1 An Overview of the Book
Globalization was a major theme of the 2016 presidential election in the United States. Both Donald Trump, on the right, and Bernie Sanders, on the left, pursued strong populist campaigns in associating globalization, and US trade policy in particular, with major adverse effects on American workers and the US economy more generally. A common theme of their campaign rhetoric was that trade agreements such as the North American Free Trade Agreement (NAFTA) have destroyed US jobs. This outcome has allegedly been the result of relocating auto-manufacturing plants to Mexico to take advantage of lower wage costs in that country and duty-free access to this country. There were also complaints in the campaign about imports of manufactured goods from China, resulting from its major drive to industrialize and its access to the US market on a virtually duty-free basis as a member of the World Trade Organization (WTO). As a result, these imports have led to the closing of factories in the United States and the loss of US jobs that could not match the cost advantage of imports from China. In addition, this cost advantage has allegedly been magnified by Chinaâs policy of currency manipulation that was aimed at maintaining an artificially low exchange rate for the renminbi. In the field of immigration, the complaints raised by Mr. Trump were particularly strident, especially toward Mexicans. (These claims are fully analyzed in subsequent chapters.)
The focus on the perils of globalization for the United States in the 2016 presidential election was matched by similar complaints about the negative effects of globalization in more recent election campaigns in France and Germany, as well as the United Kingdomâs earlier decision to withdraw from the European Union (âBrexitâ). Altogether these developments have led some to speculate that the advanced countries are entering into an unchartered phase of globalization or possibly some reversal in the expansion of the liberal international economic order that was established after World War II (WW2).
While there may be validity to certain aspects of the claims raised in the 2016 US presidential campaign summarized above, it is also true that they provide a very selective and partial view of the effects of trade policy and trade expansion for the US economy. They also give a very incomplete view of the economic impact of globalization more generally defined to include the effects of trade expansion, immigration and financial liberalization. The purpose of this book is to elaborate on these counterclaims and provide a balanced assessment of the economic benefits and costs of globalization for the United States. At the same time, the book attempts to identify certain changes in domestic policy and in the governance of the international system that can or should be made with a view to maximizing the benefits of globalization and minimizing its costs, not only for the United States but for other countries as well.
In trying to understand the political backlash against globalization that has affected the outcome of recent elections on both sides of the Atlantic, one must also look at other factors that may account for this reaction. In this discussion, technological change must be seen as a critical factor affecting structural change in the US economy and work-force requirements in the manufacturing sector. As a result, the relative share of manufacturing in the aggregate economy has fallen sharply as economic activity in the United States has become increasingly more dependent on the delivery of services; at the same time, within manufacturing, there has been a marked shift away from traditional smokestack and machine-based industries (such as textiles and steel) to more skill-intensive, technology-based manufacturing of electronics and other sophisticated consumer goods. This process of structural change has been under way for some time and started prior to the phase of globalization under consideration in this book. Along with the declining role of trade unions in the US economy and the phasing out of traditional (defined-benefit) pension arrangements, the process and pace of structural change have contributed undoubtedly to a sense of insecurity and frustration among certain working groups. These developments, along with the impact of globalization, raise questions about the appropriate role and effectiveness of government policies in facilitating the adjustment process for those workers who have been adversely affected by structural change in the economy. This issue is also considered in the course of this book.
At the outset, it may be useful to lay out the major themes of the book in order for readers to have a clearer perspective on the orientation of the author and the main conclusions that are reached as a result of the analysis presented in the rest of this book. These are as follows:
- 1.The United States has been a significant net beneficiary of economic and financial globalization as experienced in the last few decades.
- 2.To a large extent, this conclusion should not be a surprise, as the United States has played a leading role in defining the ground rules and conditions for globalization which have been favorable to its economic and financial interests.
- 3.In many respects, the gains from globalization are often ignored in public debate, as they are more diffuse and generalized than the costs, which tend to be concentrated and localized and thus easier to identify.
- 4.Many of the concerns raised about globalization more properly should be attributed to the impact of structural adjustment of the US economy associated with the effects of technological change and other factors that have also contributed to a growing problem of income inequality, of which globalization is only one.
- 5.Economists have not done a good job in identifying the restrictions and limiting assumptions of the models they use to explain the benefits of globalization, especially in the area of trade liberalization.
- 6.The global financial crisis of 2008â09 was not an inevitable outcome of financial globalization but rather can be attributed to speculative financial activity, fraud and abuse in financial transactions, a breakdown in the counter-party risk assessments of the private sector and defects in the financial regulatory framework.
- 7.Immigrants have contributed importantly to the industrial development of the United States and more recently to its strength as a high-tech service economy; the association between migrants and higher gross domestic product (GDP) per capita appears to be broadly based and not a significant factor in the growth of income inequality.
