Globalization Policy (1/2): Is The Negative Narrative Justified?

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When all is said and done, we are going to remember 2016 as the year against globalization. Trump surprisingly gained popularity among US voters, the UK Independence Party led Great Britain to exit the EU, and Euro-skepticism is on the rise in Europe. The common blueprint? Strong negative feelings against globalization and the electorate they appeal to.

The negative narrative of globalization

In their narratives, globalization appears as a zero-sum game, with countries clearly taking advantage of the system and countries fouled by it. This perception is strikingly discordant with the literature on international trade which maintains that its welfare-increasing nature spans across national borders.

We saw that the geographical distribution of pro-Brexit votes mirrored that of Republican dominant counties in the US, with urban areas leaning liberal and the peripheries voting ‘against the establishment.’

We cannot assume that those were simply emotional votes, individuals that get easily seduced by populist rhetoric. These voters took a decision informed by their past experience. And it appears that globalization has failed them. The promise of greater wealth did not reach their pockets.

Economists have been targeted as part of the elite that, in their ivory tower, inebriate with technicalities ultimately far from reality, unable to predict the real world implications of globalization for the common man. Is it true, though? Did economists not provide any admonition against the side effects of trade openness?

In what follows we are going through a short digest of the international trade literature point of view on the topic, starting from traditional trade theories, going over to the distributional effects of trade, and its effects on firms and  workers. The purpose is to create a bridge between that ivory tower and the real world it is trying to describe and improve.

The acclaimed notion of welfare gains from trade

Trade theory was born in 1817 with David Ricardo’s famous assertion that Great Britain would benefit from dropping trade protection. With a simple logic he described how free trade allows each country to specialize in the production of the good that is the cheapest to produce domestically, export it and import everything else.

Since each country only produces its least-cost product and imports the least-cost products of its trading partners, more resources are liberated in the economy and society is overall better off both domestically and overseas.

This intuition opened the doors to multiple scholarly efforts to estimate and quantify these gains at the aggregate level. And yes, the conclusion is that when goods and factors of production are freely exchanged more resources are available within each country. And yes, this supports the claims in favor of decreasing trade barriers. These models, however, do not say much about how these resources are distributed.

The question then becomes: who gets richer from globalization? Does everybody gain?

 

Read part 2 here: Globalization Policy (2/2): Winners, Losers, And Solutions

 


References:

Dix-Carneiro, R. (2014). Trade liberalization and labor market dynamics. Econometrica.

Feenstra R. (2004). Estimating the effects of trade policy. University of California, Davis, Department of Economics Working Papers.

Grossman, G. M. and Rossi-Hansberg, E. (2008). Trading tasks: A simple theory of offshoring. American Economic Review

Kaplinsky, R. (2000). Globalization and unequalization: What can be learned from value chain analysis?  Journal of development studies.

Melitz, M. J. (2003). The impact of trade on intra-industry reallocations and aggregate industry productivity. Econometrica.

Menezes-Filho, N. A., & Muendler, M. A. (2011). Labor reallocation in response to trade reform (No. w17372). National Bureau of Economic Research.

Milberg, W. and Winkler, D. (2013). Outsourcing economics: Global value chains in capitalist development. Cambridge University Press.

OECD (2013). Interconnected economies: Benefiting from global value chains. Technical report. Meeting of the OECD Countries at the Ministerial Level. Paris 29-39 May 2013.

Ricardo, D. (1817). On the Principles of Political Economy and Taxation. London

Wood, A. (1994). North-South Trade. Employment and Inequality.

Maria Carnovale
About Maria Carnovale:

A Public Policy PhD Candidate at Duke University, Maria was trained as an economist at Università Bocconi in Milan, Italy. She studies environmental policies and trade policies related to global value chains.