There is no sturdier defender of the international economic order that has been in effect for many decades than The Economist. It salutes free trade and free markets at every opportunity. In recent issues it has been bemoaning the erosion of that system as a combination of the pandemic, Russia’s invasion of Ukraine, and the rise of an aggressive and arrogant China has forced countries to rethink their dependence on international sources of critical goods. Although the United States is not the only country reconsidering its policies, in The destructive new logic that threatens globalization, it is accused of dealing the system its fatal blow. It begins with this lede.
“America is leading a dangerous global slide towards subsidies, export controls and protectionism.”
“Since 1945 the world economy has run according to a system of rules and norms underwritten by America. This brought about unprecedented economic integration that boosted growth, lifted hundreds of millions of people out of poverty and helped the West prevail over Soviet Russia in the cold war. Today the system is in peril. Countries are racing to subsidise green industry, lure manufacturing away from friend and foe alike and restrict the flow of goods and capital. Mutual benefit is out and national gain is in. An era of zero-sum thinking has begun.”
“The old system was already under strain, as America’s interest in maintaining it waned after the global financial crisis of 2007-09. But President Joe Biden’s abandonment of free-market rules for an aggressive industrial policy has dealt it a fresh blow. America has unleashed vast subsidies, amounting to $465bn, for green energy, electric cars and semiconductors. These are laced with requirements that production should be local. Bureaucrats tasked with scrutinising inward investments to prevent undue foreign influence over the economy now themselves hold sway over sectors making up 60% of the stockmarket. And officials are banning the flow of ever more exports—notably of high-end chips and chipmaking equipment to China.”
The article claims that countries like the United States are essentially reindustrializing themselves. In the process they must duplicate the research and development of their former trading partners, something it considers an expensive waste of time and resources. In particular, it suggests the global response to climate change will be hindered by this transition. Another serious concern is raised.
“Another problem is the fury of friends and potential allies. America’s genius after the second world war was to realise that its interests lay in supporting openness in global commerce. As a result it pursued globalisation despite, by 1960, making up nearly 40% of global dollar GDP.”
“Today its share of output has fallen to 25% and America needs friends more than ever. Its ban on exports to China’s chipmakers will work only if the Dutch firm ASML and Japan’s Tokyo Electron also refuse to supply them with equipment. Battery supply chains will likewise be more secure if the democratic world operates as one bloc. Yet America’s protectionism is irking allies in Europe and Asia.”
Let us begin with this last point. Yes, allies are “irked” by Biden’s protectionist measures. However, at the same time they are proclaiming that NATO, the European Union, and the G7 have never been so collaborative as they are now in supporting Ukraine’s efforts to survive an invasion by Russia. What is obvious from this collaboration is that without the US, NATO would be completely ineffective in coming to Ukraine’s aid. It also follows that NATO countries would likely be easy taking for a successful and resurgent Russian Army without US participation. These “irked” countries should also recognize that what is happening in Ukraine could be the harbinger for a World War III in the same way the Spanish Civil War previewed World War II. Russia, China, Iran, and North Korea have formed an alliance of sorts, and are collaborating militarily and economically, a counterforce of autocracies whose members all hate the democracies with which they are contending. It is necessary for the US to be as powerful and proficient as possible to contend with these enemies.
The same group of “irked” allies are also collaborating with the US in measures to hinder China from reaching its goal of political and economic dominance. The US must take the lead. What is the alternative?
There are three international crisis requiring action: Russia, China, and climate change. The US is now, once again, the leader of the free world. One might say Biden is “making America great again.”
Is deglobalization bringing to an end a period of great economic and social progress? Not hardly. The distribution of resources from wealthy countries to non-wealthy countries in search of low wages and higher profits did do some good in lifting economies around the world and eliminating poverty in many places, but it did that while creating social unrest over increased economic inequality in the wealthy countries driving globalization.
The impact of globalization on the distribution of income has never been more clearly demonstrated than by a graph produced by Branko Milanovic in his book Global Inequality: A New Approach for the Age of Globalization. This has received some notoriety as “the elephant curve.”
This chart plots the percentage gain in real income (2005 international dollars) over the period 1988 to 2008. The horizontal axis is the percentile of the global income distribution. One can conclude that the incomes of low to moderate income people across the world have increased over this period by what appears to be a significant amount. There is a dip in income growth to approximately zero at 80%, followed by a steep rise at higher income levels. Globalization has helped the low-income people of the world and it has benefited the wealthy of the world. Who are those left behind as indicated by Milanovic’s point B?
“They are almost all from the rich economies of the OECD (Organization for Economic Cooperation and Development). If we disregard those among them who are from the relatively recent OECD members (several Eastern European countries, Chili, and Mexico), about three-quarters of the people in this group are citizens of the ‘old-rich’ countries of Western Europe, North America, Oceania….and Japan….People at point B generally belong to the lower halves of their countries’ income distributions.”
“In short: the great winners have been the Asian poor and middle classes; the great losers, the lower middle classes of the rich world.”
No economic system that punishes middle-class citizens in order to increase the wealth of the wealthiest can long survive. Milanovic’s “old-rich” countries, including the US, are all suffering unrest as angry citizens drift towards anti-democratic leaders and ideologies. Democracy itself is at stake. The best way to ensure a democratic system is to have a majority of voters believing that their government is providing a path forward to a better life. National economic inequality must be constrained. The middle class must do better. Deglobalization and the creation of more higher paying domestic jobs is a good start.
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