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Anti-Globalization: We Have Been Here Before

by
  • Kip Beckman
| Feb 21, 2017
Kip Beckman
Principal Economist
World Outlook

Globalization generated sharp increases in wealth, thanks in part to rapidly expanding trade and the free movement of people across national borders. However, the gains from globalization were not shared equally. This growing disparity between the rich and poor (especially lower-income workers) contributed to voter support for right-wing nationalists who promised to turn the tables on free trade and implement controls on immigration.

If that sounds like a description of 2016, it isn’t. The year was 1914: The beginning of World War I ended an unprecedented four-decade increase in trade, immigration, and standards of living. The backlash against open borders and trade sharply weakened the global economy and contributed to the outbreak of World War II.

Morgan Stanley Chief Global Strategist Ruchir Sharma contends that there are eerie similarities between the end of globalization in 1914 and the present hostility toward trade and immigration.1 The most recent globalization boom started after World War II and picked up steam in the 1980s due to rapid technological change. After losing momentum during the 2008 financial crisis, this wave of globalization is now in retreat. The election of Donald Trump, Brexit, and the rise of right-wing populist leaders across Europe, who are committed to leaving the EU and putting the brakes on migration, are clear signs of the dawn of a new era.

Both globalization eras were driven by swift changes to technology and the opening of large economies to international trade. Prior to 1914, the expanding use of the telegraph and steamships along with the opening of Great Britain’s economy (the world’s largest in the 19th century) to greater imports drove the global economy forward. The more recent period of globalization was also linked to changing technology. Container ships, personal computers, and the Internet, as well as China’s and India’s embrace of the global economy and international trade, all helped boost globalization.

Elevated unemployment rates (particularly among blue-collar, mid-skilled workers), rising income inequality, and declining social mobility contributed to today’s turn against globalization. Employment and social dislocation were also sources of unrest in the early part of the 20th century. Between 1879 and the late 1920s, the share of income going to the wealthiest 1 per cent of Americans rose to a peak of nearly 20 per cent.

Anger over inequality increased, and politicians gained power on promises to reverse the trend toward a more open world economy. The U.S. Congress implemented the Smoot-Hawley Tariff Act in 1930. The result was a global trade war, as its trading partners retaliated against the rise in U.S. tariffs. International trade slumped from a peak of 30 per cent of global GDP in 1914 to around 10 per cent by 1933. The United States also clamped down on immigration: From the million or so migrants who came to that country in 1914, new arrivals slowed to a trickle within two decades.

The similarities of these two eras have some important implications for today’s global economy. On the plus side, the abrupt end to the period of increased trade and immigration that culminated with the outbreak of World War I didn’t completely eliminate the forces in favour of globalization. It took decades, but eventually globalization became recognized as a catalyst for economic growth and development.

There are also some important lessons from the past regarding the disastrous effects of implementing populist economic policies. Between the two world wars, the anti-globalization agenda took hold as countries increased barriers to trade. Weaker economic growth and rising inflation contributed to the beginning of the Great Depression in 1929. Currently, populist politicians are making the same mistake by demanding restrictions on immigration and the elimination of free trade deals. President Trump has already pulled the United States out of the Trans-Pacific Partnership agreement and promises to renegotiate the North American Free Trade Agreement.

The world economy is already dealing with restraints on economic growth attributable to slowing population growth and weak gains in productivity, and is expanding at a pace below 3 per cent. Policies that end up reducing international trade and immigration will only make the situation worse. Since World War II, few countries have managed to boost economic growth and reduce poverty without the stimulus provided by strong growth in exports. Higher barriers to trade will make it more difficult for developing countries to reach these goals.

The International Monetary Fund and other international institutions have defended globalization. They stress that most job losses in the manufacturing industry can be attributed to automation, not free trade agreements. Furthermore, developed countries like the United States and Canada need to attract more immigrants to counteract the effects of declining population growth. A greater focus on education, especially in the United States, would help to prepare the workforce for a far more technically oriented economy. But for the time being, it appears that the voices trumpeting the benefits of globalization have been shouted down.

1    NewYorkTimes.com, When Borders Close, November 12, 2016. www.nytimes.com/2016/11/13/opinion/sunday/when-borders-close.html?_r=0 (accessed February 15, 2016).

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