Trump, Free Trade and Globalisation: An alternative?

Peter Hain


Peter Hain


Peter Hain advocates a fresh approach to the current world order, through a Four Point Programme

Are decent, secure working class jobs compatible with free trade? Has globalisation failed too many people?  Is Donald Trump’s ascendancy to the US Presidency part of a wider populist revolt against both globalisation and free trade?

Last month the head of the International Monetary Fund, Christine Lagarde called for urgent action to tackle a ‘middle-class crisis’ hitting working people as she warned that inequality, distrust and a lack of hope were fuelling growing populism.  Lagarde conceded there was growing inequality evident from a 2017 Oxfam report showing that eight billionaires owned the same amount of wealth as the poorest half of the world’s population – 3.6 billion people.

Another recruit to this view came from an equally unlikely corner. In December, Mark Carney, Governor Bank of England, issued a rallying cry to policymakers across advanced economies to tackle the causes of a growing sense of ‘isolation and detachment’ among people who feel left behind by globalisation, global trade and technology. Those forces had favoured the ‘superstar and the lucky’, he said. ‘But what of the frustrated and frightened?  The fundamental challenge is that, alongside its great benefits, every technological revolution mercilessly destroys jobs and livelihoods – and therefore identities – well before new ones emerge,’ he said.

Carney noted the rise in living standards around the world in recent decades and said technological progress had lifted more than 1 billion people out of poverty. But he recognised that many citizens in advanced economies were ‘facing heightened uncertainty, lamenting a loss of control and losing trust in the system…..Rather than a new golden era, globalisation is associated with low wages, insecure employment, stateless corporations and striking inequalities.’


The financial crisis had exposed how banks had been working in a ‘heads-I-win-tails-you-lose bubble’.

What an admission from these two high priests of financial capitalism.

In direct response President Donald Trump’s election campaign conjured vivid ideas of a western Shangri-La for working class white American males, complete with shotguns, stars and stripes and Stepford wives. He held out the prospect of returning America to the good old days: coal mines would be profitable in Pennsylvania, steel plants would pay their way in Ohio, and no manufacturing jobs would be in jeopardy anywhere in America’s rust belt.  Above all Trump appealed to Americans who felt left behind by globalisation and technological change.

In short, globalisation has been good for many but also grim for far too many.  In America and Britain those who have lost out have tended to be clustered in particular industries, particular regions and particular towns which have seen their economic vitality vanish and their self-respect suffer. Coal fields, ship yards, steel towns, clothing & textile centres and heavy engineering plants have been hit hard, notably across South Wales, the North of England and Scotland. 

But in the advanced economies of the western world it is more austerity and slow growth, than globalisation, which has squeezed UK living standards since the global financial crisis.

Which brings me to a painful truth: Donald Trump’s victory has come as an overdue wake-up call to both conventional politics and orthodox economics.  It has injected urgency into pleas for help from communities left behind by globalisation and free trade agreements.

But first a little personal history to illustrate Britain’s long and deep involvement with globalisation.

For the past 26 years, first as Labour MP for Neath and now as a member of the House of Lords, my primary place of work has been the Palace of Westminster beside the river Thames in London. Visitors to London often take a boat ride from Westminster downstream to Greenwich, home of Greenwich Mean Time. The trip takes them past two of Britain’s global financial centres, the City of London and its recent offshoot Canary Wharf, as well as historic landmarks like St Paul’s cathedral and the Tower of London. 

As they approach Greenwich they see a symbol of the first age of globalisation, the magnificent 19th century sailing ship Cutty Sark.  In the 1870s she brought tea from Shanghai to London via the Cape of Good Hope, carrying mainly manufactured goods on the return leg.  But Britain now ships far more manufactured products from China than we do to it.[1] Even only twenty years ago China was a minor trading partner in world markets. Today she is a mega-trader, having overtaken the US as the world’s leading supplier of merchandise exports. By 2030 China’s share of such exports is forecast to be double that of the US, four times that of Germany and ten times that of the UK.

