Moving from Globalization 2.0 to 3.0

While seemingly elegant in theory, globalization suffers in practice. That is the lesson of Brexit and of the rise of Donald Trump in the United States. And it also underpins the increasingly virulent anti-China backlash now sweeping the world. Those who worship at the altar of free trade – including me – must come to grips with this glaring disconnect.

Truth be known, there is no rigorous theory of globalization. The best that economists can offer is David Ricardo’s early nineteenth-century framework: if a country simply produces in accordance with its comparative advantage (in terms of resource endowments and workers’ skills), presto, it will gain through increased cross-border trade. Trade liberalization – the elixir of globalization – promises benefits for all…

In the US, Trump’s ascendancy and the political traction gained by Senator Bernie Sanders’s primary campaign reflect many of the same sentiments that led to Brexit. From immigration to trade liberalization, economic pressures on a beleaguered middle class contradict the core promises of globalization…

In short, globalization has lost its political support – unsurprising in a world that bears little resemblance to the one inhabited by Ricardo two centuries ago. Ricardo’s arguments, couched in terms of England’s and Portugal’s comparative advantages in cloth and wine, respectively, hardly seem relevant for today’s hyper-connected, knowledge-based world. The Nobel laureate Paul Samuelson, who led the way in translating Ricardian foundations into modern economics, reached a similar conclusion late in his life, when he pointed out how a disruptive low-wage technology imitator like China could turn the theory of comparative advantage inside out…

Of course, this isn’t the first time that globalization has run into trouble. Globalization 1.0 – the surge in global trade and international capital flows that occurred in the late nineteenth and early twentieth centuries – met its demise between World War I and the Great Depression. Global trade fell by some 60% from 1929 to 1932, as major economies turned inward and embraced protectionist trade policies…

Similarly, the means of Globalization 2.0 are far more sophisticated than those of its antecedent. The connectivity of Globalization 1.0 occurred via ships and eventually railroads and motor vehicles. Today, these transportation systems are far more advanced – augmented by the Internet and its enhancement of global supply chains. The Internet has also enabled instantaneous cross-border dissemination of knowledge-based services such as software programming, engineering and design, medical screening, and accounting, legal, and consulting work.

The sharpest contrast between the two waves of globalization is in the speed of technology absorption and disruption. New information technologies have been adopted at an unusually rapid rate. It took only five years for 50 million US households to begin surfing the Internet, whereas it took 38 years for a similar number to gain access to radios…

Unfortunately, safety-net programs to help trade-displaced or trade-pressured workers are just as obsolete as theories of comparative advantage…

The design of more enlightened policies must account for the powerful pressures now bearing down on a much broader array of workers. The hyper-speed of Globalization 2.0 suggests the need for quicker triggers and wider coverage for worker retraining, relocation allowances, job-search assistance, wage insurance for older workers, and longer-duration unemployment benefits.

Stephen Roach cautions, “the alternative – whether it is Brexit or America’s new isolationism – is an accident waiting to happen.” Globalization is not only inevitable, the most recent wave is complete. The backwash is populated with opportunist capitalists jumping ship this time for a 10% wage advantage instead of greater – some fleeing China to Mexico for the second time. Replicating the short lurch that followed the passage of NAFTA in the Clinton years.

What comes next in emerging markets, newly-developed and developing economies will be friendly competition and cooperation. That already is a central point of advocacy in China and ASEAN nations. Obama and President Hillary [probably] are stuck with the stereotypical American political solution of playing the blame game to unemployed and underemployed constituents – while Congressional know-nothings continue their death spiral-dance with religious conservatives hoping to retain their seat-of-the-pants veto of any legislation that might aid American workers. We’re faced with the potential of nothing changing in Washington until the elections of 2022 and 2024.

OTOH — If Americans are bright enough to remove bigots-pretending-to-be-conservatives from Congressional power in the November election, there may be an opportunity to implement the sort of safety net Dr. Roach suggests. We’ll see. Part of being both an optimist and cynic is my confidence in science and knowledge aiding our species in solving the problems we create. Just not in my lifetime.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s