New threats to globalisation

The last two decades have seen an astonishing increase in the extent and range of engagement and interaction among Asian countries and between them and other parts of the world.

Twenty years ago, exports of goods and services accounted for about 17 per cent of world GDP - a figure not much higher than it was on the eve of World War I. Over the past 20 years, exports of goods and services have risen and now exceed 30 per cent of global GDP for the first time.

Nowhere in the world have these trends been more dramatic than in Asia. Twenty years ago, merchandise exports accounted for just 7½ per cent of Asian GDP, barely more than half the figure for the world as a whole.

Since then, Asian merchandise exports have increased by just over 13 per cent per annum, on average, compared with 8½ per cent per annum for the rest of the world. Last year, merchandise exports accounted for 25.2 per cent of Asia’s GDP, slightly above the corresponding figure for the world as a whole of 24.8 per cent. Add in commercial services, and exports represented 28.5 per cent of Asia’s GDP in 2005 (2006 data are not yet available).

Asia now accounts for 22½ per cent of the world’s merchandise exports, almost exactly double its share years ago, and for 22 per cent of the world’s exports of commercial services.

This increasing integration and engagement with the global economy has considerably assisted the growth of Asian economies and improved the standard of living in Asia.

Asia’s real per capita GDP5 has risen at an average annual rate of 4¼ per cent per annum over the past two decades - or by 5½ per cent per annum excluding Japan - compared with just 0.1 per cent per annum in the rest of the world. Per capita Asian GDP has risen from 42 per cent of the global average 20 years ago to 70 per cent last year; or, excluding Japan, from 29 per cent to 60 per cent of the global average.

Moreover, the gap between the per capita income of Asia’s richest economy, Japan, and its poorest, Laos has narrowed from 19 times to just under 14 times over this period. Vietnam, which was almost as poor as Laos 20 years ago, has since seen its per capita income rise from one-twentieth to one-tenth of Japan’s figure.

Unlike the “globalisation” of the 19th century, which in many instances was forced upon Asia by a combination of European colonialism, “gunboat diplomacy” and “unequal treaties”, during recent years Asia has “globalised” by choice.

And yet I believe it is not being unduly alarmist to say that “globalisation” as we understand it today is under greater threat now than at any other time during the last 30 years - and certainly more so than a few years ago when meetings and occasions such as these were routinely besieged by rowdy and usually violent demonstrations.

The onward march of technological progress, which is undoubtedly one of the factors enabling greater economic and social engagement and integration among nations, may well be unstoppable. But this engagement and integration also requires the consent of governments. And what governments give they (or subsequent governments) may also take away.

The last three decades of the 19th century witnessed technological innovation no less dramatic in its impact than that of the past 30 years. According to Professor Kevin O’Rourke of Trinity College, Dublin, “no other innovation, including … the telephone or … the Internet, has had comparable impact on the speed of information flows and capital market integration” as the laying of the first transatlantic cable in 1866.

Yet during this period, beginning with Bismarck’s tariffs of 1879, “there was a powerful and comprehensive globalisation backlash on the European Continent prior to World War I, and it was even more dramatic in the New World”. American tariffs escalated sharply after having been initially increased as a revenue-raising measure during the Civil War.

Here in Australia, the [then] pre-eminent colony of Victoria introduced tariffs in 1865 at a maximum rate of 10 per cent; but by 1893 the maximum rate had risen to 45 per cent. Immigration policy in the United States, Canada, South American and Australia also began to become more restrictive during this period.

Although there were perhaps fewer epoch-defining technological innovations during the 1920s and 1930s than in the last decades of the 19th century, this was nonetheless a period when technologies invented some decades earlier - such as electricity, radio and the automobile - became much more widely diffused than they had been hitherto, at least in the more advanced economies.

Yet this was, as is widely understood, a period in which governments around the world consciously sought to “roll back” the globalisation of the pre-1914 era, which they emphatically succeeded in doing.

