Globalization Is Alive, Well, and Changing

June 7, 2022   |   Tags: , ,
Global business is still very much global.

Free trade is under greater attack today than it has been in decades, especially in the United States. Despite continued public support for foreign trade and globalization generally (even during the height of the COVID-19 pandemic), a bipartisan cadre of American politicians and pundits is increasingly skeptical of, or downright hostile to, the longstanding consensus in favor of trade liberalization. The U.S. government, moreover, increasingly prioritizes national security, economic "resilience," and the people and communities allegedly left behind by our modern and globalized world. The Biden administration's reluctance to remove former President Donald Trump's tariffs or to pursue new trade agreements has, along with pandemic-related supply chain snarls and Russia's invasion of Ukraine, signaled to many that an era of de-globalization is upon us.

Yet, even as its justifications and the global economy change, the current skepticism toward free trade and globalization remains misguided. Academic literature and recent events continue to provide strong economic, geopolitical, and moral support for free trade and the multilateral trading system. There is also little concrete sign that the world—so far, at least—is really de-globalizing, though trade and supply chains, as well as the rules under which they operate, are changing.

Put simply, the death of globalization is greatly exaggerated.

The Criticisms

Today's criticisms of trade and globalization fall into three general categories. From an economic perspective, critics contend that decades of "unfettered free trade" are responsible for widespread "deindustrialization" in the United States and, by extension, increased job loss, depressed family formation, and the erosion of industrial towns, particularly in the Rust Belt. The most common target is U.S. trade with China—in particular, the 2000 U.S. law that granted China permanent normal trade relations and ushered the country into the World Trade Organization (WTO) in 2001. This supposedly drove the now-famous "China Shock" period between 1999 and 2011 during which a sizable increase in Chinese imports caused, according to various economists, the loss of millions of American jobs and associated social ills. Others claim that the U.S. trade deficit—not only with China—is responsible for similar harms since the 1990s, and that globalization's theoretical benefits supposedly fail to match its reality while destroying the lives of millions of American workers and their communities.

Second, critics increasingly claim that international trade has undermined U.S. national security by not only crippling the country's industrial base but also making it dependent on foreign nations, especially potential adversaries, for critical goods. Thus, protectionism and industrial policy are needed to re-shore essential industries not on economic grounds but geopolitical ones. Here again, China looms large, as critics not only blame China's economic rise on U.S. trade policy but also use it to justify trade and investment restrictions on key sectors (like pharmaceuticals or semiconductors) and a broader "decoupling" of the U.S. and Chinese economies. Recent events in Russia and Ukraine supposedly reinforce these concerns. 

Finally, there are criticisms based on morality, particularly from self-declared pro-worker populists on the left and (increasingly) the right who claim that globalization sacrifices the common man and vulnerable communities on the altar of economic efficiency and gross domestic product, delivering diffuse benefits to educated, urbanite globalists at the concentrated expense of real Americans. The elites get iPhones, Netflix, and knowledge jobs, they claim, while the working class gets a life of joblessness, government dependency, or worse.

The Reality

In each of these criticisms, there is a nugget of truth, but they remain overwhelmed by the reasons to support free trade and oppose protectionism.

The Economic Case

It's undoubtedly true that international trade, like all forms of market competition, disrupts some American companies and workers that, through government protection, formerly had the U.S. market to themselves. However, the economic case for free trade remains rock solid. American consumers (who are also American workers, by the way) gain from new access to goods and services at lower prices and in greater varieties. These gains come not only from foreign-made items but also from similar domestic ones that are now forced to compete with imports on price and quality. Studies show that trade's "consumer surplus" is far more significant than a few cents on the proverbial cheap T-shirt. Recently, for example, several economists have found that falling prices caused by Chinese imports into the United States during the 2000s generated hundreds of thousands of dollars in consumer benefits for each American job potentially displaced by the China Shock—the equivalent of giving every American "$260 in extra spending per year for the rest of their lives." Similar gains occur outside the United States: European consumers, for example, save €60 billion per year (about $64 billion) from lower tariffs resulting from the European Union's entry into the WTO. Studies also uniformly find that these benefits—again contrary to the conventional wisdom—tend to disproportionately aid the poor and the middle class, who have tighter budgets and concentrate their spending on tradable sectors like food, clothing, footwear, and consumer electronics.

