Have politicians given up on globalization?

For the most part, globalization has had profoundly positive effects. It has boosted growth, accelerated innovation and lifted millions out of poverty. Its effects have been especially positive in the developing world.

In the developed world, however, globalisation has failed to live up to its promises: first, in relation to income and wealth inequality both within and between countries; and second, in respect to its sustainability in the face of continuous structural change.

Until the financial crisis, most policymakers and establishment politicians saw this increased inequality as an acceptable price to pay for stronger economic growth. As emerging economies, most noticeably China, integrated into the global system, there was a sense of almost unlimited gains.

Since the financial crisis, however, a new narrative has emerged. Along with the crisis itself, income inequality and profound structural changes in economic activity and demography have led to talk of secular stagnation and have driven resentful populations to voice their discontent at the ballot box. This has led to the rise of populism in the West – and especially in Europe.

The rise of populism

Electorates across the advanced economies are fragmenting and increasingly seeking alternatives to mainstream centrist parties.

Electorates across the advanced economies are fragmenting and increasingly seeking alternatives to mainstream centrist parties. Even where centrist parties maintain strong electoral bases, the Overton Window – the range of policies that voters find acceptable – has shifted. In many countries, mainstream parties have chosen to ape the policies of their populist rivals. This has resulted in more difficulty in building effective governing coalitions and legislating policy.

Uncertainty has increased

The upshot is that policy uncertainty has increased. And this, in turn, has exerted significant pressures on economic and market activity. Opinion polling has also become less accurate, increasing political risk for investors.

To better understand the magnitude of the shift in the political and policy environment over the past decade, we utilise our proprietary ASI Globalisation Index. This empirical framework was created using four sub-indices representing the different drivers of globalisation. These are trade, capital, information and people.

To address the impact of political and policy change on globalisation more directly, we re-categorised the variables in our broad index into de facto variables, which are true in fact even if not officially sanctioned, and de jure variables, which are true in accordance with the law and are officially sanctioned.

By splicing the data along these lines, we seek to distinguish between trends that are a direct consequence of policy and legal stipulations and those that instead represent activities or flows informed but not defined by policy.

Unsurprisingly, the results differ from country to country and region to region. Our research shows that most countries are taking steps to liberalise trade relations further. There is one big exception, however. The US – still the world’s largest and most important economy – is moving in another direction. It has been notably keen to use trade policy as a stick with which to achieve its ends.

We have already seen skirmishes with its two closest neighbours, Canada and Mexico, as President Trump sought to renegotiate the North American Free Trade Agreement on more favourable terms to the US. And warning shots have been fired in the direction of the European Union.

But the US has come closest to an all-out trade war with China, the world’s second-largest economy. A series of tit-for-tat tariffs – with the threat of further escalation – has introduced a troubling atmosphere of uncertainty to the global economy.

What action is required?

The uneven distribution of the benefits and the growing threats to trade liberalisation do not necessarily mean that globalisation is doomed. Policies to tackle the failings of globalisation are available.

These include distributive policies specifically designed to tackle inequality. A common assumption is that there is some kind of necessary trade-off between pro-growth policies and policies that reduce the dispersion of gains from that growth. Some argue that the adoption of redistributive policies runs the risk of hampering growth.

But that is false. Public investments in infrastructure, spending on health and education, and appropriately targeted social-insurance provision are all pro-growth and pro-equality. There is remarkably little evidence that more direct redistribution through the tax-transfer system damages growth. Instead, redistributive policies may prove positive for growth by increasing stability and extending the economic cycle.

As for the diminishing-returns argument, our analysis using the ASI Globalisation Index illustrates that lowering policy barriers to goods trade has been only one aspect of the story of globalisation. Barriers to services trade remain high, and there is no harmonisation of national standards. Opening up protected domestic sectors and allowing technology to facilitate services and digital trade may facilitate another supply-chain-based acceleration in trade.

The need for global governance

Efforts to establish global governance practices in data and digital trade also need to be accelerated. Earlier this year, members of the World Trade Organisation gathered to discuss new rules to govern global digital trade. The consensus was that more efforts are required to prevent the erection of further barriers. These include increasing interoperability, reinforcing the rule of law and enhancing digital rights. Progress is lagging the pace of digital protectionism, however.

An equally pressing challenge relates to international governance of people flows. While there is ample evidence of the economic benefits of migration, its sustainability should not be taken for granted. During the 1920s and 1930s, migration levels fell noticeably in response to the imposition of restrictive legislation by Western governments. That trend continued for more than two decades and was a critical contributor to the retreat from globalisation in the interwar period. Only the shock of the Second World War prompted a more wholesale rethink.

A renewal of the post-war consensus on international institutions, agreements and principles is unlikely to materialise without a major economic or political shock. However, our analysis highlights that the challenges facing the global economy at the current juncture are equally critical. Investors should demand greater urgency. We also urge policymakers to prioritise the governance of the engines of ‘new globalisation’: trade in services, flows of data and flows of people. These are the factors that will determine globalisation’s benefits over many decades to come.


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Risk warning

Risk Warning

The value of investments, and the income from them, can go down as well as up and you may get back less than the amount invested.