Why is there a Backlash Against Globalization?
Globalization, or economic globalization to be more precise, is driven principally by rising international trade and investment flows between nations. This kind of globalization has led to gains for many groups of people in disparate nations. Even so, there is now a significant backlash against globalization in the United States (US). To see why, it is important to first recognize that the aggregate economic impacts of international trade for large economies such as the US are rather small. So, the backlash against globalization is really about the distributional impacts of trade — -who gains, who loses, and by how much?
To understand these distributional impacts or, put a little differently, the impacts of international trade on inequality, it is helpful to cast the discussion in terms of the following two-step scheme. In the first step, we look at global versus within-country inequality. In the second step, within a particular nation, we examine the impact of trade on consumers and producers.
Utilizing this scheme, is there a tradeoff between global and within-country inequality? We can shed light on this question by focusing on the survey data based research of Christoph Lakner and Branko Milanovic. This research suggests that income growth in general between 1988 and 2008 resulted in dramatic reductions in global inequality and poverty. However, when this same question is examined using tax data, the data tell us that the world’s top 1 percent has captured 27 percent of the total income growth over a nearly four decade period. So, unfortunately, the available evidence is both insufficient and mixed on the question about whether the world’s poor have benefitted from globalization at the expense of the middle classes in rich countries.
What about the impacts of international trade on labor and prices within countries? If we concentrate on trade between the US and China then the evidence is stark. Between 2001 and 2004, when US imports from China rose dramatically and this rise was accompanied by increased offshoring by US firms, there was a sudden and dramatic decline in US manufacturing employment and this caused major disruptions in the US labor market.
One cannot meaningfully comprehend the backlash against globalization without examining the impact that international trade has on regional inequality in the US. This is because trade’s impacts on a nation’s labor markets vary by region, depending on the extent of a particular region’s exposure to trade. What is particularly noteworthy is that unlike what economists typically assume about labor mobility (that it is high), the recent research of MIT economist David Autor and his colleagues demonstrates that workers in adversely impacted commuting zones in the US are not mobile across these zones. This means that prevailing frictions in labor markets, along with the impacts of international trade, are together responsible for the unhappy situation in which many manufacturing sector workers in the US find themselves. From a policy standpoint, if existing labor market frictions prevent people from moving then the case for “place-based” policies over “people-based” policies is much stronger than what the conventional wisdom in economics would have us believe.
In addition to adverse regional impacts, international trade has also led to unequal impacts on consumers. Specifically, trade has lowered prices for consumers but the amount by which prices have gone down is less than the amount by which production costs have gone down. In other words, while average prices facing consumers have declined, this decline has not matched the average cost declines enjoyed by firms. So, contrary to the findings of competitive trade models, price markups are not constant but have increased and so has inequality between consumers and producers.
Finally, it is worth emphasizing that international trade fueled globalization has led to the rise of a few “superstar firms,” with a relatively small number of firms accounting for larger shares of the market and high profits. A closely related phenomenon is the rise of global value chains (GVCs). In fact, there would appear to be a symbiotic relationship between these two developments in that GVCs contribute to the emergence of huge, multinational “superstar” firms that enjoy immense market power, large profit margins, and unequal bargaining power over their suppliers.
Policymaking in the US ought to support people where they live and invest in those places when international trade has taken a toll on American workers. Specifically, regional policymaking needs to do what is necessary so that those who are unemployed because of international trade do not feel, as Nobel Prize-winning poet Gabriela Mistral writes, that “everyone left and we have remained on a path that goes on without us.”