The consumer gains from trade are a big reason why Americans today work far fewer hours to own more and better essentials than at any prior time in history. Dartmouth economist Bruce Sacerdote finds that lower-income Americans' overall consumption (adjusted for inflation) increased by 62 percent to 164 percent between 1960 and 2015, not fully accounting for improvements in quality. In other words, poorer Americans today can consume about twice as many goods and services as their 1960 counterparts, and expanded international trade is undeniably a big reason why.

Additionally, domestic companies and farmers gain financially from exporting their products: Total exports of goods and services hit almost $2.5 trillion in 2019, and the United States was the world's second-largest goods exporter and largest services exporter that same year. Firms also benefit from imports, either by moving and selling foreign-made items in the United States or by using them to produce other things. Indeed, the total value added to wholesale trade, retail trade, and transportation and warehousing was more than $3.1 trillion in 2019—output that in many cases (e.g., Gap or FedEx) wouldn't exist but for global trade. Foreign-made inputs and equipment, moreover, boost American manufacturers' global competitiveness and constitute about half of all goods imported into the United States. The best testaments to these benefits are the thoroughly documented harms that Trump-era tariffs on steel and aluminum inflicted on American manufacturing investment, output, and jobs.

American companies also gain from foreign direct investment—dollars that overseas companies acquired by selling stuff to U.S. consumers and then injected back into the U.S. economy. Foreign investments in U.S.-based companies (e.g., BMW in South Carolina) generated $5 trillion in sales and $1.1 trillion in value-added—the affiliates' direct contribution to GDP—in 2019, and these same firms conducted more than $71 billion in research and development (mostly in manufacturing) that same year. Research also shows that foreign ownership benefits not only U.S.-based affiliates—via increased capital spending, new production or management techniques, or better supplier networks—but also their surrounding communities and neighboring companies. Anyone still doubting such benefits can drive down Interstate 85 from Charlotte, North Carolina, to Montgomery, Alabama, to check out the multinational factories and bustling towns firsthand.

The "corporate" gains from trade inevitably benefit American workers. For example, a 2020 report found that trade directly or indirectly supported approximately 40.6 million jobs. New research also finds that, while only 6 percent of U.S. firms in manufacturing and services are goods traders, these firms account for half of the economy-wide employment today and 60 percent of all new net jobs created after 2008, primarily through the establishment of new businesses. Meanwhile, foreign-owned affiliates in the United States employed almost 8 million Americans in 2019, typically at higher wages than similarly situated workers at U.S.-based competitors.

Trade also has allowed American companies and workers to focus on their comparative advantages in capital-intensive manufacturing and skilled services. The increased prominence of these jobs in the American economy has enabled a transition from manual, inefficient, and even dangerous low-skill jobs to generally safer, more productive, and better-paying ones. A job transporting that cheap T-shirt (e.g., working at Amazon) now pays better, and is more promising, than the job making it.

In general, increased imports into the United States between 1994 and 2019 have coincided with gains in domestic output, employment, and real (median) wages. That same period also saw an increase in the share of American households making more than $100,000 (from 23.8 percent to 34.3 percent) and declines in the shares of middle-income (44.6 percent to 40.3 percent) or low-income (31.8 percent to 25.5 percent) households. In other words, during the hyperglobalization era, the American middle class shrunk because households got richer.

Free trade is also integral to the "creative destruction"—that is, the constant replacement of old firms, jobs, and products with new ones—that raises our living standards. While much of this activity is imperceptible, it is doubtlessly driven by consumers and capital seeking more productive ends in the global marketplace. International competition, for example, has long pushed American companies, such as the Big Three automakers in the 1980s, to improve their products or go out of business. And the money Americans save by buying cheap foreign goods is often spent on, or invested in, promising domestic companies and their higher-skilled workers. The outcome of these unseen transactions is not just "cheaper stuff" but better and once-unimaginable goods, better jobs, better companies, and better lives.

