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Western critics blame globalization and developing economies (read China) for factory closures, the loss of “high-paying” jobs, climate change, income inequality, rising crime and a host of other issues. Peter Navarro, US President Donald Trump’s trade czar, for example, accused China of “unfair trade practices” and manipulating its currency, which he claimed is responsible for closing 50,000 factories, stealing between 20 and 30 million jobs, and putting taxpayers on the hook for US$3 trillion.
Are Navarro and other critics’ allegations against China and other developing nations true?
The case against globalization
The International Monetary Fund and other reputable organizations can attest to the fact that globalization is responsible for between 1.5% and 2% of global economic growth, lifting hundreds of millions of people out of poverty in the developing world and improveing living standards in the developed countries. Analysts at Morgan Stanley and other US economic and financial institutions have estimated that inexpensive Chinese “imports” alone have saved the average American family US$1,000 a year, allowing consumers to buy and save more.
A study conducted by the University of Pennsylvania, Trump’s alma mater, found that automation was responsible for manufacturing job losses. Moreover, it was US businesses that decided to relocate jobs to developing countries with low wages, and lax labor and environmental regulations that “hollow out” its manufacturing sector.
It could be argued that the persistently high US trade deficit with China is attributable to Washington’s policies and American manufacturing firms outsourcing to China. The US Congress has banned the sale of “security sensitive” or “dual civilian/military use” products to China and other countries deemed potential “adversaries,” squandering considerable export opportunities. Moreover, over two-thirds of “imports” (valued at approximately US$270 billion out of the total estimated US$350 billion in 2016) are goods produced by the US inside China. China in fact only exported US$180 billion to America in that year, a number close to the value of US exports to it. If the US relaxes export restrictions and readjusts the value of Chinese “imports,” America might have registered a trade surplus with China.
Post-World War II globalization
Globalization was promoted by the US and the UK to spur economic growth in the post-war period. In 1944, when victory over the Axis powers – Germany, Japan and Italy – was a foregone conclusion, the two English-speaking countries sponsored the Bretton Woods Conference (attended by 42 allied countries) to chart the world’s post-war economic road map, unfettered trade investment being its cornerstone. The conference established two institutions – the IMF and the World Bank – the former was to facilitate and promote trade and investment and the latter was to facilitate reconstruction.
Globalization was promoted by the US and the UK to spur economic growth in the post-war period
The US, being the largest financial contributor to and the biggest shareholder of both institutions, dictated the post-war rules to acquire a “America First”-type policy. For example, the chief US representative, Harry Dexter White, rejected the UK-proposed “bancor” and successfully demanded that the greenback become the “reserve currency” for international transactions, making the US the world’s “bank of last resort,” affording it an “unlimited” source of money (since the greenback is universally accepted as a medium of exchange, storage of value and unit of account) to strengthen its global dominance.
The US also insisted thati the IMF and World Bank operate as a bank, promote US-style democracy, and apply the Washington Consensus (a neoclassical framework developed by John Williamson as a “one size-fitss-all” development path for emerging economies) as loan conditions, including: implementing austerity programs in periods of economic slowdown or recession, privatizing state-owned enterprises, and liberalizing trade and investment.
These conditions were said to be instituted to protect and promote the interests of the West, particularly those of the US, “helping” the borrowing nations was just a side benefit. Privatization of state-owned enterprises was meant for Western (read US) firms to take over state-owned enterprises (banks and oil) in the borrowing nations, as was the case with Russia and some African countries. Insistence of borrowing nations to implement austerity programs was to ensure the creditors are repaid. Unfettered trade and investment was to open the developing economies’ markets to the developed ones.
To further protect its market from foreign imports, the US Congress rejected the UK proposal of forming the International Trade Organization (ITO).
To replace the ITO, the US proposal, the General Agreement on Tariffs and Trade (GATT) was set up to negotiate tariff liberalization or reduction, but on goods only. But it became clear that the West in general and the US in particular was (and still is) only interested in reducing tariffs on goods in cases where they have a comparative advantage. This was done by establishing non-tariff barriers such as anti-dumping measures during the Tokyo Round of negotiations (which developing countries were neither invited to nor participated in).
It was not until the Uruguay Round (1986 – 1994) under the GATT framework that developing nations were invited to and participated in multilateral trade negotiations. That was only because the West and Japan wanted a non-agricultural agreement to access increasingly affluent emerging economies’ markets, China’s in particular.
However, the US and EU continue to apply NTBs to bar or restrict imports that are “hurting” domestic producers, albeit ones that they subsidize heavily. Farm subsidies account for approximately 50% of the EU budget, and over 25% of US farm income is from government handouts. The EU and US arbitrarily impose anti-dumping duties on Chinese-made steel and solar panels, accusing China of selling the products at “below cost.” The US recently imposed a 300% tariff on Canada’s Bombardier CS100-series planes, citing heavy government subsidies.
The issues created by structural changes
The West – and the US in particular – have undergone significant structural changes since the 1980s, including the relocation of manufacturing abroad and the automation of production in an effort to increase profits and export pollution. Developing nations, China in particular, offered low production costs made possible by cheap killed labor and efficient infrastructure.
However, they did not implement sufficient job retraining programs to address displaced workers or the changing labor market. The advent of technological changes alters the job market, so a skill that is in demand today may disappear, or new ones are required tomorrow. Consequently, structural unemployment not only persisted but grew.
Caving in or pandering to vested interest groups have created trade issues and climate change. Canada’s former prime minister Stephen Harper refused to ratify the Tokyo Accord on greenhouse gas emissions to protect the interests of the Alberta oil sands industry. Trump’s revival of the oil and coal industries will likely worsen climate change. His tearing up of the Trans-Pacific Partnership and making what Canada and Mexico refer to as “harsh” demands could erode trade between the US and its two partners, exacerbating economic issues in all three.
Politicians in the developing economies are not blameless for the world’s economic and climate change. Chinese leaders’ inability or unwillingness to curb industrial overcapacity is a source of trade fiction between China and other countries. Turning a blind eye to factories dumping toxic chemicals into the atmosphere might be responsible for climate change.
A final comment
It could be argued that it was the West, the US in particular, that was “eating the developing countries’ lunch.” Colonizing underdeveloped lands, exploiting their resources and enslaving their indigenous people enriched and empowered the West. The much-hailed Marshall Plan, a post-World War II aid program for the reconstruction of Western Europe and later Asia was an “America First” policy, requiring recipient nations to become liberal democracies and spend the money on US-made goods.
The problem with “Nation First” policies is that national interests often collide, resulting in trade and geopolitical conflicts. Not ceasing to engage in military exercises with South Korea and demanding that North Korea stop building nuclear weapons would escalate rather than reduce tensions in the Korean Peninsula. Likewise, the US not acknowledging that its trade policies and the composition of trade might be the cause of the deficit with China could lead to a US-China trade war.
Globalization is not the cause of the West’s economic ills, but the way it is used and managed might be. The West is also unhappy with China’s rapid economic and military rise, preventing it from eating the “whole cake.”