Globalization 2.0 in peril

Statements by world leaders strongly advocating open trade every once in a while is perhaps proof they are worried that countries could close their borders in a moment of panic.
Several Italian towns ban the sale of kebabs and other foreign food in an attempt to make Italians eat Italian. British workers at their country’s third largest oil refinery go on strike because foreign labour is being used for new construction at the refinery site. Spain is promising to pay immigrants to pack up and head home.
And then there is the more well-known case of the US, where the new economic stimulus package announced by the Barack Obama administration has controversial provisions to buy and employ American.
The war of words between the US and China on how the latter manages its currency, the use of higher tariffs by many countries to protect powerful industries such as steel, bailouts of select companies, the rise in trade disputes—all point to the disturbing fact that protectionist pressures are welling up in many parts of a recession-stricken world.
Note that most of these cases are from the rich countries rather than the poor. Some 25 years after the US and its allies pulled most countries into the global trading system and brought in the second golden era of globalization—the first ended with World War I—it is the original proponents of Globalization 2.0 who are busy trying to protect domestic interests.
It is reassuring that most world leaders continue to swear by open trade. The finance ministers of the Group of Seven (G-7) nations met earlier this month and promised to fight the growing threat from economic nationalism. The larger group of 20 (G-20)—which includes India—made similar promises when it met in the middle of November.
However, that the world’s leaders see the need to make such statements every once in a while is perhaps proof they are worried that countries could close their borders in a moment of panic. Declining capital flows and the withdrawal of shaky global banks back to their home bases are other warning signs.
The theoretical case against protectionism is clear: Free trade allows countries to specialize in activities where they have a comparative advantage. For all their famed disagreements, most economists concur that open borders for the movements of goods and services are far better than tariff walls that protect inefficient producers.
If the US, for example, insists on the use of expensive American rather than cheap Chinese steel to build a bridge, it is short-changing one set of citizens to help another.
The empirical case is clear as well: Countries with open borders usually grow faster than those that build barriers to trade. Also, it is widely accepted that the protectionism of the 1930s worsened the Great Depression. It is unlikely that the old mistakes will be repeated, though we may see milder forms of the protectionist affliction in the coming months.
The problem now is slightly complicated. Say, country A decides to spend hundreds of billions of dollars to support a weak economy. A large part of this money will naturally go into the coffers of the companies and individuals who get this money. They spend part of it and that gets the economy rolling again—or at least that is what the fiscal stimulus crowd fervently hopes.
But not all the money that a government pours in stays in the country. Some of it leaks out when domestic companies and consumers import stuff from country B. So, the fiscal stimulus in country A partly helps prop up export demand in country B. It is also likely that the fiscal stimulus in the latter helps the former.
What if country B decides not to spend too much money, either out of conviction or because it already has high levels of deficits and public debt? It benefits from what the government of country A is spending, but does not return the favour.
It is in such cases that country A may be tempted to slip in trade-destroying policies that insist on local buying and employing.
Avoiding these traps will require international coordination, where countries agree to keep borders open and spend in unison.
But that will be easier said than done. Recession, unemployment and bankruptcies will almost inevitably make voters put pressure on politicians to protect domestic interests. Some of it could manifest in ugly xenophobia—do not eat kebabs, do not employ Indian techies. This is going to be a tug-of-war worth watching.
What about India? We have undoubtedly benefited from globalization. Growth picked up after the 1991 reforms and poverty levels have declined. The fear of the outside world has subsided as national confidence has grown. For all their posing while in opposition, no major political formation in India has tried to roll back economic reforms.
Yet, let us not be surprised if the old swadeshi warriors polish their armour and step into the battle with renewed vigour this election season.
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