Quantifying the overall benefits of trade is exceedingly complicated and uncertain, but economic studies uniformly show substantial gains. For example, a 2017 Peterson Institute for International Economics study calculated the payoff to the United States from globalization between 1950 and 2016 to be $2.1 trillion ($2.4 trillion in 2021 dollars), increasing GDP per capita and per household by around $7,000 and $18,000 ($7,900 and $20,400 in 2021 dollars), respectively. These benefits, again, accrue disproportionately to households in the bottom income decile.

This does not mean, of course, that all is perfectly fine in the modern American economy. However, the convenient narrative that "globalization" is the primary driver of the nation's most commonly cited economic challenges is misguided. For example, the decline in American manufacturing jobs began decades before imports were little more than a rounding error in the U.S. economy—in 1979 in nominal terms or the mid-1940s as a share of the workforce. These declines are also shared by other advanced economies (including ones with trade surpluses like Germany and Japan) and many emerging markets like China—which shed almost 18 million industrial jobs in 2012–19. In reality, the decline in U.S. manufacturing employment reflects broader, global trends (e.g., productivity gains and changing consumption patterns), not the "American carnage" decried by Trump at his inauguration. It also reflects a shift in worker preferences away from manufacturing; job openings in the sector have averaged more than 850,000 since mid-2021, and manufacturers consistently point to a lack of workers as their biggest impediment, even after offering generous pay raises and signing bonuses.

Other trends also defy the anti-globalization narrative. Male wage stagnation, for example, actually ended before the United States entered the North American Free Trade Agreement (NAFTA) in 1994 and the WTO in 1995, and those wages generally increased thereafter. Male labor force participation, meanwhile, has consistently declined since the 1950s. And despite ample job openings and significant pay increases, only a small fraction of non-working, prime-age men today report an interest in getting a job. Troubling trends in marriage and family formation (such as the share of children living with married or cohabiting parents) ceased in the early 1990s and either stabilized or reversed course thereafter. (The troublesome 1980s, by the way, also featured far more U.S. industrial policy, far less global integration, and dozens of competitor countries still foundering under communism or socialism.) Meanwhile, the vast majority of older industrial cities in the United States—the ones most vulnerable to foreign competition—have long since recovered and moved on. That a few remain in dire straits thus speaks less to national trade policy and more to those specific towns, as well as state or local policies that might inhibit adjustment and growth. 

And the supply chain crisis? Another miss. For starters, multinational corporations and consumers have been adjusting their practices—diversifying suppliers, building inventories, investing in new capacity, altering spending patterns—since COVID first hit. Keeping trade and investment lanes free from government interference helps facilitate this adjustment. Just as important, there's scant evidence that reshoring supply chains would help the country withstand future economic shocks. Two recent studies (one from the OECD and another from German research network CESifo) found, for example, that an economic shock abroad would hit a "decoupled" U.S. economy just about as hard (in terms of stability or welfare) as our current, globally integrated one. Any meager benefits, moreover, would come with major costs: Insulation from foreign shocks makes a nation more susceptible to domestic shocks (say, a freak ice storm in Texas) and intensifies any resulting pain because local supply chains adapt more slowly than global ones.

Studies also show that moving toward a more localized U.S. economy would reduce economic efficiency and thus increase prices while reducing output. In reality, most supply chain problems have little to do with trade policy and a lot to do with the pandemic and misguided U.S. policies—stimulus checks, tariffs, zoning, environmental regulations, immigration restrictions, etc.—that overheated demand or restricted raw materials, labor, transportation, and construction.

The baby formula crisis provides a timely, albeit terrible, example of these economic realities. Decades of tariff and nontariff (FDA) barriers effectively walled off the U.S. formula market from foreign competition: According to the White House, 98 percent of all formula consumed here is made here. These and other trade restrictions, combined with government welfare contracts that encouraged domestic industry concentration, created a brittle system that crumbled in the face of a serious domestic shock (the Abbott recall and plant closure) and struggled to recover thereafter. Now the Biden administration's solution to the crisis is to fly in formula from abroad—formula that was seized at the border only a few weeks ago. 

