Social Policy in Ontario

By ignoring free trade’s excesses, we lost those on the margins

Posted on August 27, 2016 in Debates

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TheGlobeandMail.com – ROB/Commentary
Aug. 27, 2016.   JAMES DEAN AND VIVEK DEHEJIA

James W. Dean and Vivek Dehejia are economics professors at Simon Fraser University and Carleton University, respectively. James W. Dean is writing a book titled Paradoxes of Globalization.

For more than a century after Nelson trounced Napoleon in 1805 at the Battle of Trafalgar, the British and their navy defended a world order of “small-l” liberal values and trade practices. By most measures, the world was more “globalized” in 1914 than it was until the United States and its Air Force began to enforce similar values and practices across the “free” world after the Second World War.

Jump ahead another half-century. In 2016, Donald Trump strutted onto the American stage. Recently, he laid out his putative presidential economic platform. It embodies the most dramatic and plausible threat to liberal values the postwar world has thus far encountered. Meanwhile, Britain has voted to leave the world’s largest free-trade area. Those of us who cherish the liberal world order must examine why we have failed to defend it properly.

Globalization promulgates paradoxes. While it enriches us immeasurably, culturally as well as materially, it also gnaws at us viscerally: We are nostalgic for lost traditions, communities and religions. And we feel powerless to preserve these in the face of forces that seem to override our own governments’ supposed sovereignty.

Freer trade with China has accelerated the transformation of our industrial heartlands into Rust Belts. Open borders have transformed Britain from Shakespeare’s “sceptered isle” into a multicultural melting pot that many old-stock Anglo-Saxons find too spicy for their tastes. Meanwhile, the Soviet-U.S. military duopoly, which kept the Cold War cold, tipped into U.S. hegemony after 1990. But that, perversely, seems to have encouraged regional conflict and chaos.

At the core of these paradoxes is a conflict of globalization with national sovereignty, and their mutual conflict with democracy – something long understood by political scientists but until recently only dimly perceived by economists.

Voters resist both free trade and immigration that threatens their jobs, and nations resist treaties that undermine their sovereignty – even when forgoing them carries an economic cost. Hence, Mr. Trump’s supporters sense (wrongly) that their job insecurity and stagnant wages can be cured by autarky. Hillary Clinton’s supporters are suspicious that the Trans-Pacific Partnership serves corporate over collective interests. British voters are fed up with Brussels because it appears to lay a bureaucratic blanket over a business community that is the most enterprising in Europe.

Where we professional economists have failed these voters is in our blind advocacy of globalization at all costs. We rightly argue that free trade across borders benefits all nations that participate. At the level of individuals, this is virtually tautological: If I freely choose to buy from you and you freely choose to buy from me, we are, by the very definition of free choice, both better off.

At the level of nations, we do concede that some subgroups will lose from free trade, but we are rightly convinced that the net benefit is sure to be positive. We blithely claim that losers can quickly be compensated by way of taxes and transfers, and in the long run through retraining and other jobs.

But in the real world, compensation doesn’t happen so easily. As economists, we need to dirty our hands and devote much more energy to advising politicians and policy makers how to feed the golden goose of free trade without confiscating its eggs from the most vulnerable.

And, of course, globalization means much more than just free trade: It means free movement of money, people and ideas.

In times of global financial crisis, some sophisticated economists, notably Jagdish Bhagwati during the 1998 East Asian meltdown, have advocated temporary controls on cross-border capital flows. But most economists remain opposed, oblivious, for example, to the dangers of short-term money rushing in and out of the emerging world as U.S. interest rates fall and rise. This phenomenon helped trigger, among other effects, Brazil’s recent roller coaster from boom to bust.

Currently, free movement of people is perhaps the foremost traumatic challenge to our two-century-old liberal world order. Freedom to migrate is at the core of the free world’s success, along with freedom to trade and to move money. Yet, like capital flows, the movement of people is prone to crisis and sometimes must be controlled. Just as economists filter out the messy second-best from utopian visions of how the world should work, we likewise sweep periodic crises under our orderly theoretical table.

American paranoia about immigration, both illegal and legal, fuels Mr. Trump’s support. It also fuelled support for Brexit in Britain. Ideologues on the left and right were to blame, but equally culpable were professional economists. We have the tools to deal with tradeoffs at the margin – such as the benefits and costs of temporary caps on surges of immigration – but got stuck in strictly bounded boxes labelled “Leave” or “Remain.”

Rather than the doctrinaire certainty that feeds extreme solutions – sovereignty and democracy over globalization, or the reverse – we economists need to reclaim the nuanced world that lives at the margins.

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Tags: economy, globalization, ideology, immigration, multiculturalism, participation, standard of living

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