The Cutty Sark was quickly put out of business in the tea trade by technological change – the Suez Canal and steam ships. Trade and technology don’t always advance at the same pace, but they do both disrupt established patterns of production. Trade has often been blamed for pain that is more due to technological change.  Loss of industrial jobs today may be an example.   Exposure to new markets and new methods of production can shake up settled trading links and transform an established industrial base, allowing some places to enjoy a flourishing future while plunging others into deep uncertainty. From a buoyant status quo, to a bleak hiatus quo.

Globalisation came in two phases. First, the boom in global trade and in cross-border flows of capital during the late 19th and early 20th centuries.  Then in its second phase since the Second World War. 

World trade as a share of world GDP soared from 9 per cent in 1870 to 16 per cent just before the First World War, before sinking to less than six per cent at the end of the 1930s as protectionist measures made the Great Depression even worse.

After 1945 world trade recovered, helped by cuts in transport costs and reductions in trade barriers brought about by eight rounds of multilateral trade negotiations, regaining 1914 levels by the 1970s. Since the 1990s global trade in goods and services has risen to unprecedented levels with exports expanding from some 19 per cent of world GDP in the early 1990s to 33 per cent of world GDP today as the growth in trade accelerated. Since 1990 we have entered what economists call an era of ‘hyperglobalisation’.

According to the IMF world trade grew at a rate of six per cent per year between 1980 and 2008, helped by the end of the Cold War and the reintegration into the world economic system of the countries of soviet Eastern Europe, by China’s re-entry after her post-1978 economic reforms, by India following her reforms in the early 1990s, and by the spread of democracy in parts of Africa and South America.  In economist Stephen Roach’s phrase: ‘Market economics has circumnavigated the world.’

From outside the Royal Observatory at Greenwich visitors get a clear view back across the river Thames to Canary Wharf with its international banks, high rise office blocks and expensive luxury flats – London’s answer to Manhattan, the epicentre of support in Britain for the neoliberal ideology that led to the 2008 global financial crisis, and the principal beneficiaries from the multi-multi-billion taxpayer-funded bank bailout. Vast glass towers now stand on the site where the London docks used to employ tens of thousands before they finally closed in 1980.

The shiny modern buildings of Canary Wharf overlook next door working class Poplar in the London borough of Tower Hamlets and its council housing estates. Tower Hamlets is the third most deprived area in Britain and has the highest level of child poverty in London, with over a third of its children living in out-of-work families in 2013.

There in microcosm at Canary Wharf are the two faces of globalisation. New technology and new jobs alongside areas of neglect. Finance dominant with investment banks standing proud only yards away from poverty and food banks. Stratospheric rewards for a few alongside meagre pickings for the many. Like so many others the people of Poplar count among the casualties of globalisation. 

Despite the impressive figures on the increase in world trade in recent decades, globalisation has fallen far short of the promises made for it. Freeing up international trade by cutting import tariffs and removing non-tariff barriers to trade was supposed to boost the global economy, raise real incomes all round and improve living standards across the board.

Globalisation has helped to do some of those things. But the recent gains may have been much exaggerated. The American Nobel economist Paul Krugman reckons that only between 5 and 10 per cent of the rise in real incomes since the early 1990s has been due to increased globalisation.  Nick Crafts of Warwick University estimates that membership of the European Union since 1973 has added about 10 per cent to Britain’s GDP. That’s an annual GDP gain of only about a quarter of one per cent.

These are all gains well worth having, but they are not the full story of globalisation which has been a success but a qualified success. Political leaders, prompted by economists, have oversold the upside potential of globalisation and understated the downside risk.

One of the downside risks of globalisation, not so much unforeseen as swept under the carpet, has been a failure to ensure that the gains are shared widely and fairly. Initially, in the 1950s and 1960s, the advanced Western economies grew much faster than before World War Two and inequality fell significantly as governments pursued policies of full employment, social welfare and progressive taxation.  But since the 1970s not only have real incomes grown at a slower pace but the gains have gone mainly to those at the top of the income ladder, encouraged by a neoliberal ideology that abandoned full employment, weakened social welfare and opposed redistribution. 

