Monday, January 09, 2017

Don't blame economic globalization, blame global governance and national mismanagement

Economic globalization is good. Supranational power grabbing and national failures to reform the welfare state are the problem.

Also published on CapX 

Writing in the Wall Street Journal, the newspaper’s Chief Economics Commentator, Greg Ip, argues that “The world's ideological divide isn't left versus right, it's globalist versus nationalist, and globalists have work to do.” 

He makes a few accurate remarks but is largely missing the point, which I’ll argue hereunder, quoting from his piece:

To start off, he asserts:
“Supporters of these disparate movements are protesting not just globalization—the process whereby goods, capital and people move ever more freely across borders—but globalism, the mind-set that globalization is natural and good, that global governance should expand as national sovereignty contracts… Their targets are such global structures as the EU, the World Trade Organization, NATO, the U.N. and the North American Free Trade Agreement.” 
To his credit, Ip makes a distinction between scrapping borders and concentrating power at the supranational level. The former is fundamentally a good and still popular thing. Nobody in France protests the EU makes sure Ryanair is allowed to operate there. Mass migration is of course less popular, but it’s debatable how connected this is, while it also is a phenomenon that really only took off in Europe in the last thirty years (at least when one looks at the pace). 

While it is true that the populist forces attack both scrapping borders and concentrating power, it’s however incorrect to argue that these necessarily need to go hand in hand, which also Ip does seem to think, thereby agreeing with the populist armada, as he writes: 
“By ceding modest amounts of sovereignty to international institutions, a country could make the world, and itself, far stronger than by pursuing its own narrowly defined interests.” 
As I’ve explained, the EU could perfectly concentrate on scrapping national protectionism without almost ever imposing EU-wide harmonized one size fits all regulation agreed at the EU level for 500 million people. The EU actually used to function more like this, but since the 1980s, many national decision making vetoes were scrapped, so it became easier to harmonise, while politicians were also just very keen to try to replace national protectionism by European protectionism. Some crony business lobbies obviously didn’t object.

The journalist also argues:
“But globalists would be wise to face their own shortcomings. They have underestimated the collateral damage that breakneck globalization has inflicted on ordinary workers, placed too much weight on the strategic advantages of trade and dismissed too readily the value that many ordinary citizens still attach to national borders and cultural cohesion.” 
He does have a point that less barriers to trade can create disruption, especially in economic sectors that have been overprotected for years (think steel, or even the taxi sector, where ordinary taxi drivers who paid huge fees for their legally protected monopoly suddenly see Uber entering the market, exploiting technical-legal loopholes). 

Such “collateral damage” should really be blamed on the protectionism preceding it, similar to how Russia’s suffering in the 1990s should be blamed on the preceding 70 years of extreme economic planning and not on whoever was in charge then.  

To deal with such collateral damage, Ip seems to suggest some kind of economic transfers (welfare): 
“If globalists are to regain the public’s trust, they will need to re-examine their own policies. The dislocation caused by past globalization casts doubt on the wisdom of prescribing more. That globalization’s winners can compensate its losers makes impeccable economic logic, but it rings hollow among those too old to retrain or move.”
Think of the taxi driver who’s just been driven out of business by Uber, while still having to pay back that huge loan he took out, hoping to be able to enjoy a monopoly for years. Do we really help this person by not “prescribing more” competition, which would result in more cheap imports from Asia? Of course not. Especially the weakest in society are dependent on trade openness, as they spend a higher share of their income or savings on things like clothing and food, that have become cheaper thanks to lowered barriers to trade. 

The real problem in the West isn’t so much that many factories have shut down or moved but that not enough alternative businesses have been started to compensate for the pain. A quick glance at the West’s ailing welfare states reveals a business environment of high taxation, unpredictable and stifling regulation and great public and private debt, promising more trouble ahead. Is it any wonder people are reluctant to invest and create new companies? 

Ip complains in particular about China, writing: 
“A wave of Chinese imports wiped out 2 million American jobs, according to one widely cited 2016 study, with no equivalent boom in U.S. jobs linked to exports to China.” 
He’s missing the point here. Those 2 million American jobs should of course not be replaced by jobs related to exports to China. They should be replaced by jobs which are the result of savings made thanks to falling prices. An example: when Joe Sixpack can save $300 because Apple can produce smartphones with cheaper labour in China, he has $300 more to spend in America, on American products, enabling American companies to survive. Obviously he may as well spend it on non-American products, but the fact that the savings were made in the U.S. makes it more likely the ultimate gains in terms of more investment will also end up in the U.S. 

The author further makes a few valid points, for example that China engages in “discrimination against foreign investors and products and an artificially cheap currency”. Although also the other trade powers do that, it’s true that China is more aggressive in this, which raises valid questions on how to trade with autocratic centrally steered countries. Again, however, the answer is not to impose tariffs, as this would hit Western consumers and importers hard (to the extent that it’s possible in today’s world, with its complex supply chains, to distinguish between “importers” and “exporters”). Anyone investing in China or buying products or services there should heed the advice of the Romans: “caveat emptor” or “let the buyer beware”. 

I won’t develop on Greg Ip’s wrong analysis of the euro’s ills, which he blames on “German trade surpluses” (I do that here), but I agree with his assessment that “much of the backlash against immigration (and globalism) is not economic but cultural” and that “globalists should not equate concern for cultural norms and national borders with xenophobia.” 

Also here, however, not the sheer scrapping of trade barriers is what has angered so many people, but supranational power grabs over immigration policy or national budgets. Surely one can make a good case for EU freedom of movement and how it’s necessary to allow people to move permanently in Europe if one wants to really free up trade, but should the right to move to another EU member state really be unrestricted? At the moment, seven million Spanish could move to France, if they wanted to (and one million British have actually moved to other EU states). Would it be so unreasonable to cap this at a “culturally acceptable level”? Again, I don’t think it’s a good idea (in Europe), but it may well be wise to implement if only to maintain open trade with Britain after Brexit. 

More pressing is of course immigration from outside of the EU – given how non-Europeans tend to integrate less easily into Europe then Europeans. If only Europe’s current borders would be respected, through Australian-style border protection, and the ongoing large flow of irregular migration would be stopped, we’d see a lot less support for the populists who are keen to throw out the free trade baby with the migration chaos - bathwater.  

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