June 25, 2007
Free Trade and Inequality V Posted by Fredric Smoler at 11:55 AM EST John Steele Gordon writes that “By globalization I do not mean simply free trade—trade without the taxes we call tariffs or artificial barriers such as quotas. It is perhaps true that the world had more free trade in 1914 than in 1990. But it had less globalization in 1914 than it had in 1990 and a lot less than it has now. In 1914 the developed world exported manufactured goods to the undeveloped world (much of which the developed world had sovereignty over) and imported mostly raw materials and agricultural products in exchange. . . . By globalization I mean integrated markets and globalized manufacturing. . . . This new and irreversible world came about for three reasons. (1) Led by the United States, the world has been reducing trade barriers since the end of World War II to the point where they are a mere ghost of what they once were. (2) Ocean transportation costs have declined by orders of magnitude. Just as the collapse of overland freight transportation costs, thanks to the railroads, made national markets possible in the nineteenth century, containerization and much cheaper air freight have created global markets that were impossible before. . . . (3) International communications costs have virtually disappeared.” I think this is a very reasonable definition of globalization, although it omits one sense in which the world economy of 1914 was more globalized than today’s: There were fewer legal barriers to emigration and immigration. You did not need a passport to leave or enter the United States, or Great Britain, or many other places. That aside, Mr. Gordon’s stress on technical rather than regulatory changes is certainly plausible: Transport and communications costs have indeed dropped sharply, and the industrialization of much of Asia is another vast change. On the other hand, from the perspective of Great Britain, the first industrialized nation, the industrialization of Germany and the United States was probably as powerful and alarming a change in the world as Asian industrialization is to the United States and European Union today. One comparison I’d draw between the two periods is that Britain was tempted by the allure of de-globalizing policies (protectionism) as we are now, and to draw what is to my mind a much more disturbing parallel, the economic elites in the new industrialized nations were not nearly as wedded to free trade as British elites had been for the previous half century or so. Mr. Gordon writes that the sharply increased costs of de-globalization via protectionism—he thinks there would be massive inflation—are an insuperable barrier to any reversal of policy across the board. Maybe so, but Europeans have long put up with very expensive food, despite their bankers’ powerful fears of inflation; the Japanese retail sector had very high prices because of various trade barriers; and the Chinese, who ought to fear retaliation by way of protectionism for their tolerance of massive theft of intellectual property, seem almost perfectly indifferent to that threat. I am skeptical about whether common sense and fear of probable consequences are a reliable barrier against illiberal economic policies. There seems to be an illiberal wave sweeping a significant portion of Latin America, I have the impression that profoundly illiberal zero-sum thinking is pretty common in Chinese policy making circles, and I think India could go either way; a lot of desperately poor people in India are at significant short- and mid-term risk from a liberalized economy, and they vote in large numbers. Historically, the social tensions generated by liberalized economies have rarely occurred within fully democratic states, and by one theory (I do not share it) they couldn’t have, since voters would have stopped liberalization before the rewards came rolling in. Non-democratic states (China springs to mind) run their own risks. They are too good at repressing protest over the costs, thus avoiding reforms and palliatives until a revolutionary wave swamps the kleptocratic elites. I agree that very bad economic ideas are self-defeating. In some famous cases, though, they are self-defeating because they provoke wars which states with badly run economies then lose. This is a feedback mechanism with a good long-run outcome, but the short-term costs are very high indeed.
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