The Return of Globalization
As the G-20 finance ministers gather in South Korea, trade is returning but currency wars are brewing. Can they agree to cooperate before protectionist urges tear them apart?
As the G-20 finance ministers gather in South Korea this weekend in advance of November's big meeting, they will surely notice that globalization is back -- almost. The trajectory of world trade over the last two years looks V-shaped: a drop of 12.2 percent in 2009 followed by a projected gain of 13.5 percent in 2010. Cross-border financial flows are recovering: After more than halving from $1.3 trillion in 2007 to $500 billion in 2009, net portfolio flows to emerging markets will rise to some $700 billion this year. Global foreign direct investment is soaring to $1.2 trillion this year, after plunging from $2 trillion in 2007 to $1 trillion in 2009.
As the G-20 finance ministers gather in South Korea this weekend in advance of November’s big meeting, they will surely notice that globalization is back — almost. The trajectory of world trade over the last two years looks V-shaped: a drop of 12.2 percent in 2009 followed by a projected gain of 13.5 percent in 2010. Cross-border financial flows are recovering: After more than halving from $1.3 trillion in 2007 to $500 billion in 2009, net portfolio flows to emerging markets will rise to some $700 billion this year. Global foreign direct investment is soaring to $1.2 trillion this year, after plunging from $2 trillion in 2007 to $1 trillion in 2009.
Yes, practically all G-20 countries engaged in protectionist measures of some kind during the crisis — less than 5 percent of world trade was spared one form of interference or another, estimates Global Trade Alert, an independent monitoring initiative. But the overall damage was orders of magnitude less than perpetrated by the beggar-thy-neighbor protectionism of the Great Depression. International commitments made over the past 60 years to liberalize world trade and finance — defended by thousands of proponents of free markets ensconced in industry, academia, the media, and governments — preserved the open global economy.
But we are not home free. The foundations of globalization are at risk. And when the full G-20 summit begins next month, shoring it up should be at the top of the agenda.
Emerging economies from Brazil to China are engaged in currency warfare to promote their exports. Washington threatens tariffs against Beijing on the diplomatic battlefield. In the United States, widening U.S. trade deficits (likely $450 billion in 2010) are a familiar precursor of protectionist impulses that spur calls to keep imports out and jobs at home. Poll after poll shows that free trade has become deeply unpopular among blue collar and college-educated, white-collar workers alike. Trade is now practically synonymous with the much-feared outsourcing that scared Americans when John Kerry ran for president, pledging to blast Benedict Arnold companies that send jobs abroad. President Barack Obama’s slogan is only slightly different: Stop tax breaks to companies that ship jobs overseas. Even Republicans, once a reliable force against protectionism, at best mutter misgivings.
The specter of trade barriers and currency wars create uncertainties for global companies at a time when they should be investing to revive the global economy. But financial markets are also beset with question marks about new regulations. With countries from Asia to Europe elbowing for an edge, legitimate fears are spreading about global regulatory fragmentation and favoritism for domestic financial operators. Some emerging countries are flirting with capital controls, a failed but politically appealing experiment from decades past.
Rules on foreign direct investment and sovereign wealth funds are also in flux. Advanced and emerging country governments have crafted rules to restrict foreign purchases of domestic assets on highly subjective "public order" or "economic security" grounds. A good example is Germany’s 2009 Foreign Trade Act, which enables the government to block any acquisitions of stakes in German businesses if the purchaser is a non-EU person and if the transaction threatens the public order or safety of the German state. Russia and China are in a league of their own. Only days before stepping down as president in May 2008, Vladimir Putin signed a law restricting foreign investment in 42 sectors ranging from oil and gas to fishing and publishing. China has notoriously sought to keep foreigners from "critical economic sectors" over which it wants to retain state control, such as the automotive, chemical, construction, electronic information, and science and technology sectors. Such measures all too easily ricochet around the world in the form of retaliatory barriers.
Such policies may have short-term political benefits, but there are no good alternatives that come close to generating the benefits that emanate from freer economic exchange. A Peterson Institute study shows that the U.S. economy alone has gained $1 trillion annually due to globalization in the postwar era and stands to score another $500 billion per year from future policy liberalization. Matthew Slaughter of Dartmouth College’s Tuck School of Business has found that for every job outsourced from the United States, almost two are created in America, and that the prime globalizers — U.S. multinational companies — pay up to 24 percent higher wages in the United States than do non-globalized firms.