Other products dominated by domestic production, such as pickup trucks, also suffered from pandemic-related supply chain problems in 2020–21, as much as their "globalized" counterparts, if not more so. The lesson in each case is the same: protectionism doesn't improve economic resilience—it usually makes things worse.

Even the damage attributed to the 1999–2011 China Shock has been wildly oversold. Along with the aforementioned consumer benefits from Chinese imports, numerous studies completed since that period reveal fewer American jobs were lost than the 2.4 million often claimed; substantial employment gains in services and export-oriented industries; and net economic benefits for the U.S. manufacturing sector and the country as a whole (about 96 percent of all U.S. workers came out ahead). Even if one were to treat the China Shock as economic gospel, moreover, perspective is sorely needed: The total American jobs lost due to the 11-year China Shock are less than half of the approximately 5 million job separations that occur each month in a healthy U.S. economy, and the 1 million lost manufacturing jobs would constitute less than 20 percent of all such losses (and less than 5 percent of all job losses) over the same period.

Recent analyses also show that low-skill manufacturing employment and "late stage" industries with routine, standardized processes likely would have suffered the same fate in the last two decades, regardless of the China Shock, due to competition from other developing countries and non-trade issues such as automation. In fact, data show that from 1990 to 2017, Chinese imports replaced other imports (particularly those from Asia), not domestic production and that this trend reversed—lower Chinese imports and greater imports from Vietnam, Mexico, and elsewhere—when Trump's China tariffs were implemented.

These numbers answer a question that economic nationalists and China hawks rarely ask: What would have happened without the China Shock? They indicate that Chinese import restrictions would not have saved most of the American manufacturing jobs destroyed between 1999 and 2011—those jobs would have simply been lost due to other things, including technology and non-China imports. (Indeed, that's just what happened when President Barack Obama slapped 35 percent tariffs on Chinese tires back in 2009.) Economists have long understood that adjustment to economic shocks—whether due to trade, technology, pandemics, or whatever—is never easy, but there's nothing about the China Shock, which ended a decade ago, so novel or harmful as to justify abandoning a century of scholarship and experience on the overall benefits of free trade.

Finally, the last few years have forced us to re-learn about the failures of the only alternative to free trade, protectionism. Studies show, for example, that American consumers, both companies and individuals, bore most of the burden of the Trump administration's tariffs on home appliances, solar panels, steel, aluminum, and Chinese-origin goods. Downstream manufacturing firms have been forced to pay higher prices for metals than their global counterparts, thus costing them sales and jobs; exporters (farmers and manufacturers) have lost competitiveness due to higher input costs and foreign retaliation; and investment has suffered due to uncertainty surrounding American and global trade policy. The tariffs also failed to achieve their objectives. Global steel overcapacity, for example, remains a problem; there's been no revival of domestic solar panel production; Chinese economic malfeasance has actually increased (likely in response to U.S. tariffs and sanctions); and Beijing's hardline stances on human rights, free speech, the South China Sea, and other issues have deteriorated further.

Engagement thus remains the worst trade policy—except for all the others that have been tried.

The Geopolitical Case

The multilateral trading system arose in the second half of the 20th century, not only from a desire for global economic growth or to empower global consumers but mainly from a fear that the division of the world into competing economic blocs could again fuel global military conflict. Fresh out of two world wars that began, in part, due to trade conflicts, the founders of the General Agreement on Tariffs and Trade (GATT) believed that countries that traded with each other (and thus had access to an institutionalized means for resolving commercial disputes) would be less prone to engaging in geopolitical competition or armed conflict with each other. And this system, for all its fits and starts, has met this aim reasonably well for over seven decades: The GATT and its successor, the WTO, have provided an avenue for the peaceful resolution of trade disputes and for countries to commit to a series of rules and economic reforms, mainly as a prerequisite for accession to the organization, that increase global interdependence and make bilateral disputes less likely to emerge. Even China signed on to the rules and undertook reforms, with subsequent backsliding more a failure of WTO members' enforcement efforts than of the rules themselves.

