Can the West Abandon Globalization?

Going back to mercantilism and trade blocs.

April 28, 2023

Author

Branko Milanovic

Branko Milanovic is the Presidential Professor at the City University of New York’s Graduate Center, and Senior Scholar at Luxembourg Income Survey.

In her new and important book “Homecomings,” Rana Faroohar dissects globalization as we know it and looks at what lies ahead.

Faroohar’s point is not new, but is told with unusual clarity and it comes at the right time. It is that the West should abandon globalization.

Instead of continuing to pursue it, the West should revert to trade blocs, in this case created between nations sharing certain political values and geopolitical interests.

It should use “friend-shoring,” the new term invented by Chrystia Freeland, Canada’s Deputy Prime Minister.

Two reasons

There are two reasons why the West should abandon globalization. The first is that it was not good, economically, for its middle classes.

The “elephant graph,” originally produced by Christoph Lakner and myself, tells that story in a nutshell.

The period of high globalization between 1988 and 2008 was good for Asian middle classes and the global top one-percenters, but not for the Western middle classes.

The second reason is that geopolitically, globalization helped the rise of China. The country is already now, but will be even more so in the future, the main military and political competitor of the United States.

China today accounts for 21% of global GDP vs. the United States’ share of 16%. Back in 1988, the percentages were, respectively, 3.6% and 20%.

Trump tuned in first!

Now, these two arguments why globalization should be scrapped in favor of regional blocs do make perfect sense from the point of view of Western governments’ political interests.

The idea was, to the great but undeclared chagrin of the American liberals, first raised by Donald Trump. Now the liberals, in this respect like in several others, are happy to follow in Trump’s footsteps.

Telling the rest of the world

The problem is how to explain this volte-face to the rest of the world. After all, the Western narrative has since 1945 been built precisely on the opposite view: Open trade helps all the countries and leads to peaceful coexistence.

While one need not subscribe to the Montesquieu-Bloch-Doyle view of trade as an engine of peace, the economic arguments in favor of open trade were always strong.

China, India, Indonesia, Vietnam and Bangladesh made them even stronger.

On shaky ground

Now, the West which was the principal ideological champion of free trade has soured on it because it no longer works in its favor.

Whether it does so or not is, from a global perspective, immaterial: The idea of open trade was not based on particular benefits to one side – as mercantilism was – but to the mutual benefits for most.

The gains were not, ever, thought to involve absolutely everybody. Rather, the idea was that the losing parties would be compensated domestically – or at least that their particular losses will not be allowed to derail the entire process.

Back to the drawing board?

We are now told that we need to go back to the drawing board. But we are not allowed to call these reversals by their real names. Their real name is trade blocs.

Trade blocs have existed before. In the case of the UK, they were called “imperial preferences.“ In Japan’s case „co-prosperity zone.“ Grossdeutschland’s Central European area. In the Soviet Union’s case the “Council for Mutual Economic Assistance.”

They also responded to geopolitical interests of the countries that introduced them.

Mercantilism under a new name

For some 80 years, they were held to have been ideologically retrograde, part of “beggar-they-neighbor” quasi autarkic policies.

Now, we are to believe that “friend-shoring” is somehow different. It is not. It just mercantilism under a new name – and hence trade blocs in a different costume.

Instituitionally deeply embedded

There is a further problem. The West was “in charge” of the dominant economic ideology for many decades. That ideology pervaded all international organizations.

If the West is now going for “friend-shoring,” how is the IMF to explain to Egypt, Paraguay, Mali and Indonesia that they should continue with open trade?

If globalization is (rightly) credited with raising incomes in Asia and with the greatest reduction in global poverty ever, are we now to reverse policies on global poverty and to argue that regional trade blocs should become the economic basis from which to proceed?

Who is going to tell this to the IMF, the World Bank and the WTO?

The world can’t be flipped on a hat

If the West abandons globalization, this is fully understandable from the mercantilist perspective of national grandeur. Colbert would approve.

But one should not delude himself/herself in believing that the rest of the world can just be flipped on the drop of the hat, and would not notice the enormity of the ideological change that this implies.

And would not wonder if the initial impulse that advocated economic openness might not have been based on geopolitical concerns that are now found wanting.