No. 39

Speakers Simon Evenett Dialogues on Globalization Series Professor of International Is Globalization in Trouble? Trade and Development at the University of St Gallen Yes, globalization is Alejandro Jara in deep trouble! Counsel, King & Spalding, Geneva & former Deputy Simon Evenett presented evidence drawn Director General, WTO from five years of his research to raise the alarm about “hidden” protectionism. He stated, Jean-Pierre Lehmann “Most protectionism is not easy to spot and is IMD Emeritus Professor of International Political hard to monitor and count – that’s why it stays Economy out of reports.” Since the onset of the global financial crisis, there have been instances of Moderator governments resorting to measures that tilt the Carlos Braga playing field in favor of domestic commercial Professor of International interests. Some of these actions do not fit Political Economy and the customary definition of protectionism, but Director of The Evian The world economy has become increasingly nonetheless hurt the commercial interests of Group@IMD interconnected and interdependent in the other countries. Figure 1 (black line) shows Research & post-World War II era. Although the term the total number of protectionist measures Development “globalization” may mean different things that governments worldwide engaged in Ivy Buche to different people, it essentially conveys annually. It was cause for concern in 2009, Lindsay McTeague the idea of linkages among countries and G20 leaders committed to a halt on driven by international trade and services, implementing new distortions to global with concurrent flows of capital, including commerce. There was a dip in 2010/11 as In June 2014, about 70 foreign direct investment (FDI), technology, economies recovered, but thereafter, a sharp executives, academics information and people – leading to increased rise in protectionism occurred. The scenario and representatives integration of markets across political is even more serious when viewed after from governments and boundaries. Since the 2008 financial crisis, correcting for reporting lags – the data (red civil society attended a however, there are signs that the momentum line) reveal a steep increase in protectionism thought-provoking debate of economic integration is stalling, trade measures in 2012, reaching levels much organized by The Evian liberalization seems to be losing its appeal as worse than 2009. Based on these findings, he Group@IMD. A panel a major policy objective, and new regulatory stressed, “If governments were worried then, of speakers, moderated initiatives have often adopted a protectionist they should be even more worried now!” by Professor Carlos bias that constrains the movement of Braga, looked at the goods, labor and capital. To begin the future of globalization and discussion on whether globalization is questioned whether it is in trouble or not, Professor Carlos A. facing a real threat. The Primo Braga began by asking whether audience was also asked – for reasons that are politically to rate the proposition that motivated – we are going to see a globalization is in trouble, situation similar to the 1930s when both before and after the there was a significant roll-back of the debate, and the findings process of economic integration and were shared in real time. an increase in “beggar-thy-neighbor” types of policies. Could the process of For more about The Evian Group@IMD international economic integration (i.e. see www.imd.org/eviangroup/ globalization) be reversed? Figure 1: Number of beggar-thy-neighbor measures implemented

© 2014 IMD – International Institute for Management Development. No part of this publication may be reproduced, stored in a retrieval system or transmitted in any form or by any means without the permission of IMD. Professor Evenett explained that in 2009/10 of global commerce have multiplied, so most of the protectionist measures were have the means available to governments taken by industrialized countries, but since to disadvantage foreign firms, thus helping then large emerging countries have been nations to circumvent WTO rules. catching up. This protectionism took place despite the WTO’s global architecture These points are consistent with Professor of trade rules and the spread of regional Evenett’s reality check with MNCs which trade agreements. He highlighted three noted that their biggest concern is key reasons for the WTO’s ineffectiveness corporate political risk – encountering all in stopping these practices: sorts of unanticipated policy risks on the ground in the many countries in which • The types of “beggar-thy-neighbor” they operate. For example, the European policies have changed, so they are Commission is investigating some major not being caught by WTO’s standard international firms for tax avoidance, while safety net. Instead of tariffs and the British government voiced concerns quotas, the “new” protectionism has over US Pfizer’s bid to buy AstraZeneca. taken the form of trade-distorting He concluded, “Termites are eating away subsidies, government contracts and at globalization. There are many ways access to credit on easier terms, tax to frustrate globalization and distort There are many ways to breaks, financing deals with strings competition – it is not just about raising frustrate globalization attached, local content requirements for trade barriers and tariffs – and we are and distort competition multinational companies (MNCs) going seeing a lot of it now!” – it is not just about to foreign countries, and bailouts. raising trade barriers • The way the WTO measures No, globalization will and tariffs – and we are protectionism often relies on “inaccurate continue to move forward! seeing a lot of it now! data” that focuses on the wrong trade barriers. Such data reveals only the tip With his deep experience in negotiating of the iceberg of global protectionism, trade agreements, Alejandro Jara took an while the bulk remains hidden under the optimistic view. While he agreed that the surface, as revealed in reports from the financial crisis had seen the introduction Global Trade Alert (GTA) think-tank (see of some protectionist measures, such as Figure 2). Consequently, the WTO does anti-dumping duties, producer subsidies not see the big picture of the extent to and buy-local provisions, he argued that which global trade is being affected. these policies were largely piecemeal and • WTO rules, centered as they are on tariffs ad hoc. They did not result in a significant and more transparent trade policies, are closing of markets and the world did incomplete and weak. Just as the types not retreat into isolationism – in fact, it has struggled to move forward toward Figure 2: WTO focus on G20 trade restrictions is a poor guide to global liberalization. World trade rebounded protectionist totals in 2010 and has been growing steadily but slowly, ever since. Furthermore, he stressed that technology, a key driver of globalization, would certainly continue to move forward, not backward. It is difficult, if not impossible, to reverse it. Because of greater interdependence, local measures increasingly impact other economies (through a technical standard or a subsidy), or even have a global impact (carbon emissions). Thus, there is a need for better global governance or cooperation, usually achieved through international treaties, MOUs, actions by international or regional agencies, and a myriad of soft and hard laws. Better governance is necessary to harness globalization and ensure that people are able to benefit from reforms. Has global