Notwithstanding their devastating economic and social consequences (including not just the Great Depression but the rise of Hitler in Germany and the militarists in Japan) - policies aimed at restricting trade, capital flows and migration enjoyed widespread popular support.

Globalisation is under threat today, not from violent demonstrators motivated more than anything else by a hostility to capitalism and to liberal ideas, but from a growing belief on the part of some governments that there are no votes in it.

The threat to globalisation is evident in the inability or unwillingness of a growing number of governments to complete the Doha Round of trade negotiations, notwithstanding the overwhelming evidence of the benefits to be gained by doing so.

And it is evident in the mounting protectionist sentiment in the United States, most recently exemplified by the Commerce Department’s March 30 preliminary ruling foreshadowing the imposition of “countervailing duties” on imports of coated paper from China.

Given the overwhelming evidence of the damage done by protectionism, why is it so popular?

Part of the reason, I believe, is because of the way in which politicians and trade officials typically seek to “sell” trade liberalisation to their electorates. Almost without exception, trade negotiations are presented as a matter of making “concessions” to other countries - by lowering barriers to imports from them, or by allowing inflows of investment from them - in order to gain “concessions” in the form of enhanced access to their markets. Yet, in truth, the greatest benefits of trade liberalisation come from the enhanced access it gives a nation’s consumers to a broader range of cheaper and often higher-quality imports.

This “exports good, imports bad” view panders to the widespread belief that tariffs are something a country make foreigners pay in order to get their goods into its market; as opposed to the truth which is that tariffs are something a country forces its own consumers to pay in order to keep foreign-produced goods out of the country.

Little wonder, then, that reducing tariffs is rarely popular; or that imposing or increasing tariffs, especially when described in such superficially heart-warming terms as “protecting jobs”, enjoys such widespread support.

Two things stand out about the US Commerce Department’s recent ruling on coated paper imports from China: first, users of these products have no “standing” in the legal procedures by which producers are able to procure court rulings which ultimately lead to higher prices for them. The system is “stacked” in favour of producer interests.

The second is the sheer hypocrisy inherent in the laws under which such rulings are procured.

The basis for last month’s rulings by the US Court of International Trade and the Commerce Department is that the Chinese Government allegedly subsidises the export of coated paper products (something which China of course denies). The US Trade Representative’s Office has also listed steel, petrochemicals, high technology, forestry and paper products, textiles, plywood, machinery, copper and other non-ferrous metals as sectors which (in its opinion) receive subsidies from the Chinese Government through administrative measures such as tax reductions or exemptions, credit allocations, low-interest loans, debt forgiveness and the reduction of freight charges. Last month’s rulings will no doubt encourage US producers in these sectors to seek similar rulings.

Why is it illegitimate for countries to subsidise the export of manufactured goods - so that WTO rules allow other countries, under certain circumstances, to impose “countervailing duties” on imports of those goods from those countries - but it is quite legitimate for countries to subsidise the export of agricultural commodities, as the United States (in particular) and the European Union do?

The answer is, of course, because WTO rules do not preclude agricultural subsidies.

But given that, and given the persistent refusal of the United States and the European Union to agree to bring trade in agricultural products under the same set of rules as those pertaining to manufactured goods, is it any wonder that nations (particularly those in the developing world) whose comparative advantage lies primarily in agricultural commodities see those rules as being stacked against them?

The second reason why protectionism may be gaining in popularity may be the growing dissatisfaction, particularly in the United States, with the way in which the rewards of globalisation are being distributed. There are two aspects of this on which I want to focus.

The first is the growing share of national income accruing to businesses as distinct from households. In 2006, after-tax corporate profits represented 12.2 per cent of US GDP. By a wide margin that is the highest proportion since at least 1929.

Similar trends are apparent in many other countries.

In the sense that globalisation has resulted in a significant increase in the global supply of labour relative to that of capital - the IMF’s latest World Economic Outlook, published this week, suggests that the effective global labour supply has quadrupled over the last 25 years, with most of the increase taking place since 1990 - this result is exactly in accordance with the long-established predictions of economic theory.