Numerous studies have also found that increased trade leads to fewer armed conflicts among states—a core national security objective. As countries trade more with each other or become more exposed to each other's growth, they are less prone to engage in conflict, and they often form deeper alliances. These security benefits are driven by several factors. First, trade makes countries more economically interdependent, thus making future conflict more costly. Second, trade and bargaining are more cost-effective ways of resolving disputes and obtaining foreign resources. Third, trade increases material prosperity and promotes mutual tolerance and understanding. And fourth, trade can limit the power of domestic constituencies that benefit from armed conflict. 

Russia's invasion of Ukraine does little to undermine these points, and in some ways, it enhances them. Neither the academic literature nor all but the most overzealous pundits claim that trade prevents armed conflict, but that it simply makes interstate violence less likely. The Russia-Ukraine clash may therefore be considered an exception to a decadeslong decline in wars between trading partners and deaths from cross-border conflict. Vladimir Putin's "Fortress Russia" strategy, moreover, worked to reduce Russian engagement abroad so that the nation could withstand economic blowback resulting from its foreign aggression. Prior to the Ukraine invasion, in fact, Russia was relatively isolated economically, sporting a trade/GDP ratio well below the global average.

Yet public and private sanctions still inflicted immense economic pain on the Russian economy, while "globalized" smartphones, VPNs, and social media thwarted Putin's propaganda machine. Governments could pursue financial sanctions because of Russia's continued reliance on the U.S. dollar—currency obtained due to international trade. These and related events might also serve as a warning to other illiberal countries with extraterritorial ambitions, especially those like China which are far more integrated into the global economy. According to numerous reports, Beijing's hesitancy to fully embrace Russia during the Ukraine conflict stems from concerns about the repercussions for a globalized China, which has already suffered sustained capital outflows since Putin invaded. Thus, isolating China economically might make future conflict in Taiwan or elsewhere more likely, not less.

Finally, allowing developing countries access to the U.S. market can decrease the appeal and perceived benefits of joining terrorist organizations and networks because it demonstrably produces not only economic growth but also better opportunities and improved standards of living in impoverished regions. These benefits are particularly important for developed countries at risk of bordering states' poverty or instability spilling into their territories through increased migration or refugee flows. The easiest way to slow migration from poorer Latin American countries to the United States is to make potential migrants wealthier at home via trade.

The Moral Case

As Adam Smith wrote in The Wealth of Nations, "Man is an animal that bargains." Humans are unique in our ability to peacefully exchange goods and services to meet our needs. For millennia, we have built cultures, societies, and systems around the principle of voluntary trade. In doing so, we have come to act naturally as equals—even though we may be of different ages, genders, nationalities, races, or religions. When individuals can freely pursue their self-interest through trade, obtaining value by providing value, the "invisible hand" yields economic and social outcomes that benefit society at large.

Intended or not, American trade liberalization has removed many of the political barriers that thwart these voluntary, beneficial human interactions and the many inequities that prevailed in the previous, more protectionist U.S. system. Trade restrictions have long propped up certain politically powerful U.S. workers and industries (in steel, sugar, textiles, etc.) via hidden, regressive taxes on all other Americans, making the country poorer overall in the process. And it is immoral for the government not only to prioritize the protected groups' well-being above that of other Americans but to do so at the latter's direct expense. Removing tariffs might create pains for formerly-protected workers and companies now competing for their neighbors' once-captive dollars, but moral claims based on that disruption ignore that the protection itself never should have been there in the first place.

The morality of trade doesn't stop at the water's edge either: The lowering of U.S. trade barriers, along with American leadership forming agreements and participating in trade institutions such as the WTO, has produced immeasurable benefits for the world's poorest people. The International Labour Organization reports that between 1993 and 2018, for example, the share of working individuals in low- and middle-income countries living in extreme poverty (less than $1.90 a day, in purchasing power parity terms) fell from 41.7 percent to 9.8 percent—a decline of about 550 million people. Other studies show that trade helps these workers not only consume more but also move from subsistence and informal activities to formal wage or salary work. Child labor is disappearing too: The overall number of child workers (ages 5–17) decreased by approximately 38 percent, or 94 million, between 2000 and 2016—benefits especially important for women and girls who were once simply married off (or worse).

