The "D" Word: Deglobalization

Once described as inevitable, unstoppable, and irreversible, the great economic experiment with global integration is faltering.

Before we go any further, let's be clear about something. Globalization has been declared dead before. But in the past, those peddling reports of its demise seemed just a little too eager, barely able to conceal their glee. And, of course, they were never quite able to produce the body.

This time, things are different. There are bodies everywhere. This time nobody's smiling.

Financial Times editor Martin Wolf described the mood at January's meeting of the World Economic Forum in Davos, Switzerland as "gloom verging on despair." British Prime Minister Gordon Brown warned recently that the global economy was in a "downward spiral."

These are not the voices of protest. Wolf is the author of a 2004 book titled Why Globalization Works. Brown has called globalization "a force for good." This is about as far away as you get from the anti-globalization crowd that regularly shows up to demonstrate at meetings of international financial institutions such as the World Bank, the IMF, and the WTO.

In normal times, these are voices that exemplify sobriety. These are not normal times. Brown even uttered the "D" word – depression – a word placed off limits by economists long ago out of fear that its mere use would spread unnecessary fear and minimize the collective global misery of the 1930s.

There is, however, another "D" word looming out there, one so clunky and unappealing that it is unlikely ever to end up in the title of a best-seller: Deglobalization.

When people think of globalization, they often think in terms of "flows" – trade flows, investment flows, immigration flows. This is a useful way of looking at it, because it provides an easy measure of globalization's progress at any given time. The greater the flows the more integrated the global economy has become. Over the last few decades the progress has all been in one direction.

Those days are gone. Trade flows have begun to drop off. Foreign direct investment has been declining for the last two years and is projected to dip even further in 2009.

But deglobalization, like globalization, will not merely be limited to flows of financial capital and manufactured good. It will affect people as well.

In the United Kingdom, a French-owned company's plan to hire Portuguese and Italian contractors rather than British workers recently resulted in a nationwide string of work stoppages. In South Africa, immigrants and refugees from neighboring Zimbabwe have been targets of xenophobic violence.

Economic pain has led members of both U.S. political parties to support "Buy American" and "Hire American" provisions as part of federal stimulus spending.

"The purpose of this program, asking taxpayers to sacrifice, is really not to create jobs in the European Union," Illinois Democrat Dick Durbin, the second highest ranking member of the Senate, told French news agency AFP. "I want to create jobs in Illinois."

“With the unemployment rate at 7.2 percent, there is no need for companies to hire foreign workers … when there are plenty of qualified Americans looking for jobs," added Iowa Republican Chuck Grassley.

With friends suddenly in short supply and serious talk of protectionism in the air, globalization is clearly on the run. But could the American credit and mortgage crises actually force the mighty wave of globalization into reverse?

Why not? It's happened before.

The collapse of the Byzantine Empire destroyed the 2,000 year-old Silk Road and plunged the rich world into a mercantilist scramble for colonies. The global integration of the late 19th century – a time economist John Maynard Keynes called an "extraordinary episode in the economic progress of man" – was undone by the horrors of World War I, resulting in nearly 40 years of beggar-thy-neighbor trade policies and anemic worldwide economic growth rates.

Over the last half century, globalization has had salutary effects on governance, innovation, and prosperity. It is a controversial process, to be sure, but a return to mercantilism seems certain to prolong the current crisis.

The challenge for policy makers will be to resist political pressure to de-globalize. The temptation will be strong, but giving in will not be de-lovely.

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Photo Credit: Buy American! by Photo Mojo

Should America "Buy American"? Remember the Golden Rule

Today, joining European leaders and U.S. President Obama, Japanese prime minister Taro Aso weighed in on the ethics of the "Buy American" clause (championed by the U.S. steel industry) in the stimulus bill passed by the U.S. House of Representatives last week. From Bloomberg:

"'Buy American' is definitely wrong," Aso said today in parliament. "It's clearly against the spirit of the World Trade Organization to say you must use American steel to make bridges."

From a strictly utilitarian perspective, more American companies use steel than produce it. Protecting a few U.S. steel jobs at the expense of larger U.S. companies bears scrutiny. As economist Douglas Irwin put it in the New York Times: "General Electric and Caterpillar have opposed the Buy American provision because they fear it will hurt their ability to win contracts abroad."

But it is worth remembering another, perhaps more universal ethical principle--the Golden Rule--in making policy.

In this Christian Science Monitor editorial, the Golden Rule is invoked:

If "Buy American" is not expunged from the recovery package, President Obama will cede his moral authority to lead the world away from mutually destructive trade policies – triggered by a crisis for which the US shares much blame.

To recover, America will have to export more, not less. "Every man for himself" won't accomplish this; only the golden rule will.

Economist Douglas Irwin also calls on the Golden Rule in the New York Times op-ed:

Remember the golden rule, or the consequences could be severe. When the United States imposed the Smoot-Hawley Tariff in 1930, it helped set off a worldwide movement toward higher tariffs. When everyone tried to restrict imports, the combined effect was a deeper global economic slump. It took decades to undo the accumulated trade restrictions of that period. Let’s not make the same mistake again.

Similarly, Nayan Chanda warns against "beggar thy neighbor policies" in the Straits Times:

The legal challenge aside, one unavoidable consequence of any “Buy American” provisions in the stimulus package would be retaliation from China, Europe and other countries now in the process of allocating government funds to boost their sagging economies. Concerned about the wider ramifications of this retaliation, US business groups — including major companies such as Boeing, Caterpillar and General Electric — have called on Congress to resist such protectionist measures.

Despite the lessons of history, the dangers posed by protectionism are often seen as a problem for tomorrow while saving jobs is a fiercely urgent task. The world now needs leaders who can stay calm in the face of the raging storm and work together to stimulate their own economies without triggering a new wave of protectionism.

"Buy American" provisions may temporarily provide job security for some Americans, but the contagion of protectionism will stunt global trade and bring misery to Americans and the rest of the world.