The European Union encapsulated what the economics of globalisation were supposed to be about. First it would encourage economic growth throughout the Union by making trade between member states barrier-free – promoting trade by creating a single European market with a common set of rules and free movement of labour, capital, goods and services.

Second it would simultaneously protect citizens of member states from the worst consequences of free trade, like job losses and closures as traditional industries lost out to new ones. This would be achieved by protecting people with new jobs, a social charter of rights like maternity paternity and parental leave, a lifetime training entitlement, protection against age discrimination, rights to information and consultation at work, equal rights in all its aspects, and assured holiday leave.

To ensure that enough of the gains from trade enjoyed by the winners were shared with the losers, the former would compensate the latter for their losses, stopping casualties turning into outcasts. But it hasn’t turned out that way in Britain.  Increased foreign trade has made most countries and most people better off, but a very significant group have been left behind because the gains have not been shared evenly. Everyone may have benefited from lower priced imports, but for many skilled and unskilled manual workers these gains have been wiped out by job losses in industries that cannot compete with their new foreign rivals. Whole towns have been hollowed out. Traditional industries have been hit hardest, the towns where they are based suffering terrible redundancies and tight squeezes on the wages of their low skilled workers. 

Recent research has challenged the economic consensus about the beneficial impact of trade on working people that prevailed up to the early 2000s.[8]  This research explored the ‘China Shock’: the serious adjustment costs caused by China’s reintegration into the world economy.  China’s share of world manufacturing exports rose spectacularly by ten times over twenty years, from 1.9 per cent in 1990 to 18.8 per cent in 2013. 

Until the 1990s economists tended to find that international trade had only a minor impact on wages and jobs because workers hurt by trade could readily relocate to other regions. The disappearance of US manufacturing jobs was nothing new. It had been happening since the late 1940s and was put down to new technology and higher productivity. 

But research suggests that things changed in the age of hyperglobalisation. First, US labour markets were ‘stunningly slow’ to adjust to trade shocks. Local unemployment rates remained high for a decade or more, with the workers displaced by competition from foreign imports suffering long term wage losses. Second, the ultimate net gains from trade were only realised once workers moved across regions from declining to expanding industries, accepting significantly lower pay in the process. Third, offsetting job gains in other industries had yet to materialise. In short globalisation brings pain that is harsh and protracted, not mild and soon gone.

The chickens came home to roost in the recent referendum on UK membership of the European Union and in the US Presidential election. British voters’ decision, a catastrophic in my view, to leave the EU represented a rejection of globalisation.  It was a damning verdict on the inability of the EU to provide the effective social support that working class people in particular need to cope with the stresses and strains that inevitably accompany globalisation. Behind that failure has been the neoliberal ideology that has dominated the policies of the EU and its member states since the 1970s and ruled out serious redistribution, exacerbated by harsh and completely counter-productive austerity policies.

So why have the expectations of globalisation been so high? 

Economists have traditionally supported free trade between countries, since the English economist David Ricardo in 1817 introduced the concept of comparative advantage to explain why countries would find international trade mutually beneficial, and better than trying to meet all their own needs from domestic production.

Ricardo explained that by each specialising in the production of different goods in which they respectively enjoy a comparative advantage (that is, in which their labour productivity is relatively high) two countries can gain from trading with one another. Importing something makes sense if it takes less labour to produce the exports needed to pay for it than it would to produce it yourself.

The simple Ricardian model, assumes that labour can move freely between industries as the pattern of production changes in line with comparative advantage.  So individuals as well as countries as a whole become better off due to international trade, with the benefits of trade spread evenly.  Everyone’s a winner.