The oft-demonized globalized capital markets are a force of great good, inspiring financial development and entrepreneurship the world over. Peterson Institute fellow William Cline’s survey of the literature concludes that general financial openness boosts growth by about 1 percent annually for industrial countries, and 0.5 percent annually for emerging countries. Openness to foreign direct investment contributes about 1 percent annually to growth in industrialized countries and 1.4 percent annually to growth in emerging countries. Globalization has also been among the best foreign-aid programs the world has ever known: The World Bank has found that when it comes to stimulating growth, globalization has a direct, one-to-one relationship with poverty reduction.
Globalization has many drivers, from the logic of comparative advantage to economies of scale and scope, new technologies, and the spreading of high research and development costs across larger markets. But a good share of globalization — at least a third by most measures — owes to better policy, including trade and financial liberalization. The paradox is that just when open markets are needed to revive growth and employment, voters are turning against pro-globalization policies.
Meeting in Seoul this November, G-20 leaders have an opportunity to reinvent themselves as agents of globalization. Such a Herculean agenda is not only urgent to safeguard the gains of globalization in the 21st century; it is key for giving the group a fresh sense of purpose in the post-crisis world. It is most fitting for a body whose members make up 85 percent of the world economy and are among globalization’s greatest beneficiaries.
Yet the G-20’s recent record does not inspire confidence. The litmus test for the group’s effectiveness is coming now as the crisis-induced urgency to cooperate dissipates. At the first post-crisis summit in June in Toronto, the group, including and in particular Obama, struck out: The leaders opted for political convenience and backslid on their prior commitments to conclude the Doha trade round, coordinate financial regulations, and get tough on imbalances.
The G-20 can in Seoul improve its batting average through five commitments to build stronger bases for globalization:
First, global imbalances and trade deficits in the United States and countless other countries like Australia, Britain, France, and India need to be curbed. Perhaps the rise of materialistic Asian middle classes coupled with a young army of frugal Americans will, over time, propel a grand correction from the bottom up. But there is no time to wait and see. The G-20’s worthy growth framework, approved in 2009, must succeed, and it will do so only if countries around the world take serious unilateral policy actions: a real commitment by China and other East Asian countries to channel money into household demand, a burst of infrastructure spending in Africa and other poor developing regions, and a sharp correction of gaping U.S. budget deficits. Currency warriors that go to battle without these supporting policies must understand that theirs is a suicide mission.
The second policy priority must be to conclude the languishing Doha round, the surest way to inject new vitality to the world economy and markets. But thinking must start now about streamlining the clogged multilateral system. The engine of multilateral trade liberalization in the past six decades, the World Trade Organization (WTO) has grown, to borrow a phrase from the New York Times‘ Thomas Friedman, "hot, flat, and crowded." Unlike in the 1940s, trade talks now tackle multiple issues among a record 153 members. The WTO needs to drop rules that inhibit faster deal-making among coalitions of the willing.
Third, financial regulatory coordination remains critical in a world where banking is global yet rules are national. Complete harmonization is next to impossible. What’s needed instead are compatible and nondiscriminatory rules. The G-20 must address pending issues head-on — common principles for jointly managing failing multinational banks, coordinated clearing and supervision of over-the-counter derivatives, and agreed-upon auditing standards and accounting rules. Longer-run transparency requires sturdier peer reviews, along the lines of the WTO’s trade policy reviews. Otherwise the Financial Stability Board, the supposed grand regulatory coordinator, risks fading to a wallflower in global finance.
Fourth, cross-border investment is crucial for forging new trade ties and generating jobs. But there’s no global code of conduct for reviewing foreign investments. Based on a handful of principles, such a code would apply to investments tinged by national security and strategic asset concerns. For their part, emerging-market sovereign wealth funds must not become vehicles for advancing state capitalism — and they must dispel suspicions that they are just that through greater transparency, better communication, and adherence to rules of good conduct.
Finally, U.S. leadership in catalyzing new commitments is vital: No other country is able or willing to shoulder the burden. But to lead abroad, America must reform at home. The fiscal gap needs to be closed by replacing public spending with private investment. But a new policy paradigm — call it Capitalism 3.0 — is also needed to defeat the gnawing sense of precariousness among American workers. The new system should marry security with labor mobility. Health insurance and home mortgages should not be reasons for people to stay put after their jobs have disappeared. Lifelong worker training programs are in order.
Economic integration is a fabulous force and one of the best agents the world has known for spreading growth and prosperity. But globalization is not automatic: For it to flourish in the 21st century, the G-20 has to step up to the plate and play ball, something in each member’s enlightened self-interest. Seoul offers a chance to get started on redesigning the rules of the game.
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