October 16, 2013

Globalization isn’t what it used to be. In its heyday, trade and international investment (“capital flows”) boomed. Consider. From 1980 to 2007, the value of global exports increased by nearly sevenfold, reports the World Trade Organization. As for capital flows, the annual amounts rose from $500 billion to $11.8 trillion over the same period, estimates the McKinsey Global Institute. New middle classes emerged. Hundreds of millions of people escaped abject poverty. All this seemed a real-world triumph of economic theory. Trade allowed countries to specialize in what they did best. Liberalized capital enabled investment to seek the highest returns.

Times have changed. Globalization hasn’t been repealed, but it has entered a more cautious and regulated phase. We’re creating a “gated globe,” argues Greg Ip, U.S. economics editor of the Economist in a masterful analysis. “Walls have been going up” to obstruct the free flow of trade and money, he writes. But the walls have “gates” that countries can open or close as they please. “Governments increasingly pick and choose whom they trade with, what sort of capital they welcome and how much freedom they allow [firms] for doing business abroad.” The private sector also embraces restraint; multinational companies have become more selective in their global commitments.

This is most obvious in finance. According to McKinsey, international capital flows in 2012 were still only 60 percent of their 2007 peak. Much of the pullback occurred in Europe, where banks had dramatically increased cross-border loans. Unfortunately, this contributed to Europe’s economic crisis. Cheap credit enabled debtor countries — Greece, Spain, Portugal, Ireland — to underwrite housing booms and government deficits. Chastened European banks are now shedding risky loans and rebuilding capital, which acts as a buffer against losses.

Global capital flows are recognized as a double-edged sword. “They can fuel borrowing booms, especially in countries with underdeveloped financial systems, leading to devastating busts when the money flows out,” writes Ip. Countries try to suppress surges of short-term “hot money,” chasing higher interest rates or stock market returns. Case in point: Brazil. In 2009, facing a flood of foreign money, it imposed a 2 percent tax on foreign purchases of its stocks and bonds. The rate was later raised to 6 percent and then suspended when foreign funds began leaving Brazil. The point was to smooth erratic flows in both directions.

Trade liberalization has also weakened, albeit more gradually. Worldwide negotiations, with the lower tariffs and trade concessions applying to almost everyone, have flagged. The latest round, begun in Doha, Qatar, in 2001, remains stalemated. Meanwhile, countries have resorted to regional deals (such as the North American Free Trade Agreement among the United States, Canada and Mexico), and trade is distorted by a variety of policies, from rigged exchange rates (China) to subsidized export loans (many nations).

Globalization reflects three basic forces: lower transportation costs (containerization, air freight); cheaper communications (phone service, the Internet); and favorable government policies. The first two are well-entrenched; the third isn’t. What Ip calls “gated” globalization might also be described as “a la carte.” Countries want to pick and choose — to take what helps and reject the rest. This is understandable, but is it viable? Can globalization coexist with rising nationalism? Can it overcome the rivalry between the United States and China?

With slow economic growth — caused in part by faltering globalization — mutual suspicions intensify. On both sides, there’s ample ground for mistrust. Many U.S. companies see themselves as victims of unfair competition from China. “China has long used compulsory joint ventures, technology transfer and access to cheap land and loans from state-owned banks to boost companies in strategic sectors,” writes Ip. And China isn’t alone in giving its companies preferential treatment.

On the other hand, China and many nations view the United States as destabilizing the global economy. First came the 2008-09 financial crisis. Now there’s the threat of a default. America is supposed to fortify confidence; instead, it does the opposite.

Globalization has always had its dissenters, most understandably among workers whose jobs were lost or wages depressed by international competition. But their grievances were muffled by solid overall economic growth. Now the opposite may happen: Slow growth may amplify complaints against globalization. The danger is that governments around the world, trying to shield themselves from globalization’s vices, will cripple its virtues.

Read more from Robert Samuelson’s archive.