The Trans Pacific Partnership (TPP) has been shredded. NAFTA is in President Trump’s crosshairs. Other trade agreements are stalled or collapsing. Brexit won. World trade volume is slowing down. In 2016, cross border investment by multinationals fell by 10% to 15%. The proportion of sales that Western firms make outside their home has shrunk. The profits of multinationals are falling and the flow of new multinational investment has been declining relative to GDP. The Economist recently declared that “the global firm is in retreat.” Has globalization hit a wall?
In 2016, cross border investment by multinationals fell by 10% to 15%. Is the “global firm in retreat”?
Globalization has been the Bold idea animating the world economy at least since the 1970s. Its adherents point to the fact the number of poor people has fallen in the past 40 years from more than two billion to just under one billion. This is an astonishing achievement, given the increase in world population and the long-term slowing of global economic growth, especially since 2008.
While impressive, poverty reduction has not come without a cost. The globalization that has rescued so many in poor countries has harmed some people in rich countries, as factories and jobs migrated to where labor is cheaper. Globalization is less splendid for those who not only don’t reap its benefits, but suffer from its impact. Even before Donald Trump’s upset victory at the polls, we have long known that less-educated and lower-income Americans have seen little economic gain for four decades.
Large segments of the population in advanced countries have not been doing well: in the U. S., the bottom 90 percent has endured income stagnation for a third of a century. Median income for full-time male workers is actually lower in real (inflation-adjusted) terms than it was 42 years ago. At the bottom, real wages are comparable to their level 60 years ago. The effects of the economic pain and dislocation that many have experienced are even showing up in health statistics. For example, the economists Anne Case and Angus Deaton, this year’s Nobel laureate, have shown that life expectancy among segments of white Americans is declining.
The failure of globalization to deliver on the promises of politicians has surely undermined trust and confidence in the “establishment.” And governments’ offers of generous bailouts for the banks that had brought on the 2008 financial crisis, while leaving ordinary citizens largely to fend for themselves reinforced the view that this failure was not merely a matter of economic misjudgments. Globalization isn’t the only reason for the hollowing out of the nation’s workforce—technology is a major component—but it is the reason most citizens blame.
But globalization isn’t so much slowing as it is taking new forms. Globalization 4.0 needs another Bold idea to save it from itself. The most potent form of globalization today is occurring inside nations, according to Holbert Harris, chairman of economics at George Mason University. Instead of a dark cloud of protectionism descending upon the world as our nomanklatura would have us believe, events are forcing multinational companies to rethink their competitive advantage again. Some of the old arguments for globalization have become obsolete in part due to globalization’s success. Also, large firms no longer have a lock on new ideas and innovation. Technology giants with their extensive worldwide supply chains are still generating value. Apple made $46 billion abroad last year five times more than GE which is often considered the bellweather.
There have been previous backlashes against globalization such as those that came after the first and second world wars. But it’s no longer about how poor countries can get rich but about ensuring that the benefit of wealth creation is not confined to the 1%. The responsibility for making sure globalization works for all lies with two groups of people: politicians and businesspeople and neither group seems an ideal steward. Nonetheless both groups have received their wake-up call. Daniel Hannan, the conservative MEP who the Financial Times dubbed the architect of Brexit, disputes the idea that either Brexit or Trump’s election signals the beginning of a dark age of protectionism. “The protectionists always fail,” he told the FT. “They always end up delivering the sharpest fall in living standards to the people who are their biggest supporters.” Trump knows he cannot allow that to happen. But he also knows that globalization in its present form needs a bold idea if it is to be refreshed and be sustainable. Business leaders too must adapt and change.