By Jacob M. Schlesinger
To understand the current state of globalization, consider
what's happening at three of the primary institutions designed to
promote it:
-- The World Trade Organization is growing increasingly
paralyzed by divisions undermining its ability to police
international commercial disputes.
-- The United Nations' attempt to set global migration
guidelines has provoked a backlash from more than a dozen nations
arguing it threatens their sovereignty.
-- And the leading model of cross-border economic harmonization,
the European Union, is slated to lose one of its biggest members,
the U.K., in March. For the 27 countries remaining, polls forecast
a united front of Euroskeptics winning enough seats in May
parliamentary elections to "turn back the clock on European
integration," according to a recent Der Spiegel analysis.
Clearly, globalization -- the smooth flow of goods, labor and
capital across borders -- faces intensifying headwinds in 2019. The
challenges, both political and commercial, are mounting, and
growing messier, while advocates find responses increasingly
difficult to craft.
Slowing ahead
Those challenges are reflected in the data. The WTO recently
lowered its outlook for world trade growth in 2019 to 3.7%, down
from a recent peak of 4.7% in 2017, due in part to "heightened
tension...between major trading partners." The U.N. warns of a
"troubling global investment picture," marked by a 23% drop in
foreign direct investment in 2017, followed by another 41% decline
in the first half of 2018. The organization also estimates the
annual growth rate of international migrants fell to 2% for 2015-17
from 2.9% annually for 2005-10.
The news isn't all bleak for globalism. For one thing,
international economic integration shows no signs of collapsing, as
it did during phases of outright deglobalization. From 1914 to 1945
-- a period marked by two world wars and the Great Depression --
trade plunged from 38% of global economic activity to 7%.
What's more, the global trading system has shown some surprising
resilience. The U.S. and Mexico -- each led by market-skeptical
nationalist-populists -- last year defied expectations by salvaging
the North American Free Trade Agreement with modest tweaks, rather
than blowing it up. The day after signing that pact, President
Trump reached a truce with his Chinese counterpart, Xi Jinping, in
their monthslong market-rattling trade confrontation, at least
until March 1.
The globalist-bashing American leader now vows that his
long-term goal is expanding, not constricting, international trade
-- albeit rejiggered along lines he considers more favorable to the
U.S.
Yet "the quality of globalization is getting worse," says Adam
Posen, president of the Peterson Institute for International
Economics. "It doesn't mean it's going away," he says. But the
benefits -- the efficiencies and income gains -- "are eroding."
Even the staunchest advocates of globalization acknowledge that
those benefits from a tighter world economy haven't been shared
equally, while the process of creating them has amplified income
inequality and disrupted many long-successful industrial
communities in advanced economies. They urge that the system be
fixed. In an October primer on "sustaining globalization," the
Peterson Institute recommended improving education and making it
more inclusive, giving "all displaced workers sufficient financial
and administrative support," addressing income inequality, and
shoring up the health-care system.
But there's growing difficulty in pursuing such policies, the
result of a kind of political Catch-22. Intensifying polarization
is consuming democracies around the world, in part due to the
backlash against globalization. The resulting paralysis in turn
makes it harder for leaders to enact the policies that could
moderate opposition.
Italy's left-right ruling coalition took office last year vowing
to do more to take care of globalization's losers, crafting an
ambitious budget offering a universal basic income for the
unemployed, while lowering the age when retirees could receive
pensions. But Rome was forced to scale back the plan in December,
bowing to bond traders driving up Italian interest rates on fears
of runaway debt, and to EU leaders declaring the plan violated the
union's limits on deficit spending.
In Washington, an ideological divide between Democrats and
Republicans over how best to ensure health coverage has led to the
erosion of existing government programs without any bolstering of
private-sector alternatives. Both parties talk about doing more to
help hard-hit workers and communities with more training and
infrastructure, but have done little to provide funds.
"We've been operating for a long time in a situation where
positive action by the federal government is limited," says Edward
Alden, a trade expert at the Council on Foreign Relations whose
2016 book "Failure to Adjust" chronicled the links between the
anti-globalization backlash and the lack of worker support
programs.
Rules fights
Beyond the internal divisions within major economies, the gap is
also widening between them over how to define the rules of
globalization -- another force constraining the advance of world
economic integration. American authority to impose its vision of
markets has eroded, while China is gaining increasing clout to
shape the world economy with its contrasting strategy of
state-driven commerce.
That's a big change from the early 1990s heyday of
multilateralism, when 120 trade ministers gathered in Marrakesh,
Morocco, to finalize the agreement creating the WTO. The Cold War
had just ended, and the international economy seemed to be
coalescing around U.S.-style capitalism, steered by the U.S. as
sole superpower. The new body was both rooted in that
end-of-history assumption of convergence, and designed to enforce
it.
But the subsequent emergence of China as the world's leading
trader has tested that mid-1990s framework, exposing
hard-to-reconcile contradictions over the definition of "fair"
trade. Those long-simmering disparities erupted into open conflict
in 2018, with Washington and Beijing imposing steep tariffs on more
than half of all goods exchanged between them -- essentially
espousing a new era of dis-integration between the world's two
largest economies, unless such fundamental conceptual disagreements
are bridged.
