial overseas
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investments, Beijing has signaled that it intends to support an inclu- sive, multilateral form of globalization.
As the world’s second-largest economy, China will undoubtedly help shape the future of the global economy. But for now, it remains unclear whether China can replace the United States as the primary champion of globalization. China is in the middle of a challenging
domestic structural shift, as it transi- tions from an economy led by exports and investment to one based more on consumption and services, and its econ- omy faces strong headwinds, including excess capacity and high corporate debt. Should the United States with- draw from its leadership role, China
would not be able to supply the world economy with a large and ac- cessible market for other countries’ exports, deep capital markets, or the kind of strong institutions, such as the Federal Reserve and the imf, that have allowed Washington to stabilize the global financial system for decades. And China has recently tightened its capital con- trols in an effort to stem capital flight—backtracking, at least for now, from its attempts to internationalize the renminbi.
Still, Beijing’s support for multilateral structures represents an im- portant step forward. A world based on bilateral relationships might work for the most powerful countries, but multilateralism has built a big tent in which the smaller, poorer countries can participate and prosper. They will suffer if they have to fend for themselves. China’s embrace of multilateralism has already enhanced its stature among countries with smaller economies. Despite strong opposition from Washington, 57 countries joined the Chinese-led aiib, many of them long-standing U.S. allies, such as Australia, France, Germany, Israel, Saudi Arabia, South Korea, and the United Kingdom. In the first quarter of 2017, another 13 countries agreed to join, including Afghanistan, Belgium, Canada, Hungary, Ireland, and Peru.
But if Washington retreats into bilateralism and Beijing wants to fill the void, the Chinese economy must keep growing and other emerging economies must increase their access to the Chinese market. Among the members of the aborted tpp, the vast majority, including Australia, Japan, and South Korea, already depend on exports to China, by far their largest trading partner, as do emerging economies
The early optimism about the Internet and the free flow of information has faded.
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all over the world. But if the United States turns toward protectionism, the $12 trillion Chinese economy is still not large enough to support global growth alone.
The new U.S. administration has blamed trade deals for manu facturing job losses and trade deficits and has threatened to impose sanctions on some of the United States’ top trading partners, such as China, Germany, Japan, and Mexico. In the short run, the U.S. government may introduce targeted hikes in tariffs on, for instance, steel imports, as well as aggressive antidumping penalties and broader trade restrictions justified by the alleged currency manipu lations of China, Germany, and Japan. The Trump administration may also try to browbeat companies, urging them to set up factories in the United States. So far, aside from tearing up the hardwon tpp agreement and sharply criticizing trade deals and trading partners alike, Trump has refrained from launching more aggressive actions. But if his domestic agenda runs aground, a frustrated Trump admin istration could turn toward more strongly protectionist policies and, in the worstcase outcome, ignite fullscale trade wars with other countries.
But there is a more optimistic scenario. Tax reform, public invest ment in infrastructure, and deregulation—all goals of the new administration—could stimulate private investment and boost U.S. growth and, with it, global growth. But to achieve this outcome, Trump must avoid becoming bogged down in unnecessary and divisive fights with the media and the courts and must firm up congressional support in his own party. In the meantime, policy makers and businesses in other countries should hope for the best but prepare for the worst.
THE AGE OF AUTOMATION For all the focus on globalization, in the long run, the most im portant force shaping the labor market and income inequality will be not trade or politics but technological change. Automation has already transformed the economies of the developed world and the nature of employment there, and almost all experts believe that the scope for expanding automation is enormous. As costs fall and the pace of innovation accelerates, the impact of automation will spread to middleincome countries and, eventually, to lowerincome ones, as well.
JA17_issue.indb 61 5/16/17 6:55 PM
Fred Hu and Michael Spence
62 f o r e i g n a f f a i r s
As capitalintensive technology replaces laborintensive manufac turing, early stage developing countries across Africa and Southeast Asia will cease to enjoy the comparative advantage offered by lower wages and production costs. Overall trade in goods will probably decline as the price of labor no longer determines where goods are produced, allowing production to move closer to consumers and cutting the costs of transportation and logistics.
Of course, no one knows with certainty how quickly such changes will occur, and every country should invest in education, technology, and infrastructure so that it can anticipate them better. For now, trade will continue to play a crucial role in allowing developing economies to grow rapidly. Although trade in physical goods may decline, trade in services will probably rise, as more and more services can be carried out remotely. As a result, developing countries should seek to grow their service sectors, especially in the tradable sector. They should also invest in innovation hubs, which can help replace lost manufacturing jobs.
As developing countries advance into middleincome status, they can no longer offer cheap labor. Such places should follow China’s lead by investing heavily in the hightech sector. Doing so has helped China transition away from traditional manufacturing and leapfrog over some of its competitors in a number of promising new industries, such as robotics, renewable energy, mobile messaging, and ecommerce.
As the history of technological change has demonstrated, technology displaces only specific kinds of jobs; it does not displace labor, at least not in the longer term. But in the short term, automation renders certain kinds of human capital redundant. This can cause difficult and sometimes lengthy transitions, both for individuals and for whole economies. In the end, however, machines raise human pro ductivity and increase incomes and prosperity. As the economists Erik Brynjolfsson and Andrew McAfee have explained, economies shift from creating jobs for which machines are substitutes to creating those for which they are complements.
Smart investment in job training can accelerate and ease these transitions. Policymakers should learn from the Nordic countries, where governments have combined training programs with various forms of income support and redistribution. Governments should not offer training only to the unemployed. Displaced middleincome
JA17_issue.indb 62 5/16/17 6:55 PM
Why Globalization Stalled
Ju l y /Au g u s t 2 0 17 63
workers, who often end up in lowerpaying service jobs, can benefit from retraining that will help them compete for higherwage work.
SAVING GLOBALIZATION Predictions that the era of globalization will soon end are too pessi mistic. To be sure, the rapid expansion of trade, rising crossborder capital flows, and, above all, the spread of new technologies have transformed the global economy. They have created difficult chal lenges, and countries will continue to struggle to increase growth and productivity, while reducing inequality and creating good jobs. But there are also enormous opportunities. Turning back the clock to restore the old frameworks is impossible. The challenge is to build new ones that work.
Waving the banner of protectionism and nationalism may attract popular support, at least temporarily. But history has shown that, ultimately, it may well threaten global peace and prosperity. The United States, China, and the world at large would be far better off if they could find a path to a more sustainable globalization, reforming the existing global order rather than tearing it down completely.∂
JA17_issue.indb 63 5/16/17 6:55 PM
The contents of Foreign Affairs are protected by copyright. © 2004 Council on Foreign Relations, Inc., all rights reserved. To request permission to reproduce additional copies of the article(s) you will retrieve, please contact the Permissions and Licensing office of Foreign Affairs.
7 Trends in the Global Economy The Liberal International Order/Nye 2017 Will the Liberal .pdf
The contents of Foreign Affairs are protected by copyright. © 2004 Council on Foreign Relations, Inc., all rights reserved. To request permission to reproduce additional copies of the article(s) you will retrieve, please contact the Permissions and Licensing office of Foreign Affairs.