To the extent that enhanced trade and productivity have boosted the size of the “total pie”, workers may still be better off in absolute terms even if their share of that pie has diminished - and the IMF suggests that this is indeed the case in all advanced economies.

But this may be of little comfort to householders - that is to say, voters - to whom their diminishing share of national income appears to be of greater importance. Nor has it been of any assistance in alleviating those grievances in the United States in particular, that taxes on corporations have been cut at a time when their share of national income has been rising sharply.

The second aspect of the distributional question is that, in the United States at least, the distribution of income among households has become considerably more skewed (in favour of the highest income households). According to the US Census Bureau, the top quintile of the income distribution has received over 50 per cent of total household income in three of the past five years. The share of household income going to the top 5 per cent of the income distribution topped 22 per cent in 2005 for the first time.

As was the case in the late 19th and early 20th centuries, increasing inequality in the distribution of income provides a fertile soil for those seeking to sow the seeds of protectionism and other “anti-globalisation” policies. In that earlier era, the “anti-globalisation” backlash was initially led by populists such as William Jennings Bryan, but was quickly taken up by the Republicans under Theodore Roosevelt and continued under the Harding, Coolidge and Hoover Administrations in the 1920s and early 1930s.

Today, the protectionist charge may be being led by Democrats such as Charles Rangel, Charles Schumer and the recently-elected James Webb; but according to Republican Senator Lindsey Graham, “this is one issue where Republicans and Democrats are together”.

Once again, it has hardly assisted the cause of those who wish to argue against the proposition that globalisation primarily or even only benefits the rich that taxes on upper-income earners in the United States have been explicitly reduced by the current Administration.

The more redistributive nature of Australia’s tax-transfer system, by contrast, appears to have prevented a similar trend emerging in this country, at least as regards the distribution of income (although I am not as confident that this also applies to the distribution of wealth).

Ironically, the distribution of income is also becoming more unequal in China. By one account, the richest 10 per cent of Chinese households now account for more than 40 per cent of China’s wealth, and the poorest 10 per cent for only 2 per cent. However there is as yet no sign that these trends have contributed to rising anti-globalisation sentiment in China, as they evidently have in the United States. That may be because the poor (at least in urban areas) and the middle classes are getting richer, and believe that they will continue to do so, even if they aren’t getting as rich as quickly as the highest-income groups.

A new emerging threat to globalisation is the possibility that quite legitimate concerns about the environment may be used by protectionists as a cover to advance their cause.

With the growing acceptance by governments and businesses of the threat posed by climate change comes a danger that some will seek to use the contribution to greenhouse gas emissions made by the transportation of goods, services and people to advance their urging of greater restrictions on the movement of goods, services and people across international borders.

It would not be surprising if industries which have traditionally enjoyed (and continue to seek) high levels of “protection”, and those who now purport to see something inherently noble in “self-sufficiency” in food (a trend highlighted by the emerging practice of including “food distances” on restaurant menus) sought to make common cause with those urging practical ways of ameliorating global warming. The European Union, in particular, has been seeking to have WTO rules altered to allow it to restrict trade on what it regards as “environmental grounds”.

As Austrade’s prolific Chief Economist Tim Harcourt points out, exports benefit economies and nations in many ways: they under-write economic growth; they encourage innovation and the transfer of knowledge; they generally achieve higher levels of productivity; they provide safer working environments and invest more in the training of their work forces; and they create personal as well as business relationships between nations.

But as Tim Harcourt also says, “we can’t have exports without imports”. Export promotion agencies need to be at the forefront of efforts to persuade people of the broader benefits of trade and investment liberalisation, to ensure that those benefits are widely and fairly distributed (and seen to be so), and thereby help to counter the siren song of protectionism which once again threatens to grow in intensity to the detriment of us all.