Brexit is a bad omen for world commerce

Friday , June 24, 2016 - 10:00 PM64 comments

Jim Tankersley

(c) 2016, The Washington Post.

The economic story of the past quarter-century was the rapid advance of globalization, the unleashing of trade and commerce among countries rich and poor - a McDonald’s in every European capital, “Made in China” labels throughout Toys R Us. The Brexit vote on Thursday ends that story, at least in its current volume. Voters will soon tell us what sort of sequel they’d prefer.

A slowdown in trade growth has already gripped the globe over the past several years, according to data from the World Trade Organization. Prospects now look bleak for completion of major new trade agreements, including the Trans-Pacific Partnership and a new accord between the United States and the European Union, no matter who wins the U.S. presidential election in November.

Political factions in other European countries are clamoring to follow Britain out the door of the European Union. Republican presidential candidate Donald Trump is promising to levy the highest set of tariffs in the past century for America against China, Mexico and other key trading partners. His presumptive Democratic opponent, Hillary Clinton, has vowed to renegotiate existing deals such as the North American Free Trade Agreement.

These developments come at the hands of an anxious working class across the West, whose members feel left in the cold by many developments of the rapid integration of foreign products and people into their lives.

It is clear from the results of the British vote, and from Trump’s rise in U.S. politics, that there is a large backlash against the results of globalization so far.

MORE: Brexit: Same phenomenon, different country

Native-born workers without college degrees are venting their frustrations with immigrants, with factory jobs outsourced abroad and with a growing sense of political helplessness - the idea that their leaders no longer respond to concerns of people like them.

University-educated voters in Britain overwhelmingly sided with the “remain” campaign in Thursday’s vote; those without college degrees powered the victory for “leave.” The top issue among those voting to go was Britain’s right to act independently. The second-highest was immigration.

In the United States, throughout the Republican primaries and into the general-election campaign, white voters without college degrees have formed the core of Trump’s support, and polls show they, too, are frustrated with immigration and economic integration (in the form of free trade).

The forces driving those populist uprisings, both against EU bureaucrats in Brussels and elected officials in Washington, are complex and intertwined. They include long-simmering racial tensions and increased political polarization.

But across the West, the economist Branko Milanovic argues, the rise of populism corresponds to a decline in the income share held by the broad middle classes of those countries.

Milanovic has studied global inequality trends extensively and is the creator of a semi-famous chart showing how the rise of global trade boosted incomes for the poorest and very richest workers in the world - everyone, really, except for the working class in the West.

In a recent blog post, Milanovic writes that in the United States and other rich countries, “populism is rooted in the failure of globalization to deliver palpable benefits to its working class.”

With the Brexit vote, the populist movement can already claim a victory: It has won a clear reversal from the economic-integration trend of the past decades.

Now the question is whether the movement will ultimately push the world into a more Western-worker-friendly form of globalization - or a full-fledged retreat to protectionism.

Either seems possible.

MORE: Brexit is the Americanization of British politics

In the protectionist scenario, countries such as France and Spain could follow Britain out of the European Union. Trump could win and impose his 45 percent tariffs on trading partners, and China, Mexico and others could retaliate with WTO complaints and tariffs of their own. Economists worry about those possibilities. Some have warned that they could trigger a global recession. (If Brexit has not begun to, already.)

In the “reformed globalization” scenario, if you will, political leaders could re-engineer the terms of trade to better cushion workers against shocks and better ensure the gains from trade are broadly spread among workers in rich countries, and do not just flow to the rich.

This appears to be Clinton’s stated goal, for example. “I recognize we have to make some changes in trade agreements,” she told The Washington Post in an interview this week, “but I also believe we can’t shut our borders to trade.”

Last month in Washington, the first deputy managing director of the International Monetary Fund, a former Barack Obama economic adviser named David Lipton, gave a speech titled, “Can Globalization Still Deliver?” In it, he called for a “new form of globalization that works for all” - one that clearly shows working-class voters “the opportunities of collaboration and integration.”

“Too many people in the developed world see only a loss of jobs to lower-wage destinations,” Lipton said.

“Too many people fear that immigration is compromising their economic well-being. Too few see clearly the payoffs - poverty reduction, the innovation that comes from shared ideas, higher living standards from greater access to trade and higher returns to the wealthy world from investment partnerships with developing countries.”

But if they want to sell wary workers on the gains from integration - to salvage a new era of globalization, instead of launching a new dawn of economic retrenchment - public officials might need to be more honest with themselves about the trade-offs that come with deepening economic ties.

Harvard University economist Dani Rodrick dubs those trade-offs the “inescapable trilemma of the world economy.” What that means is that we can have any two of these three things, but never all three: democracy, national sovereignty and global economic integration. In other words, you can’t have people voting their own interests, in a country that always places its own interests above the shared interests of the global community, while also stitching everyone’s economies together seamlessly.

“If we want more globalization,” Rodrick wrote in a 2007 blog post that has only grown in relevance over the past eight years, “we must either give up some democracy or some national sovereignty. Pretending that we can have all three simultaneously leaves us in an unstable no-man’s land.”

A land of Big Macs, cheap toys and more and more Brexits.

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