The U.S.-China trade spat is also undermining the authority of
the organization tasked with resolving such disputes. A core
purpose of the WTO is to reduce the odds of commerce-hampering
trade wars -- where countries choose on their own to punish and
retaliate against trading partners -- by creating a trusted,
neutral arbiter to determine whether global rules have been
broken.
For a quarter-century, it generally succeeded. But the Trump
administration argues the WTO isn't equipped to police flagrant
fouls, especially by China, and has taken matters into its own
hands, often slapping on trade sanctions without awaiting Geneva's
imprimatur. That has triggered a self-reinforcing spiral of
extralegal trade disputes, with Beijing and other nations
retaliating outside WTO channels.
New ground for U.S.
That highlights another big shift casting a cloud over the
future of globalization: For the first time in decades, the U.S.
isn't committed to advancing the cause. American officials say they
will work with like-minded nations to try to reform the global
system, but no longer offer open-ended support for it.
"We have to be very careful about recognizing multilateralism
for multilateralism's sake," Clete Willems, the White House aide
overseeing international economic policy, told a December
conference of Washington trade lawyers and lobbyists.
Even as the U.S. has flipped from its longstanding role as
globalization champion to challenger, other countries have tried to
fill the void, continuing to advance the cause of trade
liberalization. But they are doing so in ways that fragment, rather
than solidify, the global economy, by creating bilateral and
regional free-trade zones.
Eleven nations in Asia and the Americas on Dec. 30 started their
own bloc of tariff rates and trade rules dubbed the Comprehensive
and Progressive Agreement for Trans-Pacific Partnership. On Feb. 1,
Japan and the EU will create yet another commercial zone, with a
separate manual governing business between their economies. The
result is an increasingly complex patchwork quilt of
sometimes-overlapping, sometimes-conflicting regulations, making it
harder for multinationals to do business across regions.
The rapidly evolving nature of trade itself has become a
challenge to the ideal of a cohesive global economy.
Technology is, of course, accelerating globalization in many
ways, by cutting costs, facilitating communication and allowing
even tiny firms to transmit products and services instantly via the
cloud to consumers all over the world. The McKinsey Global
Institute estimates that, since 2015, the global value of
international data flows has exceeded the value of global
merchandise trade.
But the impact of digitization is complicated, and can at times
simultaneously tighten and weaken economic ties across borders, as
it allows companies to do more business outside their home country
with a much smaller footprint in foreign markets. A U.N. investment
report noted that, for many multinationals, "by creating new ways
to access markets the digital economy can make a physical presence
less fundamental or even obsolete, which could result in a retreat
of international production."
And digital free trade can be more difficult to police than
conventional goods trade. Over the steady postwar march toward
globalization, trade liberalization focused on tracking and cutting
tariffs and quotas on machines, crops and other concrete goods. The
battles over those policies have at times been fierce, but the
battle lines were fairly clear over how to define and detect
protectionism.
"Digital protectionism is hard to define and perhaps even harder
to contest," writes Susan Ariel Aaronson, a professor of
international affairs at George Washington University.
Attempts to do so foment testy cross-border squabbles over
policies that many governments say are legitimately designed to
guard privacy, cybersecurity or law enforcement -- even if they
also happen to raise production costs, hamper data flows, and force
companies to turn over to foreign governments source codes and
other valuable intellectual property.
Many U.S. companies have complained about the
commerce-restricting impact of new European privacy rules that took
effect last year, prompting some to leave the bloc and cut off
Continental customers. The response from European lawmakers in a
widely cited open letter: "Data protection should not be subject to
trade negotiations. It is a fundamental right, not a trade
barrier."
In a 2017 survey of 400 chief information and technology
officers, the consultant Accenture found that three-quarters
"expect to exit a geographic market, delay their market-entry plans
or abandon market-entry plans in the next three years" due to new
digital trade barriers.
It doesn't help that the WTO can't offer clear guidance on what
is or isn't allowed, since its rules haven't had a major update
since 1995 -- long before world trade was revolutionized by
Amazon.com Inc., Google, cloud computing, mobile phones and apps.
In 2013, two dozen members launched talks to try to hash out
consensus guidelines for digital trade, but that effort was put on
hold after three years of fruitless discussions, and remain
stalled.
Despite all the problems, Alan Wolff, a veteran American trade
lawyer and now deputy director general of the WTO, says he is "very
optimistic, " because, he says, "open borders and rules-based
trade...are better for national economies...and efficiency is a
gravitational force."
The motto of the city of Geneva is "post tenebras lux," which
translates to "after darkness, light," Mr. Wolff told a December
audience at the Peterson Institute. But he was careful to avoid
forecasting just when the latest fights would pass and a new dawn
of globalization would emerge. "Do we go over a cliff first?" he
asked. "Perhaps."
Mr. Schlesinger is a Wall Street Journal senior correspondent in
Washington. He can be reached at jacob.schlesinger@wsj.com.
(END) Dow Jones Newswires
January 21, 2019 19:34 ET (00:34 GMT)
Copyright (c) 2019 Dow Jones & Company, Inc.