international analysis and commentary

Globalization: change of a leading narrative


In January, the world was confronted with a landmark moment in modern history: the newly sworn-in President of the United States Donald J. Trump pulled the country out of the Trans-Pacific Partnership (TPP), a 12-country Pacific trade treaty. Being a man of many controversial promises, Trump at least delivered on this one, as he had repeatedly stated that his first act as president would be to withdraw America from the TPP.

There is, however, quite some irony in his act. For decades one of the most important export products of the US was perhaps not a specific product or a service, but the political-economic doctrine of open markets, free trade and global economic integration. But the new “leader of the free world” has made it abundantly clear on behalf of his voters that the days of free trade and capital movement are numbered.

Opposition to globalization is on the rise, and not only in America. The Brexit vote and the rise of populist parties all over the Old Continent clearly show that in Europe many people are revolting against continuing international economic integration and the once promising free trade narrative, a tune that for more than half a century set the tone for the Western post-war economic order.

World commercial connections in 1872


The narrative power of the free market doctrine was firmly based on two pillars. The first one was rational economic theory: a set of rather convincing models according to which free trade and free movement of capital would lead to higher trade volumes, higher employment, higher competitiveness (which in turn should lead to lower prices) and greater variety of goods and services. All in all free trade promised an infinite increase in (material) wellbeing.

The second pillar of the ideology’s success was that, in contrast with communism, liberalism delivered on its promises, at least in the shorter term. While in the decades following the Second World War people in the East were getting poorer and more oppressed, citizens of the Western world were introduced to unprecedented levels of wellbeing. Understandably, when the Soviet Union finally collapsed, non-Western countries where lured by the Western political-economic order, and were happy to open their borders to let the capital flow in. Famous and illustrative for the narrative power this ideology held, are the words of the American historian Francis Fukuyama, “What we may be witnessing is not just the end of the Cold War […] but the end of history as such: that is, the end point of mankind’s ideological evolution and the universalization of Western liberal democracy as the final form of human government.”

Unfortunately this economic narrative did not last. As society entered the first decade of the 21st century it turned out that next to a shiny, promising future, the story also contained some untold (or non-emphasized) elements.

The first has to do with the narrative’s focus and rationale. The economic models supporting free trade focused primarily on one element: efficiency. Or to be more precise: a most efficient allocation of resources for the global society as a whole.

The important questions these models did not answer, however, are: What is efficient? And does efficient for society mean the same as efficient for an individual, of a group within that society? In theory free trade and globalization might be efficient for society, or the global community at large, but in real life what is efficient for one, might mean losing jobs for others. Unfortunately the models tell us nothing about how the latter cope with this reality. To find the answer one rather looks to the polls.

Another question the great globalization narrative leaves unanswered is that of redistribution of wealth. Or to put it in different and more popular terms: economic inequality. Open borders may generally increase material wealth in a country, but if the proceeds are distributed excessively unequally, sooner or later this will be a recipe for social friction and resistance. For decades, economic inequality was a topic that was not given much attention. “A rising tide lifts all boats,” was a mantra in which more people started to believe. Most economists did not worry too much about inequality; they believed the trickle-down effect would do its job efficiently enough, meaning that a vast increase in wealth of a small minority would over time lead to an increase for others too. Rational had it that in this way an initial increase in economic inequality would gradually fade away. This kind of logic, however conveniently it fitted the neoliberal narrative, appeared to be at least partly wrong, as studies like Thomas Piketty’s show us today.

A third blind spot in the globalization narrative is the organization of government and supervision. Countries around the world may have opened their borders to foreign capital and multinationals, but their institutional framework and governing bodies are still largely organized on national and even local levels. While leading economic agents, like multinationals and financial institutions, evolved to global operating players and forces of influence, they became increasingly difficult to hold in check by public authorities. All the economic benefits aside, over time more and more people came to see multinationals and the global financial markets not as forces of economic prosperity but as threats to them and to their countries. This is not only because of the potential negative influence they have, but also because of their ability to arbitrage in matters of taxes and regulation and to escape from every form of accountability. Recent revelations of the Lux Leaks and the Panama Papers only give us a glimpse of the scale of a parallel world in which people and companies can hide from public view and their responsibilities to society.

For decades, the free trade and free movement narrative was a convincing one – not in the least because it brought a lot of wealth. But some of its important blind spots – parts of the story that were not told out loud – have come to light. Does this mean that the globalization narrative is dead? Sadly or not, for the moment it appears that it is. Of course, most countries will not shift their focus completely inwards; that would be hardly possible in the age of the Internet and global connectedness. But in the decade to come, many countries may go into a period of reflexion and evaluation on the question of why, and on what terms they want to open their doors to others and want to do business with them.

Where does this leave those who still advocate free trade, globalization and the economy of scale as conditio sine qua non for the proper functioning of the economy? Former US Treasury secretary Lawrence Summers had a point when he recently stated in an article in the Financial Times that “voters deserve responsible nationalism, not reflex globalism.” The question is if Trump can deliver his voters nationalism of a responsible kind. Judging him on his first weeks in office, I believe it is best not to hope for too much.