Why the globalization backlash?
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Globalization is under threat. Companies that rely heavily on imports and/or global value chains may have to rethink their business models if current trends continue. After decades in which trade grew faster than the world economy, it is now slightly behind overall economic growth. The end of an amazing run of trade growth can be traced in part to increasing trade restrictions, which in 2015 achieved record levels since the World Trade Organization was created. Recently elected governments are increasingly restricting trade because voters, particularly those in many rich countries, have begun to question whether free trade is a good idea.
Why is the support for free trade declining? The conventional story in the news media and some social science research points to the costs of globalization. Workers who lose their jobs due to foreign competition oppose globalization due to the personal harm they have suffered. Particular attention has focused on the dramatic growth in Chinese imports since that country's admission to the WTO. In a widely publicized paper, several economists led by David Autor of MIT argue that competition from Chinese imports is responsible for increasing polarization of American voters. Other recent research findings paint a different, more complex picture of the reaction to globalization.
First of all, survey respondents often answer questions about free trade based on their beliefs about trade’s benefits for the country as a whole, not based on their personal economic situation. That phenomenon, called socio-tropic preferences, implicates personal beliefs and information as important factors in attitudes toward trade. For example, more highly educated individuals tend to respond more positively, but recent research has shown that they do not favor trade just because their economic prospects are better, but because they are more likely to have studied the theory of comparative advantage or to have a more cosmopolitan worldview. In contrast, Americans who dislike foreign intervention or who believe in American exceptionalism tend to oppose trade.
Second, many people do not possess strong opinions about trade and are therefore easily swayed by the wording of survey questions or by political elites. Survey respondents tend to oppose specific trade agreements if they appear in questions even as those same respondents provide broad support for vague notions of international trade. When primed with expert opinions, such as the fact that the vast majority economists support free trade, people are more likely to mimic those attitudes. As a result, support for trade may appear to vary wildly and is difficult to measure.
But does it even matter that voters are becoming more skeptical of globalization? It does, and not just because they are also consumers. The underpinnings of globalization ultimately depend on national policies. If the citizens of a country sour on globalization, then borders can quickly close, preventing exports and profit repatriation, and foreign governments can expropriate foreign investments to popular acclaim. The decline of a previous wave of globalization during the Great Depression sets a clear precedent.
So can anything be done to reverse the current backlash? If voters are simply responding to rising inequality and job loss, then redistributing the economic gains that trade generates should shore up support for globalization. However, if the other research I have highlighted is correct, then corporations have a role to play. Businesses that benefit from globalization must be more proactive in trumpeting its benefits for their local communities. How many jobs are directly related to trade? How has your firm reduced the price of consumer goods from global value chains? Being “pro-market” is not enough; the legitimacy of the rules underpinning globalization is at stake.