Free Trade Under Threat

Anxiety is spreading in the world’s wealthiest nations about unemployment, inequality and economic uncertainty due to outsourcing, global supply chains and big trade agreements. The wages of ordinary workers stagnate while corporate earnings soar. Sizable blocs of voters angrily resist trade agreements, immigration and protections for refugees. “The US presidential elections in November promise to mark a turning point in the evolution of globalization,” writes Nayan Chanda, founding editor of YaleGlobal Online in his column for Businessworld and he adds, “the populist results of an American election could interrupt the process of globalization and reduce global connectivity.” Domestic troubles drive anger. In the United States, 1 percent of the population holds 35 percent of the nation’s wealth while the bottom half of the country holds 2.5 percent of the wealth. Unlimited campaign spending gives the wealthy over-weighted influence over policy, and voters no longer trust that political leaders represent the public interest. Anger about trade deficits and long wars that fail to bring lasting peace is shaping policy proposals, and the United States could retreat into a dangerous isolationism. – YaleGlobal

Free Trade Under Threat

The US was once leader in globalization - presidential campaign rhetoric threatens a retreat into isolationism due to inequality, trade deficits, unemployment
Nayan Chanda
Monday, February 29, 2016

Ever since anti-globalization demonstrators disrupted the WTO ministerial meeting in Seattle in 1999, international gatherings regularly face the wrath of protesters. Over the years, young demonstrators have passed on their anger to a generation of voters, who elected representatives to block trade agreements and halt immigration – two of the more visible results of globalization. The US presidential elections in November promise to mark a turning point in the evolution of globalization. Along with the Biblical surge of Syrian refugees generating an anti-immigration backlash in Europe and a deflating China triggering competitive devaluation, the populist results of an American election could interrupt the process of globalization and reduce global connectivity.


Such challenges to globalization are not new, however. Over the past decade, opinion polls have consistently shown growing anxiety in the West about job losses due to global trade and migration. The expansion of trade, increasing outsourcing and supply chain production and the liberalization of financial systems have resulted in a massive rise in corporate income, bringing prosperity to China and other emerging countries while causing growing despair among the Western middle classes. In Europe, these developments have spawned nationalist demands for barriers to both trade and immigration — both are seen as causes of rising joblessness. With hundreds of thousands of refugees arriving from war-torn Middle East and North Africa, many fear the loss of their national identity.


Similar concerns were clearly on a slow boil in the US until the demagogy of the Republican Party’s presidential candidates unleashed an ugly wave of public anger. Whether it’s real estate and reality TV mogul Donald Trump or the self-proclaimed “Democratic Socialist” Senator Bernie Sanders, both have succeeded in tapping into popular anger against the consequences of globalization. Trump’s popularity has soared as a result of his racist diatribes against migrant workers from Mexico and immigrants from the Muslim world. But he has also echoed left-wing critiques in denouncing the trade pacts that have allowed countries like China to ‘steal’ American jobs and pro-Silicon Valley policies that have incentivized tech companies to replace American workers with cheap but skilled foreigners holding H-1B visas.


While multinational companies have seen their earnings soar thanks to a borderless world and technological innovation, the wages of average American workers have stagnated. The result has been a yawning income gap, with the poorest half of the country holding just 2.5 per cent of US wealth while 35 per cent is in the hands of the top 1 per cent. Trashing trade agreements, keeping jobs home and reducing income inequality is Sanders’ battle cry.


In the face of such populist pressure, his rival Hillary Clinton (who as Secretary of State helped negotiate the Trans-Pacific Partnership) is now distancing herself from the landmark trade accord. Although Clinton, as the inheritor of her husband’s trade deals like NAFTA and backing of WTO, would have reasons to moderate the populist pressure against globalization, she cannot ignore the tide that her democratic rival and even Republican contestants have been riding on. Against this backdrop, the likely Chinese moves to continue the renminbi’s devaluation will push up US trade deficit and further fan the flames of the anti-trade movement.


A retreat into isolationism to escape the unpredictable and often unforgiving tide of globalization could prove more damaging in the long term. But with the current sour mood in the developed West combining with economic, political and social upheaval in other parts of the world, global trade and investment could suffer some serious setbacks.

Nayan Chanda is the author of Bound Together: How Traders, Preachers, Adventurers and Warriors Shaped Globalization and is consulting editor of YaleGlobal Online, published by the MacMillan Center, Yale University.