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How far should we push globalisation?

Author(s): Paul De Grauwe

From the Ivory Tower:

The discussions about CETA, the trade agreement between Canada and the European Union, have focused almost exclusively on two questions. They are important but certainly not the most fundamental ones.  In this article I first discuss these two questions and then turn to the more fundamental question of how far we should push globalization.

The first question at the center of the debate around CETA concerns the way national regulations on environment, safety and health are made consistent with each other. To make trade possible in a world where trading partners have different rules about the environment, health and safety, a procedure must be followed to make these rules mutually acceptable. When, for example, two countries wish to trade in poultry, they must agree on what constitutes a healthy chicken. The attitude of many opponents of CETA in Europe is that European regulation is superior to the Canadian (or American in the context of TTIP), and that as a result Canadian and American chicken are suspect, if not poisonous. The implicit hypothesis of this attitude is that European governments care more about the health and safety of their citizens than the Canadian and American governments do about their citizens. 

Such an attitude makes trade agreements very difficult. Moreover, it is not based on facts. There is no reason to assume that European legislation of health, safety and the environment is superior to the North American one. If that were the case, the European regulators would long ago have curbed the harmful emissions of rigged European-made diesel cars. They did not, the US authorities did.

The second question at the forefront of the CETA negotiations had to do with the legal procedures to resolve disputes between foreign investors and national authorities. The CETA trade agreement, like many others, provides that foreign investors who feel harmed by new environmental, health, and safety regulations can turn to a special arbitration procedure. This is indeed a problem. It would be better to accept the jurisdiction of national courts in these matters, rather than allowing international investors to turn to special arbitration courts. The feeling in many countries that this is an unacceptable discrimination favoring mostly multinational corporations should be respected. It is better to rely on the national courts to settle disputes. Yet I have the impression that the opponents of CETA (and TTIP) have blown this problem out of proportion, even arguing that the ratification of these trade agreements would undermine the foundations of our democracy. 

A more fundamental issue that arises here and which has not sufficiently been addressed in the discussions around CETA has to do with the question of  how far we should push globalization?

In my academic career I have always been an advocate of free trade. Free trade provided the basis of the phenomenal material prosperity we have achieved in Europe in the postwar period. It has also made it possible for hundreds of millions of people, especially in Asia, to be pulled out of extreme poverty and to live a decent life.

But it now appears that globalization reaches its limits. These limits exist for two reasons. Firstly, there is the environmental limit. Globalization leads to very strong forms of specialization. There is of course nothing wrong with specialization as it provides the condition to create more material welfare. But specialization also means that goods are transported around the globe a lot. The lengthening of the value chains that has been made possible by the reductions of trade tariffs means that the same goods can travel back and forth between many countries before they achieve the final consumers. All this transporting around creates large environmental costs (e.g. CO2 emissions) that are not internalized in the price of the final product. As a result, the prices of these products are too low and too much is produced and consumed of them. Put differently, globalization has made markets freer but these  markets do not function properly, giving incentives to produce goods that harm the environment. 

When the proponents of CETA (and TTIP) argue that trade agreements will lead to higher GDPs they are right, but they forget to say that this will be accompanied by rising environmental costs. If we subtract the latter from the former it is not certain that this leaves something positive.

The second limit of globalization has to do with the highly unequal distribution of benefits and costs of globalization. Free trade creates winners and losers. As argued earlier there are many winners of globalization in the world. The most important winners are the hundreds of millions who used to live in extreme poverty. There are also many winners in the industrial countries, e.g. those that work for or are shareholders in exporting companies. But there are also many losers. The losers are the millions of workers, mostly in the industrialized countries, who lost their jobs or have seen their wages decline. These are also the people that have to be convinced that free trade will ultimately be good for them and their children. Not an easy task. If, however, we fail to convince them the social consensus that existed in the industrial world in favour of free trade and globalization will deteriorate further. 

The most effective way to convince the losers in the industrial world that globalization is good for them is by reinforcing redistributive policies, i.e. policies that transfer income and wealth from the winners to the losers. This, however, is more easily said than done. The winners have many ways to influence the political process aiming at preventing this from happening. In fact since the start of the 1980s when globalization became intense most industrial countries have weakened redistributive policies. They have done this in two ways. First, they have lowered the top tax rates used in personal income tax systems. Second, they have weakened the social security systems by lowering unemployment payments, reducing job security and lowering minimum wages. All this was done in the name of structural reforms and was heavily promoted by the European authorities.

Thus, while globalization went full speed, industrial countries reduced the redistributive and protective mechanisms that were set up in the past to help those that were hit by negative market forces. It is no surprise that these reactionary policies created many enemies of globalization, that now turn against the policy elites that set these policies in motion.

 

I come back to the question I formulated earlier: How far should we push globalisation. My answer is that as long as we do not keep in check the environmental costs generated by free trade agreements and as long as we do not compensate the losers of globalisation  or worse continue to punish them for being losers, a moratorium on new free trade agreements should be announced. This is not an argument to a return to protectionism. It is an argument to stop the process of further trade liberalization until the moment we come to grips with the environmental costs and with the redistributive effects of free trade. This implies introducing more effective controls on CO2 emissions, raising the income tax rates of the top income levels and strengthening social security systems in the industrialized countries.


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