The Ricardo model’s key weakness is that it does not allow for the possibility that foreign trade might affect the distribution of income by causing some sections of society to lose while all the gains accrue to others.  Economist Dani Rodrik argues that the net gains from trade look rather paltry compared to the redistribution of income from lower to higher earners that it causes.[10]  

Even so economists have tended to back free trade and support globalisation since, by expanding a country’s consumption choices, international trade makes it possible to redistribute income in such a way that everyone gains from trade, with those who gain compensating those who lose and still being better off than before.[11]  So trade can potentially be a source of gain to everyone if society provides a sufficient safety net  to cushion the blow suffered by those who lose from foreign trade, and help them to adapt (via measures like income support and retraining and relocation packages coupled with public investment to support new industries in the areas badly hit).  

This is why most economists supported the successive rounds of tariff reductions and preferential trade agreements that have been negotiated since 1945 and which have helped to generate more international trade, faster world growth and higher real incomes. But we are now in the world of ‘hyperglobalisation’.  Senior financial and business guru Adair Turner has commented: ‘While trade liberalization from 1950 to 2000 helped drive global growth, the marginal benefits of further liberalization are small.’[12]

Today border barriers (both tariff and non-tariff measures) in OECD countries are less than four per cent. The net gain to the United States from a global move to free trade has been estimated to amount to only tenths of one percent of US GDP. The more open an economy already is, the worse the ratio of net gains from freer trade to redistribution becomes. Voters are not going to support further globalisation unless radical steps are taken to see that any gains are fairly shared. 

 

Globalisation and Global Inequality

Very recently leading economist Branko Milanovic has presented startling results from his study of the effects of globalisation on the distribution of income across the world.

His examination of global inequality between 1970 and 1992 shows no tendency pre-1990 toward either inequality or equality at the world level, with real per capita incomes rising at similar rates from the bottom to the top of the world income distribution.

But over the period 1988-2008 when ‘hyperglobalisation’ and neoliberalism really took off, the picture changes dramatically.  The first big winners were the fifth of the world’s population near the middle of the income distribution. They enjoyed rapid real income growth, reaching nearly 80 per cent at the peak. This represents the rise of the ‘global middle class’ in China and ‘resurgent Asia’ (including India, Thailand, Vietnam and Indonesia).

The second big winners were the top one per cent of the world income distribution. These are the global elite, mainly in the USA (the richest 12 per cent of Americans), Western Europe, Japan and Oceania with Brazil, South Africa and Russia each contributing one per cent of their populations to the global top one per cent. Those in the rich countries who were already better-off have done best from globalisation, causing inequality within those countries to widen.

The big losers were those between 75 and 90 per cent of the way up the world income ladder who experienced very slow, close to zero real income growth over 20 years. These are the working class and lower middle class in the rich OECD countries. They are what former British Labour Party Leader Ed Miliband called ‘the squeezed middle’. Or what economist Diane Coyle has termed the ‘decile of discontent’ on middle and low incomes in developed economies.

Milanovic has confirmed that new data to 2011 also shows the growth of the global middle class, due mainly to fast income growth in China, became even stronger after the 2008 global financial crisis.

But where the last technological revolution first wiped out well-paid working class jobs in manufacturing, this one will wipe out well-paid jobs in the service sector, many highly skilled, from lawyers to translators.  Low-paid workers in the services – jobs like cleaning, gardening, carers, bar or restaurant staff – will still be needed. 

With digitalisation, robotics and artificial intelligence the super-creative minority will be richly rewarded.  But there will be a hollowing out of the middle class and the expansion of low-paid insecure jobs at the bottom – sharply exacerbating the trends of recent times. 

Most important, the last technological revolution was accompanied by a political consensus which ensured those making the cars, the washing machines and the TV sets could also buy them, because of full employment policies, capital controls, progressive income tax and strong trade unions. Yet today’s fashion for neoliberal, deregulated, low tax markets means these kinds of protection have been, and still are, withering away.

The World Economic Forum, instead of ranking countries by GDP, has created an ‘inclusive development index’. And at the top are countries that with higher taxes, generous welfare systems and stronger, more influential trade unions.   The top seven are Norway, Luxembourg, Switzerland, Iceland, Denmark, Sweden and the Netherlands. Britain and the US are way back on 21st and 23rd respectively.  And the kind of deregulated free market low tax future the hard Brexit Britain now faces is likely to make this even worse.

