By Pascal Lamy, former Director-General of the World Trade Organization
If there is any seemingly permanent feature of the last decades whose future is now uncertain, it is globalization. Globalization – the intensification of international trade that results in the growing diversity of sites to produce goods and services – is enabled by technology that reduces distance frictions and an ideology that rewards opening because more advanced international divisions of labour boost efficiency.
However, the system of international trade is suffering turbulence. For the circulation of finance or for people who have always experienced cycles punctuated by crises, this is not particularly surprising. But this is new for trade in goods and services, which has been expanding almost non-stop: Will that survive the current disruptions unscathed? Disturbances are coming from two fronts, one warm and the other cold, which have recently drawn closer.
The warm front of politics, emotions and impulses are embodied by a vengeful Trump at the global level, and by smaller players at the local level. Their election campaigns exploit the poorly anticipated hardships that can be blamed on globalization, costs explained by Ricardo and Schumpeter: Reallocating factors of production as competitive conditions creates lots of winners who are silent – as well as numerous losers who legitimately and loudly express their pain. Wherever the systems that help mitigate social insecurity are second-rate, starting with the United States, anger takes over. A major inspiration for populism, this is usually associated with xenophobia and protectionism.
These days, the cold front – of the economy and production – is dominated by market capitalism, which acts rationally. With revolutions in technology, a business is started, then moved as relative prices change and perhaps later, it is even repatriated. Because rules are needed to ensure that competition is as fair as possible, a normative, institutionalized system of trade regulation – the World Trade Organization (WTO) – has been constructed over the past 70 years. However, this framework has not been properly to the geo-economic upheavals of recent decades, especially because it is based on an obsolete bipolar distinction of wealthy countries (that obey the principle of reciprocity) and poor countries (which have margins of flexibility that are supposed to help them catch up). This is why China, where 1990s regulations poorly control certain practices, is now getting so much attention. How are we to define China: as a poor country with many rich people – or a rich country with a lot of poor people? For the past 10 years, WTO members have not been able to settle this issue, and are now reaping Trump’s vengeance, which is less misplaced on China than other countries.
Will the current storm usher in a phase of deglobalization like those of the past? Will the global economy be able to withstand attacks by American politicians or will they get the better of globalization’s infrastructure (its famous ‘value chains’) and superstructure (multilateralism)?
For now, it looks as if events are demonstrating the theory of economic resilience: Brexit is stalled and Japan has rescued the Trans-Pacific Partnership with style. But many protectionist strikes were recently aimed at China and a few at Europe.
The response will be both global and local. At the global level, trade multilateralism must be reformed in response to justified criticism. If Trump continues to try to impose bilateralism, only China and the European Union will be able to lead a counter-offensive in defence of multilateralism: China because it would prefer that to a showdown with the USA (that China’s got a good chance of winning), and the EU because as long as it can’t act independently, it doesn’t really have a choice. That’s why the cooperation affirmed during the EU-China summit in mid-July is so important.
At the local level, social solidarity systems have to be reformed to better provide for victims of the current and future shocks from transformations that globalization is bound to accelerate and strengthen. Tony Blair talked of being ‘tough on crime and tough on the causes of crime’. To be hard on populism you have to know how to be hard on its causes. The American dimension may be too big for us, but the European dimension is ours: We should aim to Europeanize globalization.
This piece was originally published for Les Echos in French and translated for EACC Insights Volume II