Globalization Isn't Going Anywhere

Fortunately, rumors of globalization's demise have been, yet again, greatly exaggerated. The share of global GDP of the goods trade was down in 2020 from its 2008 peak, yet it was still historically high—well above levels seen during the supposed hyperglobalization heyday of the 1990s and right around where it was in 2016. This widely-cited figure, moreover, is a lousy indicator of what's really going on in the global economy. For starters, goods trade was destined to slow eventually (some goods aren't amenable to long-distance shipping and multinational production) as more economies moved from manufacturing into services (many of which are, like construction, nontradeable). Furthermore, the supposedly retrenching U.S. saw inflation-adjusted merchandise trade (imports plus exports) reach record levels in 2021. Global trade also hit a record high last year, as did trade in industrial inputs (a sign of companies' use of global value chains). And both the Panama and Suez canals saw record traffic, with the latter being expanded to handle even more cargo in the future.

Even more importantly, goods trade is only one part of the globalization story. Most obviously, global trade in services continued to increase before the pandemic and is now expanding again as countries reopen. The key here is the explosion in digital trade—the cross-border delivery and consumption of both "information and communication technology" products (smartphones, software, etc.) and traditional services enabled by those same technologies (legal advice, research and development, online education, etc.). Monthly global data traffic is expected to more than triple (from 230 exabytes to 780 exabytes) between 2020 and 2026, and international bandwidth—the best measure of cross-border data flows—saw 30 percent increases in both 2020 and 2021 (with much more on tap). Quantifying digital trade is difficult because traditional statistics have a hard time capturing the origins, volume, and value of these transactions. Nevertheless, back-of-napkin estimates reveal trillions of dollars in unseen economic activity.

Other aspects of globalization, such as international migration and capital flows, also remain at historically high levels. Countries continue to sign trade agreements, such as the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (formerly the Trans-Pacific Partnership), the larger (but less ambitious) Regional Comprehensive Economic Partnership, and the 54-nation African Continental Free Trade Area. And "cultural globalization" continues apace: Foreign cuisines are so commonplace in America that grocers struggle to stuff them all in the "ethnic" aisle; Puerto Rico's Bad Bunny topped Spotify's charts rapping in Spanish; and the most-watched show on Netflix last year was in Korean. If the world is "de-globalizing," it has a weird way of showing it.

Finally, the pandemic and Russia have surely caused multinationals to rethink their supply chains, but this is far more re-globalization than de-globalization. American companies, for example, have shifted some operations out of China mainly to Southeast Asia or Mexico, not back home. Declines in Russian or Ukrainian commodities, moreover, have pushed international buyers to turn not inward but to Canada, South Africa, Latin America, the United States, and India. Inventory and related systems have also been overhauled (less "just-in-time" and more "just-in-case"), and the market is booming for supply chain and logistics technologies that let multinationals better track shipments and processes.

In short, global business is still very much global. It's just different from what it was a few years ago. And it'll be different again in a few more.

Free trade certainly isn't painless, but its disruptions do not outweigh its tremendous economic benefits for both the country and the world. Such pains cannot obscure trade's geopolitical importance and fundamental morality, as well as the inefficacy of the lone alternative to free trade, protectionism. The challenges created by seismic shifts in industrial production, the rise of China, and even a once-in-a-lifetime pandemic are some of the most difficult of our time, and the solutions are neither clear nor easy. But a rejection of free trade wouldn't benefit the United States or correct its problems; it would probably make things worse.

Globalization will continue to grow with or without the U.S. government's endorsement. It would be far better for American policymakers to join in than to embrace economic isolation.

The post Globalization Is Alive, Well, and Changing appeared first on Reason.com.


Read More...