A Fresh Approach: A Four Point Programme

Globalisation has done plenty of good. Diane Coyle has pointed out that Milanovic’s results show that ‘nine-tenths of the world’s inhabitants have seen their incomes rise in the era of technology-enabled globalisation’, though the gains have not been evenly spread among the 90 per cent.

But globalisation has also helped to turn shipyards into scrapyards, clothing factories into call centres, and car assembly plants into car parks.  Where many secure and well paid full time jobs used to exist, too often we now see only a few insecure and poorly paid part time jobs.  In the steel industry we saw it happen to the Rheinhausen plant in Germany that closed in the 1980s, the Ravenscraig plant in Scotland that shut down in the 1990s, and it is threatening to happen to the Port Talbot plant in South Wales and the Redcar plant in England today.

Far too little has been done to ensure that the gains from free trade are shared fairly, with insufficient focus on those who lose out while others gain.  Economists have been slow to acknowledge the damage that globalisation can do. Their voices are now gradually being heard. Paul Krugman in 2008 concluded that the rapid growth of trade since the early 1990s had had significant distributional effects and that the rise in manufactured imports from developing countries had led to greater inequality in the US and other developed countries. China had made all the difference.

The days when countries like Britain thought they could go it alone in the world are long gone.  We live now in an increasingly interdependent world.  One in which we all need partners abroad to help us boost business, create jobs, promote trade, manage migration, protect the environment, tackle terrorism, preserve peace and defend our interests.

That means escaping the suffocating neoliberal orthodoxy in which government policies have been gripped in recent decades, an ideology favouring market forces wherever possible and tolerating state intervention only where absolutely necessary.  We have to revive the role of the state acting on behalf of society to promote the common good. We have to respond to the point argued now for nearly 20 years by economist Dani Rodrik that markets and states are complements not substitutes, that markets expose workers to risk, and that state action is needed to bolster the legitimacy of markets by protecting people from the risks and insecurities that markets bring with them 

In his new book Guy Standing says it is a myth that the political and economic changes of the 1970s created free markets. Instead, he argues, globalisation has hastened the development of rigged markets dominated by ‘a plutocracy and plutocratic corporations linked to concentrated financial capital that are able to gain increasing amounts of rental income by virtue of their wealth. Meanwhile wages are stagnating.’

I would pursue four priorities.  First, recognise that trade protectionism only made the Great Depression of the 1930s worse. So press for closer cooperation across the globe, but either put tackling climate change ahead of signing further trade agreements or, (better still) build climate change commitments into those agreements because the likely gains from further globalisation aren’t that great.   Some like economist Thomas Piketty have also argued for common corporation tax rates in trade agreements to prevent a race to the bottom from depleting the tax base.

Second, reform the financial system, to reduce the risk of a second global credit crunch and consequential threat of complete economic collapse like in 2008.  The idea that the financial system has inherently self-stabilising properties proved to be a neoliberal fiction. In reality it is a powder keg that could explode again unless government gets a tight regulatory grip on the whole financial system, including the shadow banking sector and hedge funds.

Third, abandon the austerity policies that have been holding back economic growth in the UK and the Eurozone since the G20 Toronto Declaration in July 2010.  In Britain’s case break out of the Brexit blues by giving the economy a substantial fiscal stimulus in the form of an extra £30 billion of public investment for each of the next two years, focused on housing, infrastructure, low carbon investment, and education and skills.

Fourth, respond to the clear evidence that regional labour markets like in Wales adjust agonizingly slowly to shocks by radically strengthening the help provided to those hurt by globalisation.

That means investing heavily in a combination of what IMF chief economist Maurice Obstfeld calls safety net policies and trampoline policies. Safety net policies that protect those at risk from job loss, such as through unemployment benefits and partial wage insurance for workers displaced into lower-paying jobs.  The time may well have come to pay a basic income to all citizens, in work or not.  Also trampoline policies that offer a springboard to new jobs by helping people adjust. The latter could include job counselling, help with retraining and relocation, wage subsidies for employers hiring displaced workers, regional infrastructure spending to help attract new jobs, health investment and more available housing.

