Grave New World – Stephen King’s new blockbuster – conjures up images of Orwellian dystopia and The Walking Dead. But the title doesn’t belong to a new thriller or horror novel. Instead it is a deadly serious warning from a leading economist that globalisation – or at least the liberal, Western-led variety of it – is under threat. Which begs the question: can it be saved?
It may seem preposterous for King – a senior economic adviser to HSBC, that most global of banks – to warn of “the end of globalisation”, as he does in the book’s subtitle. Surely increasing international exchange is a technological inevitability in a digital age? Actually, it isn’t. While the Internet and shipping containers have given rise to global supply chains that connect once-disparate economies as never before, new technologies may re-localise production. If robots and artificial intelligence can take over many more tasks, why rely so much on foreign factories in countries with cheaper labour?
In any case, globalisation is also a political choice – one that rests on liberal ideas that are under attack and an institutional framework that is fraying. So it could all too easily go into reverse. Remember that globalisation collapsed during the Great Depression of the 1930s. It then recovered gradually under US leadership after World War II and became near-universal only in recent decades as Western economies liberalised, China and other state-led economies opened up and the Soviet bloc collapsed.
But protectionism and nativism are now resurgent across the West, while a rising China that is scarcely liberal has its own ideas about how to shape international exchange. That makes international cooperation harder, economic conflict more likely. While US-led liberal globalisation is not about to give way to North Korean-style autarky, it seems plausible that the world economy could fragment into rival trading blocs, with great power politics displacing multilateral rules.
Even today, globalisation is more of a ragged patchwork than a seamless web. While trade in manufactured goods is pretty open, farmers are often protected, as are most services. Many governments limit investment by foreign firms; Theresa May wants greater powers to block foreign takeovers of British companies. Finance has become much more national since the crisis. Immigration controls are being tightened in many countries, including Britain.
Even data flows can be restricted; witness the Great Firewall of China or the EU’s new data-privacy regulation. And with the World Trade Organisation (WTO) deadlocked, preferential pacts (euphemistically known as free-trade agreements) have proliferated.
Alarmingly, support for open markets has plunged. It is fantastic that globalisation has caused global poverty to plunge, enabled the Chinese and others to catch up with the richer West and generated a cornucopia of iPhones, Netflix and cheap Chinese clothes. But it may not feel so great to those in the West whose living standards have stagnated or fallen for years, often for reasons other than globalisation.
Immigration is generally an economic boon too, yet many feel threatened by it. More broadly, a lost decade of financial crisis, bank bailouts and austerity has discredited free markets in many Westerners’ eyes; witness the UK general election, which has seen the most interventionist Conservative and Labour manifestos since the 1970s.
Worse, the US, already in relative economic decline, is now retreating from its role as the guarantor of global order. Its protectionist President views trade in zero-sum terms. He sees the international rules, institutions and alliances that his more enlightened predecessors crafted – such as the WTO, the IMF and Nato – as constraints on American power rather than magnifiers of it. One of Donald Trump’s first acts as president was to withdraw from the Trans-Pacific Partnership (TPP), a 12-country trade deal that spans the Pacific, leaving key US allies such as Japan and Australia high and dry.
As America retreats, a rising China is flexing its economic and political muscles. Beijing is busy building its own international institutions – notably the Asian Infrastructure Investment Bank (AIIB), which Britain and others joined in spite of US objections. In place of TPP, it touts its own (less ambitious) pan-Asian trade deal. With President Trump announcing the US’s intention to withdraw from the Paris climate-change agreement, China and the EU have pledged to push forward together.
In January President Xi Jinping won plaudits at Davos by presenting himself as a standard bearer for globalisation. But globalisation with Chinese characteristics may prove very different to the US-led variety. Consider its vastly ambitious “Belt and Road” initiative – “an intriguing combination of Silk Road nostalgia and Marshall Plan vision”, as King aptly puts it. This involves $900 billion (£700 billion) in infrastructure investment across 68 countries to cement their trade, regulatory and political ties to China. While it’s great that freight trains now connect London to China, the ultimate aim is to turn Eurasia into a Chinese-dominated trading area to rival the West. At a time when America and Europe are divided and threatening to turn inwards, the potential for economic conflict is real.
How might globalisation be saved? Many will argue that the threat of fragmentation is overblown; the benefits of economic interdependence are simply too great. Perhaps. But politics can trump economics; why else is Britain leaving the EU single market?
King argues that saving some form of globalisation requires a “compromise between the advantages of openness and the benefits of sovereignty”. But that is easier said than done. It would be great if China, the US and other leading countries committed to liberalise more at the WTO. The new global institution that King proposes, to resolve financial disputes between creditors and debtors, is a great idea. But as he recognises, the problem is the politics.
Even in good times, there is a tension at the heart of globalisation between economies and markets that have become increasingly international and democratic politics that remains rooted in nation states. Attempts to bridge that gap – international institutions such as the WTO and regional ones such as the EU – are inevitably imperfect and increasingly contested. Many people want to take back control, limit foreign entanglements and slam the door shut.
Wishing it were otherwise is not a sound strategy. Singing the praises of free trade and open societies often falls on deaf ears. Pointing out that many of the problems attributed to globalisation have other causes only gets you so far. While one can hope that Trump does not last long as president and that the damage he does in the meantime is contained, his voters are not going to disappear.
A second new book, The Fate of the West by Bill Emmott, suggests a way forward. While his description of the West is as depressing as King’s – “Demoralised, decadent, deflating, demographically challenged, dividing, disintegrating, dysfunctional, declining” – the former editor of The Economist (full disclosure: he hired me to work there many years ago) and occasional contributor to CapX emphasises that the future of economic and political liberalism need not be bleak.
Rightly, he believes that the main problem is not globalisation per se but rather that our economies and politics are often captured by rent-seeking vested interests. Overmighty, state-subsidised banks spring to mind, as do companies cosseted from competition, nimbyist property owners, farmers and, increasingly, pensioners. That not only gums up growth; it undermines the legitimacy of liberalism. What the West needs, he argues, is a judicious combination of openness and equality – by which he means equal political rights and economic fairness, not socialism. “Without openness, the West cannot thrive; but without equality, the West cannot last,” he observes.
We desperately need radical reforms to rekindle enterprise, create new opportunities and craft fairer societies in which people feel secure enough to embrace openness. A stronger, more confident and more open West would then be much better placed to help keep the global economy open too.
Philippe Legrain is a senior visiting fellow at the London School of Economics’ European Institute and the founder of OPEN, an international think-tank on openness issues.
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