Globalization: Can the omelet be unscrambled?

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The New Face of Globalization

There’s no doubt that globalization is under growing pressure. But how it will evolve, what are the consequences for the global economy, and how low and middle-income countries should respond are open questions.  Those were among the topics of discussion at a forum titled “The New Face of Globalization” organized by the Institute for International Economic Policy (IIEP) at George Washington University’s Elliott School of International Affairs.

Speakers were Richard Baldwin, Professor of International Economics at the International Institute for Management Development; Anabel González, then Deputy Director General of the World Trade Organization and currently Vice President for Countries at the Inter-American Development Bank; Aaditya Mattoo, Chief Economist for East Asia and Pacific at the World Bank; and Adam Posen, president of the Peterson Institute for International Economics. The IIEP’s Danny Leipziger, Professor of International Business at George Washington University, organized and moderated the event. Following is an edited transcript of their discussion, which took place in April 2023.


Leipziger: How worried should we be about the future of the rules-based, global trading system?

González: There are forces that are going in a worrisome direction. The combination of geopolitical tensions and greater rivalry among great powers; trade-restrictive industrial policies; and a harmful subsidies race. All of this, if it's not managed properly, could result in heightened trade policy uncertainty, growing disregard for global trade rules, and shrinking trade opportunities. That is a road to nowhere. This will lead to trade being less diversified, markets more concentrated, and economies weaker and vulnerable.

The good news is that the changing trade landscape also brings with it new opportunities. We know that trade is a force for the rapid climate action that we need. We know for instance about the impressive reduction in cost of solar panels and the role that global value chains have played, and this opens many opportunities for countries to participate in this green transition.

Mattoo: We haven't recognized that restrictions on knowledge flows, what we call a widening bamboo curtain, are inhibiting innovation. Both the United States and China were benefiting from collaboration between their scientists and by building on knowledge that was generated in the other, as reflected in the citations in their patents.  The research in the April 2023 East Asia and the Pacific Economic Update shows that restrictions on collaboration and knowledge flows are hurting innovation in both China and the United States. And when you look at the flows of knowledge to countries in Southeast Asia, you see that the US always was, and China increasingly is, an important source of knowledge.  Therefore, if global knowledge generation is stymied, it will inhibit productivity growth in all third countries.

Posen: Think of globalization as a fabric or a multi-layered system that was being corroded. Corrosion isn't nice, but it's not the end of the world. So, in addition to trade there's investment, there's cross-border FDI, there's portfolio investment. There's flows of intellectual capital, of ideas, of people of students. There's flows of culture, of networks – business networks personal networks. There's migration.

The overlapping layers may get very frayed between the U.S. and China, but it doesn't prevent other forms of integration going on with other regions or in other areas… Globalization still – not inevitably and not forever maybe but still – is predominantly the result of millions of individual decisions by various businesses and people and sub-national governments and particular agencies.

Baldwin: China has become the OPEC of industrial inputs. Every single major industrial country imports at least 2 percent of the value their intermediate inputs from China directly or indirectly. And since it's by far the largest manufacturer, it's the largest manufacturer of intermediate goods. And since they sell intermediate goods to everybody, there's Chinese intermediate goods in every good you import from everywhere else. So undoing that omelet and turning it back into eggs will be extremely expensive.

What we're seeing now is a switch … from the sectors where most governments trust the markets to sectors where almost no governments trust the market. So if you talk about farms and arms, no government in the world trusts the market to do the right thing, because of famine, because of war. So every country has expensive, invasive, long-term policies to influence the production of arms and farms, and I think semiconductors just got thrown into that category. But it's not a big deal – it's a tiny fraction of the output. It's just turned in to be an important one.

Leipziger: How should low and middle-income countries respond to the growing frictions between China and the United States?

Mattoo: First, don't retaliate. Turn the other cheek. Second, be a hub rather than a spoke. Third, cooperate beyond trade to keep trade open.

You don't join one block. That's not optimal for most countries. Ideally you form agreements with each of these two large countries. So, in effect you become the hub and the big countries because of their perverse policies end up being spokes. And cooperate on taxes and regulation so that there is no need to use trade policies as inferior instruments of redistribution and consumer protection.

González: First, do not turn inward even if some of those countries are doing it. Second, use trade policies more proactively to reduce the cost of trading across borders. And third, it will be in the emerging markets’ interests to support the multilateral trading system and reform the WTO. Trade integration continues to be the best bet to drive improvement in productivity growth in emerging markets. Relying on the domestic market alone has rarely provided a successful pathway to economic growth and development. Turning inwards will not make emerging markets more resilient to shocks.

Authors

Chris Wellisz

Communications Consultant

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