Page 2 www.imd.org insights@IMD governance been up to the challenge? • The virtuous cycle of global value chains, Certainly not! Many countries have FDI, services and the impact on SMEs. dysfunctional political systems that impede an effective and timely response. At the In summing up, he asserted, “Things will multilateral level (for climate change issues, move in the right direction even though IMF governance, the Doha round) it is the it may be bumpy and possibly take time. same. Political leadership has been lacking, We need better global governance, except at the beginning of the financial crisis institutions, accountability and rules but when the G-20 played an active role. we will get there.” A bigger role for corporations is envisaged by coming together, for Now for something completely example during World Economic Forum different – the Asian perspective meetings, to give a country-specific scorecard highlighting the metrics of poor Professor Jean-Pierre Lehmann looked performance, which will serve to hold at the challenge of globalization from the governments accountable. Governments Asian perspective. He contended that would hate to be exposed in this way! viewing globalization as a win-win does Mr Jara acknowledged that some not necessarily correspond to reality. First, paradoxes exist in global trade. On the one the historical dynamics of globalization hand, the rate of growth has slowed due, are too often forgotten. During the 19th Things will move in the in part, to changes in global value chain and 20th centuries, in the era of European right direction even mechanisms, which are susceptible to expansionism, Asia was exploited and though it may be bumpy policy disruptions; changes in FDI patterns impoverished. By 1950, its share of global and possibly take time. and even non-economic considerations. gross domestic product (GDP) had dropped We need better global On the other hand, there is greater to less than 20%, from 60% in 1820. Now, governance, institutions, unilateral liberalization, brought to the fore with the gradual shift of the economic balance accountability and rules by countries such as , Mexico and toward the East, 21st century globalization but we will get there. Canada. In addition, there are the “outlier” is being driven by the Asian narrative. He countries – Brazil, India, and pointed out that the West had played without – which have been unable rules on the basis of strength and power, yet to forge important preferential trade in the current era of globalization, standards agreements. Another paradox is seen in are being developed without full participation the contrast between the lesser degree of emerging economies and this trend is not of traditional protectionism due to WTO sustainable. commitments and bilateral agreements, Asia encompasses a vast territory, and the higher degree of other kinds of stretching from the Red Sea to the East protectionism because of trade remedies China Sea, along with tremendous (local content, investment discrimination diversity in religion, culture, politics and and so on). In view of the above, the economic development. There is no picture of globalization is, in many respects, doubt that certain regions – specifically incomplete because the Doha Development China and India – are having increasing Agenda (DDA) has not concluded and new impact and hence will have major roles issues such as investment are not covered. to play. The world is also witnessing the Mr Jara believes that rebalancing will take “Asianization of Asia” as more and more place, driven by factors such as: Asian countries are either looking at one • The economics of competitiveness, as another or – more specifically – at China governments continue to be pushed by with regard to socio-economic progress the private sector to embark on trade and investments in energy, trade and liberalization. infrastructure. For example, the new Silk • Resistance to peer discrimination, as Road Economic Belt across the Eurasian countries hate to be discriminated against continent proposed by Chinese President in the global market. Therefore, it is Xi Jinping is seen to have huge potential, in their interest to push for multilateral especially as a strategic base of energy agreements. resources in the new millennium. • Geopolitics, whereby countries want So far, the current wave of globalization to be in a leadership position as “rule has been good for Asia, resulting in poverty makers,” not “rule takers.” reduction and positive social and economic insights@IMD www.imd.org Page 3 change. But geopolitics forms a prominent part of the role to be able to secure its future. Professor Lehmann equation, as evidenced by the fragility that exists in argued that there is an urgent need for a new global countries such as Thailand and Burma. Moreover, the architecture and an imperative to strengthen inclusive region remains a cauldron of