In turn that means learning lessons from Scandinavian experience. Their strong social safety nets do not undermine their labour markets or their productivity performance.  Quite the opposite. For instance they promote greater participation in the labour market by freeing up workers to take jobs that would otherwise have been beyond their reach. Free education for all and skills training for any age, social security for the unemployed, and systems of care for children, the elderly and vulnerable members of society add up to what the Scandinavians call a “flexicurity”–based labour market.  This is their key defence against the worst effects of globalisation and open markets.

There is plenty of potential for government intervention to help older industrial centres to thrive as hotbeds of innovation and advanced manufacturing.  Bruce Katz and Mark Muro have named four that could be turned ‘from rustbelts into brainbelts’: Dresden in eastern Germany, home to a range of semiconductor manufacturers; Eindhoven in the Netherlands where a former Phillips Electronics facility has been turned into a technology hub; Akron in Ohio which has evolved from tire-making to advanced polymers; and Albany in New York state which is now at the cutting edge of nanotechnology. They each combine deep industry expertise, world class research centres, a commitment to collaboration across disciplines and sectors, and a sense of urgency. Nothing that South Wales cannot match.

Globalisation need not hang like the sword of Damocles over UK manufacturing. The lesson of Germany is plain for all to see.  Manufacturing accounts for 21 percent of German GDP but only 11 percent in the UK. Germany is the world’s third biggest exporter after China and the US, selling three times as much abroad as Britain. The keys to German success in world markets include her education and training system.  Britain needs to invest in training an equally skilled workforce if we are also to run the high-tech production processes and flexible manufacturing systems on which top quality products and demanding standards of customer service depend.

We cannot afford to turn our back on globalisation.  The benefits are too great.  But unless we find ways to see that the gains from free trade are shared fairly and that the inevitable casualties are helped to bear the burden of adjustment to new realities, those of our people who have drawn the short end of the stick may opt to do as they did in the UK referendum on EU membership and as their American counterparts did in the US election: declare a plague on all your houses and walk away from free trade, whatever arguments we put before them.

Our aim must be to give citizens the greater ‘control’ they have demanded as they turn their backs on the political class, too often attracted by right wing populist demagogues.  Greater control – not protectionism which would damage prosperity and feed xenophobia – but by ensuring government invests in new technology and retraining to replace old industrial jobs; ensures that immigration is not only focused upon high value added or vacant jobs which cannot be filled domestically, but also does not replace domestic British jobs by undercutting wages and conditions. 

Above all such greater ‘control’ means overturning the neoliberal obsession with austerity and shrinking the state. 

But surely both Donald Trump and the ardent Brexit leaders are flatly opposed to that?  Trump has already vetoed the Trans Pacific trade pact and plans to renegotiate the North American Free Trade Agreement, putting protectionism at the heart of his policy.  This could collapse into a trade policy free for all, meaning trade wars feeding off protection and retaliation – precisely the policies of the 1930s when trade barriers made recovery from the Great Depression more difficult.

Yet his blunt warning to car makers that he will impose charges and penalties if they shift plants out of the country is both attractive and awkward for people of the left.  Although maybe those car makers who acquiesce will be replacing their workers with robots anyway.

I want to end this lecture with some words from the venture capitalist Bill Janeway, that strike home to someone like me in the later stage of his political career. ‘Today we remain suspended in the paradox of politics.  Securing financial stability and regenerating economic prosperity requires market interventions by governments deemed untrustworthy by broad segments of the populations they represent and are meant to serve,’

Reconciling people who are poles apart and bringing them together behind radical solutions is what my politics have always been about.

 

Lord Hain is Visiting Professor at the University of South Wales and a former MP for Neath 1991-92 and Government and Cabinet Minister 1997-2010

#GlobalChoices