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Globalization, Revisited

by Sebastian Mallaby
October 4, 2008

Nick Eberstadt’s post invites comments on the relative nature of US power. I’ve contributed a few thoughts there, but would also like to build on a question raised by Desmond Lachman in his Forum comment last week. Where does this turmoil leave globalization?

Even before the financial crisis, globalization faced a long list of challenges.
-The American political system appears to be allergic to further tariff-cutting efforts. A likely shift to the Democrats in the next Congress may not help matters, though there is a counter-argument that says Democrats elected in Republican-leaning districts may be more open to trade liberalization.
-Soveriegn wealth funds and post 9/11 fears have created a drift toward investment protectionism, as documented in a recent Council on Foreign Relations report by David Marchik and Matthew Slaughter.
-Climate negotiations are likely to create a fight over green tariffs, with potential to trigger more protectionism.
-The food price spike earlier this year triggered a widespread loss of faith in global markets as providers of food security. Several countries lunged for an autarkic response by imposing export controls, and the Doha Round stalled largely because China joined India in the view that protecting domestic farmers is vital.
-Rising prices for other commodities in the past several years has produced a scramble to lock up supplies. Rather than believe that they can secure needed raw materials by buying them on world markets, China and others have taken the view that they need to buy mines, oil wells, and so on. Resource nationalism has emerged as a challenge to the liberal international order.

Against this difficult background, the world now faces a painful recession that will be blamed, with some justification, on globalized capital markets. Already, the policy response has involved more assertion of control by national governments and less faith in international markets. In some cases, the expansion of the role of the state has been unavoidable: The US government had no choice but to take-over Bear, AIG and Fannie and Freddie. In other cases, the state has flexed its muscles too much: The Irish elimination by fiat of all bank credit risk and the bans on short selling of stocks fall into this category.

So here is the question for the Forum: Is something big going on here? Globalization has always been contentious, but it was supported in large part because it was liberal (in the European sense). For at least two reasons, the consensus in favor of globalization will be harder to sustain as the role of the state increases.

1] “Fair” competition.
The legitimacy of free trade depends on convincing people that foreign producers aren’t cheating by lowering their prices courtesy of government subsidies. To be sure, one can argue that consumers in importing countries should happily pocket subsidies paid by foreign taxpayers, but as a political matter, this argument has zero traction. So when governments get involved in locking up natural resources, the suspicion that the products created with those resources are “unfairly” priced will grow. Equally, Ireland’s European neighbors are likely to view the bank guarantee as an egregious anti-competitive subsidy for Ireland’s banks. And they would be right to do so.

2] The Trojan horse worry.
So long as globalization was a liberal project, we could accept the idea that foreigners would buy American companies or assets because we viewed these foreigners as similar to ourselves: individuals seeking to maximize profits. We could rely on imports for the same reason: The producers were simply trying to sell at a good price, so as long as we had money to pay we could count on getting what we needed. But the more the state increases its role in the global economy, the shakier these presumptions seem. Western Europe could happily rely on Russian gas if the Russian government were not involved. But the government is very much involved, so the gas has become a foreign policy liability. The United States could happily rely on foreign savers to finance its deficit if governments were not involved. But central banks and other government bodies have become key providers of capital to the United States, so external financing has become a sort of Trojan horse. Global markets have smuggled national governments into the heart of our economy.

I submit that the case in favor of globalization is about to become more complicated. Comments?

1 Comment

  • Posted by Roger Kubarych

    Globalization has never been easy to live with. Capital markets have long been influenced, if not dictated, by governments. Until the 1970s, Europe and Japan maintained a lot of exchange controls. Getting them removed was a continuous task for successive US governments. But the freer the capital markets, the less control anyone had. So the fixed-rate system went out the window, replaced by wide swings in fx rates that did a lot of damage or by government interference in fx adjustment, that led to trade imbalances. They led to protectionist measures, notably the Reagan “voluntary” quotas on Japanese cars. Mercifully, that temptation didn’t spread, and the US reached a more or less bipartisan consensus to leave capital markets alone, while negotiating trade deals to take the sting off the frictions.

    But the US need for foreign capital never reached the gigantic magnitudes of the post 9-11 world. Apart from the repeated sniping at the Chinese to let their renminbi appreciate, Washington learned to live with a $700 bn dependency — and did not revive the Reagan protectionist response.

    What next? No one is going to turn nasty toward foreign investors, private or official, during a banking crisis in which everyone is begging for more money to come in. Once the immediate crisis is over, however, the West will suffer a recession and will look for trade advantages again to offset a likely multi-year stagnation in domestic demand. Heading that off will be tough, especially in the US, given the probable result of next month’s election.

    It would be hard for globalization to become as disliked as securitization, but it will come close when the unemployment rate tops 7%.