- 8.The US government has not been effective in assisting those workers or individuals adversely affected by trade or technological change; in this respect, a new social compact among business, labor and government is required, while government policies are needed to address the growing problem of inequality in the US economy.
- 9.Improvements in the global governance of the international economic and financial system are needed to ensure that the benefits of globalization can be maximized and its costs can be minimized, not only for the United States but for other countries as well.
These themes and conclusions are fully elaborated upon in the chapters that follow.
2 What Do We Mean by âGlobalizationâ?
By way of introduction, it is important to be clear as to what is to be understood by the term âglobalizationâ and what have been some of the main markers in its development. In this respect, the focus on the United States in this book is appropriate, as being the largest economy in the international economic system in the post-WW2 era, it has had a major impact on the expansion of globalization through its policies and the activities of its business and financial sectors, while also being a significant beneficiary. Given its dominance in the global economy throughout the post-WW2 era, the United States has had more freedom of action in its economic policies and a greater influence on the economic behavior of other countries than other countries have had on the United States. This asymmetric relationship is reflected in the role of the US dollar as a main, vehicle currency for international trade and financial transactions, the preference of other countries for US public debt as a major component of their foreign reserves, the size and depth of its financial markets and the major weight of US trade in global commerce. These factors are also the basis for a number of benefits that the United States draws from globalization, as explained in future chapters.
Globalization is often restricted to the discussion of increased trade in goods and services across national borders, but it should more properly be understood as encompassing the increased flow of goods and services, financial assets, workers and ideas across national borders. Globalization has been encouraged or promoted by policies and actions by governments that have reduced barriers or restrictions on these flows. In response, private agents or businesses have initiated or expanded their international operations in order to enlarge their profit opportunities, broaden their investment choices or improve the efficiency of their main business activity. In this book, I use the term âglobalizationâ to refer to the increased flows of goods and services, financial assets and workers across national borders, somewhat similar to the âfour freedomsâ (for goods, services, finance and people) of the European Union. The increased international flow of ideas covers an enormous range of cultural, intellectual and scientific phenomena that go well beyond the scope of this book. However, to the extent that the flow of ideas relates to economic activity, as in the case of intellectual property (IP) rights or foreign direct investment, they will already be subsumed within the flows of goods, services, financial assets and people that are discussed.
In understanding the forces of globalization, it is important to recognize that trade, finance and migration do not operate independently of each other, as they often have interacting effects. Trade and finance, for example, are intimately related as trade flows could not take place without the benefit of short-term credit operations and cross-border payment arrangements by banks. Also, capital flows in the form of foreign direct investment are often linked to increased international trade among affiliates of multinational corporations and between independent agents in source and destination countries. More generally, trade and financial openness can have mutually interacting effects for a country such as the United States that maintains a freely flexible exchange rate. For example, an increase in financial inflows that are attracted to its deep and well-diversified financial markets may lead to an appreciation of the US dollar that can affect over time the size of its trade sector or the composition of its trade flows. More recent experience has also shown that high-skilled immigrants have provided valuable support for high-tech industries in the United States, which have become an important source of its service exports. Migrants and trade combined can increase the variety of inputs used in domestic economic activity and thus can raise productivity and real wages. International migration is also highly correlated with financial flows in the form of migrant remittances between the host country and the country of origin of migrants.
With the rapid pace of globalization during the last few decades, we are seeing within the political debates an implied or expressed concern about the tension or potential conflict between national sovereignty and international rules. As the pace of trade and financial integration within the global economic system has intensified, there has been a need to establish common rules, norms or conventions to guide that system. Yet at the same time, these international arrangements need to be accommodated within the frameworks of national legal and institutional arrangements that guide domestic economic activity. During the early post-WW2 era, the latter were clearly dominant as the forces of international economic integration that existed prior to World War 1 (WW1) had completely broken down with the effects of the Great Depression and two world wars. However, since the end of WW2, the forces of economic and financial globalization have again become dominant, and constraints on the freedom of domestic economic activity have become more apparent. Gradually, over time, as the forces of integration at the global (or regional) level become stronger, the demand for more expansive supranational legal and institutional arrangements to guide these forces will intensify. In many respects, however, the election of Donald Trump as President of the United States in 2016 represented a political decision on the part of a significant share of the American electorate to re-assess the impact of globalization on the US economy, the pace of its economic integration, and the rules governing the global system.
This tension between national and emergent supranational authority arising from globalization is perhaps most apparent at the regional level within the European Union. Given the ultimate political objectives that lie beneath the economic goals for the European Union, political leaders have recognized that a supranational authority and a set of regional institutions were needed to guide the process of economic integration. Ultimately a regional political authority will be required to make it complete. Nevertheless, the transition from a system...