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The threats against globalization

Globalization may be described as the process of growing volumes and value of the trade of goods, services, and capital among counties and regional blocs under an open market system of price determination. Its basic philosophy is the belief that countries are better off in producing the goods and services where they have comparative advantage and importing needed goods and services from countries where those countries have the comparative advantage. “Under the ambit of “Free Trade” principles and market openness, tariff and non-tariff barriers to trade among countries have been progressively brought down, if not totally eliminated. (For the interested reader, look up or “google” the principle of comparative advantage and David Ricardo, an early 19th century economist.). In simple terms, this explains why US, Western European and Japanese brands are made in China, India, Vietnam, the Philippines, Romania, Costa Rica, etc. It explains why more cars with the German brands are built in the Czech Republic than in Germany. The process of globalization is believed to have been a driving force in the growth of the world economy after the Second World War and supported over the past two decades by the World Trade Organization (WTO). The emerging economies of the Asia Pacific including the Philippines have been among the greatest beneficiaries of globalization with their export and investment- led economic growths outpacing the growth rate of the world economy.

Recent developments now indicate a political backlash against globalization among constituents in the more advanced economies for various reasons such as the loss of manufacturing jobs, the economic and social costs of immigration and security concerns. If the political backlash against globalization manifests itself in policy directions, a process of trade and migration restrictions will hinder or even reverse the growth trend of free trade.

This backlash has manifested itself in Brexit, with the Majority of British voters opting to exit from the European Union in spite of the apparent adverse implications to their economic well –being.  The protectionist platform (and hence anti- free trade) of Mr. Donald Trump, the Republican nominee for President of the United States has helped him get about 40 percent support from American voters, a reflection of a backlash against globalization. Mr. Trump’s strongest support comes from the white blue collar workers because Mr. Trump is promising to bring back the manufacturing jobs from overseas – in other words higher tariffs against manufactured imports.

The Free Trade Agreement between Canada and the European Union(EU) unravelled last week because Wallonia, the French speaking  sub-Federal area of Belgium refused to concur with the Agreement in order to protect its Dairy industry. By some peculiarity of the laws of Belgium, it cannot give its assent to the Trade Agreement without the backing from all of the five sub-federal administrations.   In France and Germany, there are anti-immigration parties gaining in popularity.

Most economists will agree that free trade is better for the world economy than protectionism. Protectionism will focus markets on the domestic economies and hence bring down volumes, increase per unit production costs and increase the unemployment rate. The development and exchange of technology among nations will diminish and innovation and productivity would be adversely affected.

Emerging markets will be more greatly affected under a regime of protectionism but even large domestic economies like the United States will suffer.

Globalization and protectionism were major issues of concern during the annual IMF- World Bank meetings in Washington D.C. during the first week of this month precisely because of the implications on world economic growth and welfare. As cited by the Financial Times, the WTO reported that it expected world trade to grow just 1.7 percent this year, slower than the IMF estimates of real world GDP growth of just over three percent. According to the WTO report, global trade has been growing significantly faster than the rate of growth of the world economy and that this year will be the first time in 15 years that global trade will grow slower than the growth of the world gross domestic product. Based on the premise that global trade has been a major catalyst of world economic growth, the concern that a slowdown in global trade will also cause a slowdown in world economic growth appears justified. This is why the IMF, World Bank, WTO and other multilateral development organizations are quite concerned with the growing sentiment for protectionism and other sentiments against the free flow of goods, services and capital and labor in the advanced economies.  It is, therefore, incumbent upon trading countries to work for sustained growth of free trade on a global scale. However, the reasons for the sentiments against globalization must also be addressed. One of the reasons is that not all economic sectors have benefitted equally from globalization.    For example, the workers in the manufacturing sector in some of the more advanced economies feel aggrieved by the transfer of some of the manufacturing processes to the emerging markets and the consequent loss of jobs. However, in the process, higher value-added jobs have opened up in the services and Information Technology industries. Governments will have to make investments in retraining and other transitioning processes to smoothen the impact of globalization on the sectors that are adversely affected.

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The opinions expressed here are the views of the writer and do not necessarily reflect the views and opinions of FINEX.  You may email Mr. Araneta at vaaraneta@yahoo.com