Jeffrey Immelt, the chief executive of General Electric (2015 revenue: $117 billion), gave an interesting speech the other day that illuminates some pressing questions about the future of globalization. This involves politics as much as economics. It should be no surprise that the three remaining major presidential candidates (Hillary Clinton, Bernie Sanders and Donald Trump) are no fans of globalization.
Most people consider globalization an economic phenomenon, signifying the spread of technology, the growth of trade, and the threats to U.S. workers and firms from many sources — low wages, manipulated exchange rates, government subsidies and pure competitive advantage. It is all of these things but also much more. If there was an organizing principle to U.S. foreign policy after the Cold War, it was globalization.
The general idea was that, as countries traded with each other, their populations would become richer — in poor countries, middle classes would emerge — and nations’ interests would become intertwined. The threat of major wars would recede, because middle-class societies prefer commerce to conflict. The new world order would have tensions and feuds, but they would be manageable precisely because they occurred in a context of shared interests.
With hindsight, we know that this vision was simplistic and flawed. Expectations were unrealistic. Three defects stand out.
First, globalization overestimated its capacity to suppress ethnic, religious and nationalistic strife. For proof, see the Middle East ablaze.
Second, it optimistically presumed strong and steady economic growth. Markets were assumed to be self-correcting, so slumps and stock declines — while inevitable — would be short and mild. The devastating 2008-2009 financial crisis and Great Recession punctured this premise.
Finally, the economic benefits of more trade and open financial markets were considered so obvious that globalization would enjoy strong political support. Not so. It represents a loss of national sovereignty. Countries accept this when the rewards — prosperity and rising living standards — seem high. When gains fade, the bargain becomes less tenable.
Enter GE’s Immelt. “Globalization is being attacked as never before,” he told MBA graduates of New York University’s Stern School of Business. “This is not just true for the U.S., but everywhere.” At another point, he said: “We are having a raucous [U.S.] presidential election, one where every candidate is protectionist.”
So GE must defend its interests. “With globalization, it is time for a bold pivot,” Immelt said. “We will localize production.” To the extent possible, production will occur where the company makes sales. With 420 factories worldwide, he said, GE has “tremendous flexibility” in locating production. For the United States: “We will produce for the U.S. in the U.S., but our exports may decline.”
Superficially, this seems reasonable. We produce where we consume; so do other countries. In fact, it’s a formula for U.S. economic stagnation, because most of GE’s growth is happening in foreign markets. When Immelt joined GE in 1982, 80 percent of the company’s sales occurred in the United States. Now, 70 percent originate elsewhere. If other multinationals copy GE (which seems plausible), there will be a slow-motion shrinkage of their U.S. operations.
Similarly, policies backed by the presidential candidates, including opposition to the Trans-Pacific Partnership, may backfire. The candidates falsely promise to strengthen the economy by “de-globalizing.” In practice, just the opposite may be true. Consider Trump’s proposed 45 percent tariff on Chinese imports. No one should think this would stimulate much added production to the United States.
“U.S. companies would not start producing more apparel and footwear in the United States, nor would they start assembling consumer electronics domestically,” writes economist Douglas Irwin of Dartmouth College in a forthcoming issue of Foreign Affairs. “Instead, production would shift from China to other low-wage developing countries in Asia, such as Vietnam.” Meanwhile, China would almost certainly retaliate against U.S. exports. The big loser would be the United States.
There would also be broader political repercussions. “Trump’s ‘America First’ policies would reinforce the drift away from U.S. global leadership — in ways that would benefit China,” my Post colleague David Ignatius recently wrote. Clinton’s and Sanders’s trade policies merit a similar verdict.
Just because globalization is flawed doesn’t mean that its nationalist substitute is superior. Creeping protectionism reduces the efficiencies created by large international markets. This would limit the possibility of lowering prices of traded goods and services. It would also foster more trade conflicts as countries aided local firms with more subsidies and protectionism.
For all its shortcomings, globalization has contributed to a huge reduction in worldwide poverty over the past quarter-century. We ought to be more realistic about its limits and should police its vulnerabilities — particularly the danger of financial breakdowns. But as an organizing principle for U.S. foreign policy, we shouldn’t abandon it until we have something better. We don’t.
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