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Globalization 2.0 Is Coming to an End

Economics / Global Economy Aug 15, 2016 - 01:51 PM GMT

By: John_Mauldin

Economics

I’m not the only free trader who is having second thoughts. Stephen Roach, formerly chief economist at Morgan Stanley, wrote:

Recent trends in global trade are also flashing warning signs. According to the International Monetary Fund, annual growth in the volume of world trade has averaged just 3% over the 2009–2016 period—half the 6% rate from 1980 to 2008. This trend reflects not only the Great Recession, but also an unusually anemic recovery. With world trade shifting to a decidedly lower trajectory, political resistance to globalization has only intensified.


Of course, this isn’t the first time that globalization has run into trouble. Globalization 1.0—the surge in global trade and international capital flows that occurred in the late nineteenth and early twentieth centuries—met its demise between World War I and the Great Depression. Global trade fell by some 60% from 1929 to 1932, as major economies turned inward and embraced protectionist trade policies, such as America’s infamous Smoot-Hawley Tariff Act of 1930.

But the stakes may be greater if today’s more powerful globalization were to meet a similar fate. In contrast to Globalization 1.0, which was largely confined to the cross-border exchange of tangible (manufactured) goods, the scope of Globalization 2.0 is far broader, including growing trade in many so-called intangibles—once nontradable services.

Similarly, the means of Globalization 2.0 are far more sophisticated than those of its antecedent. The connectivity of Globalization 1.0 occurred via ships and eventually railroads and motor vehicles. Today, these transportation systems are far more advanced—augmented by the Internet and its enhancement of global supply chains. The Internet has also enabled instantaneous cross-border dissemination of knowledge-based services such as software programming, engineering and design, medical screening, and accounting, legal, and consulting work.

Globalization 2.0 is displacing workers

Globalization 2.0, as Roach calls it, is moving much faster than the original. Some of this is due to technology, but trade agreements like NAFTA are important, too.

Nations removed barriers to speed up trade and economic growth. That, in turn, boosted the rate at which workers became displaced.

This displacement is a huge problem. But many economists and policymakers don’t even recognize it. Here’s Roach again:

Sadly, the economics profession has failed to grasp the inherent problems with globalization. In fixating on an antiquated theory, they have all but ignored the here and now of a mounting worker backlash. Yet the breadth and speed of Globalization 2.0 demand new approaches to cushion the blows of this disruption.

Ouch. That hurts, but it’s important. The future is not much comfort to those who experience disruption here and now. The future doesn’t pay this week’s bills.

Free trade doesn’t serve the masses

In a democracy (which for now we still have), the unprotected and the disrupted have experienced the dark side of globalization. They won’t just sit back and wait for better times. They’re hurting now, and they’re not hurting quietly. They can’t afford to wait.

The devotion to transcending borders and imposing common standards is causing globalization to jump the shark. It flies in the face of human nature.

We are social creatures who naturally arrange ourselves into families, neighborhoods, cities, states, and nations. We respect laws and standards more readily when they are created and enforced at the lowest possible level of that hierarchy.

Globalism seeks to bypass natural law. Top-down rules are often negotiated in secret and then presented for rubber-stamp legislative approval in one giant, take-it-or-leave-it package.

In the US, we call this “fast track.” The president has the authority (granted by the Congress) to negotiate international agreements. Congress can approve or deny it but cannot amend or filibuster.

So economic integration (as defined in modern trade agreements) is incompatible with national sovereignty (as defined by populist politicians and voters).

Second thoughts and regrets are starting to surface

Make no mistake about it: The Brexit vote was very close. The issue was not decided by a broad consensus.

On this side of the pond, we tend to think of Brexit as an overwhelming movement. In fact, it barely succeeded.

Many of our own US presidential elections have been quite close, if you look at the actual vote count as opposed to the Electoral College count.

In European countries, parties often fail to win enough votes to win a majority. So, coalitions among rival parties have to be cobbled together to run a country.

That’s democracy for you.

A Glimpse of the Future in Aug. 23 Q&A Session with John Mauldin

If you wonder what the future might hold for the US and global economies and stock markets, get answers in the free Q&A session “When the Future Becomes Today” with John Mauldin and his colleagues Patrick Watson and Robert Ross, on Aug. 23, 2:00 PM EDT. Click here to register for the call and to submit your questions.

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