Globalisation and Protectionism today

Author: Andrew McCulloch

Photograph taken in a 'sweatshop' c.1890

I found myself looking for statistics on globalisation last week after I bought an electric kettle made in China for less than £10. The one thing I had learned about globalisation was that it is commonly measured using the volume of world trade. It came as a slight surprise, however, to find that world trade is generally measured using the value of world exports and imports as a percentage of world output (or GDP). I can’t see that the resulting figure has any intuitive meaning although I'd be happy for someone to correct me on that. However, the figure below uses data on trade and GDP from the World Bank and shows how the value of trade as a percentage of GDP has varied over the last 50 years. As expected the figure shows that there has been a steady rise over time in the level of trade.

Data from World Development Indicators (Series NE_TRD_GNFS_ZS)

The vigorous rise in world trade over the last 50 years might suggest that the idea that the extent of trade between countries might decline in the near future is a little far-fetched. The figure above uses world GDP as a denominator, however, making it difficult to discern trends over time in the value of exports or imports. The figure below shows the percentage change in the value of exports over the previous 12 months for selected countries using data from 2006 to 2012 from the World Trade Organisation. The figure shows that in each country the value of exports had been rising at around 20 percent each year but that in 2009 this trend reversed and the level of exports fell by as much as 40 percent in the space of a single year. In 2010 and 2011, the growth in exports resumed but 2012 has seen the level of exports stagnate or decline in all countries.

The collapse of world trade in 2009 was due in significant part to a sharp fall in consumer confidence in most western economies. In previous economic downturns, most notably the 1930s Depression, a fall in the level of trade was also influenced by the use of import tariffs and quotas by many countries. In a situation where the economy remains depressed for a period of time, governments feel that they need to make sure that whatever consumer spending there is goes on domestically produced goods. The most straightforward way for governments to do this is to increase the price of imports relative to domestic goods (using tariffs) or to restrict the level of imports (using quotas). During the current economic downturn governments were initially felt to have done a reasonably good job of avoiding protectionism.

Several recent reports have however pointed to a rise in the use of measures such as import tariffs, exchange controls and import licenses by major trading blocs. Economic history suggests that wholesale recourse to tariffs and quotas is likely to prolong the world economic downturn, however, so while such measures might be politically popular at home, they are unlikely to make much of a positive contribution to economic growth.

Not everyone is convinced of the benefits of free-trade, however. The centre-left think-tank, Compass, argued in a recent pamphlet that the fundamental cause of most of the economic ills in the UK, such as the much discussed squeezed-middle, is globalisation. Although the argument that free-trade increases the overall value of economic output is convincing, economics has little to say about how the gains from trade are distributed (to governments, corporations, households etc). Many economists have argued that globalisation has reduced the demand for labour and wages in in the UK and US, particularly for men with poor skills. It is argued that industry has moved to Asia or Eastern Europe where labour is comparatively cheap, resulting in a lack of wage growth and a decline in the availability of well-paid jobs for unskilled workers in western economies.

In the UK, I imagine that all politicians would say they support free-trade and industrial decline and a shift towards a service economy is seen as inevitable. In continental Europe, views are more diverse and one argument that has been advanced is that foreign firms should be allowed to compete for European markets primarily through foreign direct investment rather than through trade. This would allow competition when based on higher productivity but not when based on lower wages. It would be useful to see such views discussed in British politics and it is potentially an issue which would distinguish the left and right. Indeed, the Compass pamphlet attracted the ire of the right-wing Adam Smith Institute who described it as 'economic fascism'.

The view that the free market is the bedrock of a free society (and hence that protectionism equates to fascism) was argued by Hayek in the Road to Serfdom written in the 1940s and subsequently picked-up by conservative governments in the 1980s. It is not entirely wrong but multinational corporations are not the buttress of a free society.