territorial disputes, with global rules and institutions. But as things stand in mid- China at the vortex. Japan has a fair number of current 2014, and with the failure of the WTO member countries and historical issues with China, including a tense dispute to finalize the Doha Round, it is not at all clear what over the Senkaku/Diaoyu Islands. Similar hostilities exist this new architecture might look like and at what levels with Vietnam and the in the South China Sea, constructive partnerships will occur. “What guarantees in addition to ongoing disputes with Brunei and Malaysia. are there, that during this era of rising economic rivalry, China also controls part of India’s water supply, with globalization in its current form will survive?” he asked. upstream rivers flowing through Tibet, and several incidences of Chinese incursions along the 3,500-km- And the debate goes on… long border have strained relationships. Despite all these issues, China remains the lead trade partner of all Asian During the discussion participants raised several countries with a significant export-import gap skewed in far-reaching questions that the panelists tried to its favor. Tensions are further aggravated by the lack of answer in the time available. They touched on the strong regional institutions governing trade and security. aim of globalization, the leadership role of China, the Professor Lehmann then turned the focus to the need for governments to be more accountable, how global arena, in which China – armed with lots of cash corporations can modify their role to add value, new – is making significant investments, funding US debt, kinds of disruption brought about by technology, with rescuing failing European firms, and has concluded seen or unseen backlashes – topics for future Evian a 30-year natural gas deal with Russia. Against this Group@IMD debates. Professor Braga closed the backdrop, the US and EU, though forces to be reckoned event by drawing the focus closer to home, comparing with in the WTO, are no longer able to impose their the political and economic dimensions of globalization will. It seems almost impossible to envisage one power in Europe. Clearly, people in Europe increasingly have rising and the other declining without clashing as they mixed feelings about the benefits of globalization, which pass each other; the actions of Beijing and Washington were perhaps exaggerated and not properly conveyed suggest an escalating rivalry. China perceives the US’s at the outset. The overall perception is that globalization so-called pivot to Asia – via intrusive and divisive mega- is an elitist project. The swing to the far right in recent regional trade agreements such as the Trans-Pacific European Parliament elections is an expression of Partnership (TPP), as well as alliances with Japan, South people’s discontent over the free movement of people Korea and Australia – as part of a concerted strategy of across borders and perceptions that it contributes containment aimed at preventing China’s re-emergence. to unemployment of locals, including rising youth The question that arises next is: Can the US and China, unemployment. These concerns are magnified by the whose economy is estimated soon to overtake the US, relative ineffectiveness of training interventions in the learn to live together in the 21st century? labor market, the loss of national identity and problems Being a global merchandise exporter with huge of leadership. These recent political developments are investments throughout the world, China’s position is, a warning signal that emphasizes the need to better however, vulnerable. In addition, food security is a critical understand the root causes of dissatisfaction and to concern as the country has 21% of the global population better manage the necessary economic and social but only 7% of the world’s arable land. China has to rise adjustments that are part and parcel of the process of above its domestic challenges and construct a leadership globalization.

Figure 3: Survey results: Is globalization in trouble? Survey results Participants voted on whether globalization is in trouble both before and after hearing the speakers’ arguments. Figure 3 shows the results compared with those of an earlier survey that The Evian Group@IMD carried out via its website among its community. The collective opinion of the participants after the debate was more pessimistic than that observed both before the debate and in the original survey – after the debate 44% of the audience believed that globalization is facing various degrees of trouble (score 4 and 5) compared to 30% before the debate and just 8% in the web-based survey. In the same vein, only 36% felt that globalization is progressing well (score 1 and 2) after the debate, compared to 44% before the debate and a resounding 62% in the original survey.

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