The backlash against globalisation

Interesting points from a nice article in the Times on the challenge facing globalisation. The concerns from the distributional consequences of free trade could be papered over in the initial years of the current phase of globalisation because of fortuitous global factors,

The North American Free Trade Agreement, or Nafta, exposed workers in the United States to competition with Mexico, but its passage came in the mid-1990s, just as investment was pouring into the web, creating demand for a range of manufactured goods — office furniture for Silicon Valley coders, trucks for the couriers delivering e-commerce wares. China’s entry into the World Trade Organization in 2001 unleashed a far larger shock, but a construction boom absorbed many laid-off workers... But the pervasive stagnation (today) has left little cover for those set back by globalization.

The effect of China's entry has been the tipping point, both in terms of its scale and its exposure of concentrated fault lines,

In the first 13 years after China entered the W.T.O., its exports of goods swelled to nearly $2.3 trillion in 2014 from $266 billion, according to the World Bank. The beneficiaries of this surge include anyone who has bought practically anything touched by human hands — an iPhone, a car, a Christmas ornament. Corporations that used China to cut costs raised their value, enriching executives and ordinary investors. The casualties of China’s exports are far fewer, but they are concentrated. The rugged country of western North Carolina suffered mass unemployment as Chinese-made wooden furniture put local plants out of business. So did glassmakers in Toledo, Ohio, and auto parts manufacturers across the Midwest. A paper published last year by a trio of economists — David H. Autor at the Massachusetts Institute of Technology, David Dorn at the University of Zurich and Gordon H. Hanson at the University of California, San Diego — concludes that Chinese imports eliminated nearly one million American manufacturing jobs from 1999 to 2011. Add in suppliers and other related industries, and the total job losses reach 2.4 million.

It is for this reason that social safety nets become a critical ingredient of any public policy that promotes free trade. Unfortunately, here too orthodoxy comes in the way by limiting such social safety nets on grounds of incentive compatibility. Interestingly, the comparison between the US and Europe is instructive,

In the five years after a job loss, an American family of four that is eligible for housing assistance receives average benefits equal to 25 percent of the unemployed person’s previous wages, according to datafrom the Organization for Economic Cooperation and Development. For a similar family in the Netherlands, benefits reach 70 percent.

The Economist makes a spirited defence of globalisation. It writes,

The worst-off benefit far more from trade than the rich. A study of 40 countries found that the richest consumers would lose 28% of their purchasing power if cross-border trade ended; but those in the bottom tenth would lose 63%. The annual cost to American consumers of switching to non-Chinese tyres after Barack Obama slapped on anti-dumping tariffs in 2009 was around $1.1 billion, according to the Peterson Institute for International Economics. That amounts to over $900,000 for each of the 1,200 jobs that were “saved”.

And more, 

A study by Pablo Fajgelbaum of the University of California, Los Angeles, and Amit Khandelwal, of Columbia University, suggests that in an average country, people on high incomes would lose 28% of their purchasing power if borders were closed to trade. But the poorest 10% of consumers would lose 63% of their spending power, because they buy relatively more imported goods.

There is no denying the obvious benefits of trade. But, as I have blogged here, the central challenge of globalization is in managing the political economy of its negative externalities. While its benefits are diffuse and less appreciated, its costs are concentrated and intense. Democracies, especially in times when economic growth is weak, cannot afford to gloss over the sufferings of the losers, howsoever big the net social benefits.