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Globalisation, is there really such a reason to be so discontented?

12/07/2016

By Michael Baxter

Economic theory is unequivocal. Free trade promotes wealth. It’s down to specialisation and is best summed by what many consider to be the most important economic theory there is: The Law of Comparative Advantage.

Theory says that free trade enables each country to focus on what it does best. According to the theory, free trade works in the interest of both sides of a trading agreement, even if one party is better at producing just rolexreviews about everything than the other. Take as an example, a high-powered lawyer who can command a fee of say £1,000 per hour, who happens to be good at cleaning. It may make economic sense for that lawyer to employ a cleaner, even if the cleaner takes longer to do a thorough job of cleaning the lawyer’s mansion than the lawyer would. Both parties gain from the arrangement. As for the cleaner, if they can put in a hundred hours or so of work, they can afford an hour of the lawyers’ time in the unlikely event that someone tries to sue them – a dirty bathroom, perhaps.

But just because theory says that trade makes each country in a trade agreement better off, it does not mean that reality matches theory.

In any case, there can still be losers. So, for example, free trade enables one country to focus on say steel, while the other drops its reliance on the metal to focus on other areas, such as financial services, boosting GDP, but some displaced workers in its steel industry may lose out for years, perhaps decades and maybe generations.

Think of it another way. During the post-war years, most economic growth occurred in the West and Japan, and the rest of the world was poor, leaving westerners feeling guilty and occasionally gifting money to poorer countries. This sense of guilt peaked with western families gathering around the TV, to watch Freddie Mercury, Bowie, and Mick Jagger teaming up with Tina Turner, while Bob Geldof lectured us on why we need to give more, in one of the biggest TV events ever.

In theory, free trade enables these poorer countries to focus on what they do best and close the gap on the west. Theory says that the west gains from the arrangement too, it’s a win, win situation. And as a side benefit, westerners can feel less guilty.

Take as an example the rise of the Chinese economy. Globalisation has helped hundreds of Chinese people pull out of poverty. Similar developments are occurring across many emerging markets.

There is a feeling that the price paid in the west for the rest of the world getting richer, is that the west gets poorer. This narrative is surely wrong. The global economy is not like a cake in which a bigger slice for one means smaller slices for everyone else. This cake is getting bigger, and while the proportionate slices of the cake may change, globalisation should mean that all national participants in the process should enjoy bigger slices. The richer China gets, the more it can afford to pay for expensive financial services from London, for example.

But drill down, and we find pockets within countries that have lost out, and a sense that globalisation has led to greater inequality. Not everyone in the west is better off. Many regions have been left impoverished.

This is creating a sense of dissatisfaction. And it may be getting dangerous. We saw this in the Brexit vote.

Social unrest can lead to the election of politicians who pander to a sense of injustice, but in reality respond by advancing the ideals of intolerance.

Sometimes innocent parties are blamed, for example, immigrants are blamed for low wage growth, when there is little evidence that they are the cause.

Part of the problem is that is the challenges besetting the global economy are massively complex. And that it is just too easy to blame immigrants, or China’s policy regarding its currency, or globalisation.

But the Brexit vote may have been a wake-up call for authorities. Policy leaders are beginning to take the plight of those who have lost out from globalisation, and maybe technology, more seriously. They have to, this is the only way to fight off the forces of extremism.

But in pandering to this understandable mood of disquiet, politicians must not reign in on globalisation and derail the movement to more free trade across the world. This has happened before. For example, in the 1930s, a phase of global protectionism was kicked off by the US when it passed The Smoot-Hawley-Act, which imposed tariffs on 20,000 goods imported into the US. This Act did not cause the US Great Depression, rather it was a reaction to it. But it surely made things much worse. Neither did the rise in global protectionism lead to World War 2, but it didn’t help. The fact is, countries are less likely to go to war if they rely on trading with each other.

A series of three articles:
Part one: Globalisation, is there really such a reason to be so discontented?.
Part two: The benefits of trade and globalisation
Part three: Globalisation and Brexit, global leaders shift emphasis

 

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