Is hyper-globalization at a turning point?

By Motoshige Itoh / Special to The Yomiuri ShimbunA look back at history shows that the global economic systems of the past all underwent across-the-board transformations every 30 years or so.

In the 1930s and 1940s, the world experienced the spread of the Great Depression and protectionism and World War II. In the early 1970s, the so-called Bretton Woods system that provided the postwar international monetary and financial order came to an end in the wake of the collapse of the fixed foreign exchange regime. In 1995, the World Trade Organization was launched as the core of a new multilateral trade regime.

The world has now entered an era of what Harvard University Prof. Dani Rodrik calls “hyper-globalization.” China and other emerging countries have made full inroads into the international trade and investment systems. Today, the scale and speed at which capital flows across borders is dizzying, and an ever-growing number of migrants and refugees are crossing national borders.

Large-scale cross-border flows of goods, people and capital are a phenomenon that has been taking place for 20 to 30 years now. Is the state of hyper-globalization here to stay? Or is the current shape of the global economy getting closer to its turning point in the cycle of about 30 years, as in the cases mentioned above? The protectionist pressures that are spreading worldwide offer important clues to finding the answer to these questions.

Globalization has an impact — good or bad — on people’s lives. Those who benefit from globalization give it a thumbs-up, but others who are badly affected resent it. Such resentment can spur protectionism.

People in various parts of the world have seen the spread of globalization result in increased imports from abroad, which have in turn forced local manufacturing plants to be shut down and the employees to lose their jobs. In other places, local residents have lost jobs to immigrants. Nonetheless, the International Monetary Fund and the WTO do not listen to them. So who listens to their anger and resentment? “Local politics” do — politicians they elect to represent them do.

In the United States, people in the Rust Belt region — an area filled with once-thriving centers of manufacturing — felt that spikes in imports had a destructive effect on their lives. Against this backdrop, they played a pivotal role in helping Donald Trump ascend to the U.S. presidency. Likewise, British people concerned that there were too many immigrants in their country voted to leave the European Union. These choices by voters on both sides of the Atlantic Ocean were developments basically related to local politics. Yet they have merged into swelling waves of protectionism that have already begun to alter the global economic regime.

History shows that the emergence of a trend toward global economic expansion will eventually be followed by the spread of protectionism, backed by local needs, as a reaction to globalization. Therefore, what we are now witnessing is the latest version of this phenomenon, but it differs distinctly from past versions because hyper-globalization has gathered momentum so vigorously that protectionist campaigns have become very widespread as well. As a result, it is increasingly hard to say whether hyper-globalization will remain on course in the future.

Researchers often cite a 2016 working paper titled “The China Shock: Learning from Labor-Market Adjustment to Large Changes in Trade,” which was co-written by David Autor, a professor at the Massachusetts Institute of Technology, and two other economists. The authors illustrate how increased imports from China have not only seriously affected jobs and wages in the U.S. manufacturing industry but also caused the standard of living to drop and social security burdens to rise.

The landscape of areas exposed to import competition from China is in shambles. Residents in those areas no longer care about the fact that retailers such as Walmart sell affordable goods made in China and that Silicon Valley keeps thriving by relying on Asian talent. Even if the United States benefits from imports from China at the national level, they remain angry because their areas were devastated.

Some may think the Rust Belt issue could be solved if the affected people moved to highly prosperous areas in their country. However, surprisingly few people have actually done so, as many remain reluctant to abandon their home regions. As a result, protectionist politics will only be further localized.

Researchers and government officials attending international trade conferences occasionally say half-jokingly, “[The United States and other developed countries] shouldn’t have admitted China to the WTO in the first place.”

Ever since it joined the WTO in 2001, China has expanded trade with the rest of the world at an incredible speed. From the standpoint of other countries, it is a problem that on top of having rapidly increased exports, China’s economic system differs materially from that of Japan and the West.

In China, the state involves itself massively and meticulously in industrial development by deploying the dominant network of state-owned enterprises, while supervising control over intellectual property and inward investment. Many people question whether Beijing can continue expanding trade within the WTO framework while keeping the relevant systems unique to China unchanged. In other words, they question if it is advisable for the WTO to continue functioning as it does now.

The General Agreement on Tariffs and Trade (GATT), the predecessor of the WTO, was set up as a postwar multilateral institute basically involving just developed countries in its early years. Once Japan, the United States and major European countries agreed to lower tariffs, the GATT-endorsed reductions were applied to many developing countries under the GATT clause of “most-favored-nation” treatment. GATT rules on trade liberalization mostly affected manufactured goods and did not apply to politically sensitive agricultural products and services.

In contrast, many developing countries participated in international negotiations to inaugurate the WTO with the aim of enhancing trade liberalization, including that of agricultural products and services. Moreover, the establishment of the WTO and the admission of China expedited the spread of hyper-globalization.

China, which is now the world’s second-largest economy, keeps taking advantage of its WTO status as a developing country to maximize benefits in international trade. The United States criticizes China for continuing to levy higher tariffs on imports, strictly controlling foreign investment and resorting to many unfair practices in intellectual property acquisition. But it should be remembered that the three points above, on which Washington takes issue with Beijing, have been permitted within the WTO framework because the organization has recognized China as a developing country since its admission. So, what has to be done first is to clarify whether the world will continue tolerating the singularity of China’s economic system within the WTO framework in the future.

Given that the United States is critical of China’s methods of running state-owned enterprises and supervising control over intellectual property, it is obviously difficult for the two countries to coexist within the WTO framework.

There is no doubt that the United States is aware of this difficulty and therefore the Trump administration has chosen to increasingly disparage the WTO. For its part, the trade organization has no structural capability to restrain the United States. There may be a scenario in which China will make great concessions to the United States, but it’s clear this is not an easy policy choice for China because it would amount to changing the very foundation of its economic system.

It is true that the existing global trade regime that has been in place since the establishment of the WTO is finally at a turning point. For the world economy to keep growing, it is desirable that hyper-globalization remain sustainable, but this may be impossible due to the rise of protectionism-inclined local politics.

The rules of the existing international institutions, including the WTO, do not seem to have resilience to restrain protectionism. We need to closely watch the cross-border flows of people and global money to see if the state of hyper-globalization is also at a turning point.

—Itoh is a professor with the Faculty of International Social Sciences at Gakushuin University. He was a professor of economics at the University of Tokyo until March 2016.Speech

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