The globalization process began and took on its most concrete form in the Americas. Now, reversal of that process represents a sharp turn, writes Matthew Rooney, Director of Institute Outreach and Strategic Partnerships at the Bush Institute.
For nearly a century, beginning under American leadership in 1934, the global economy became ever more closely intertwined, as tariff and other barriers to trade were lowered on more and more products among a widening circle of countries and investment flowed increasingly freely across borders. Now, seemingly all of a sudden, that process is being reversed. As tariffs and other barriers are being raised, investment is moving back closer to home.
In just the past few years, Great Britain left the European Union, severing a half century of free movement goods and services. The United States and other countries have begun raising tariffs to fend off foreign competition. And the United States insisted on renegotiating the path-breaking North American Free Trade Agreement (NAFTA). The resulting U.S.-Mexico-Canada Agreement (USMCA) raises barriers to trade in vehicles and other manufactured goods.
Trade in the Americas is the focal point
As it has been for decades, trade with our geographic neighbors in the Americas is at the center of this debate. NAFTA, enacted in 1994, eliminated or reduced numerous restrictions on trade between Mexico and the United States, while trade between Canada and the United States had been liberalized under a bilateral agreement that came into effect in 1989. NAFTA then became the paradigm for American trade policy, leading to the Central America Free Trade Agreement, the U.S.-Chile, U.S.-Panama, U.S.-Colombia and U.S.-Peru Free Trade Agreements, as well as agreements with Australia, Israel, South Korea, Morocco, Singapore and others.
USMCA, enacted in 2020, continues much of NAFTA while adding agreements that strengthen intellectual property rights protection, and opens markets for services and agricultural products. However, USMCA tightens requirements for duty-free trade in cars, trucks and other manufactured products to encourage carmakers and others to move production and jobs back to North America.
As it has been for decades, trade with our geographic neighbors in the Americas is at the center of this debate.
For the far too many people whose economic situation stagnated or declined during the past three or four decades, this no doubt sounds like good news. Intuitively, it seems obvious that, when foreign products no longer compete with domestic goods, more goods will be produced at home. By the same token, it seems obvious that, as soon as American corporations stop moving investment and jobs abroad, there will be more well-paid jobs at home.
We can see the impact in recent statistics: Global trade peaked in 2008 at just under 61% of global GDP, and tapered off by 2020 to just over 52%, about where it was in 2000.
At the same time, recent economic data point to an increase in manufacturing employment over and above pre-COVID levels, seeming to indicate that the de-globalization policy is working.
It remains to be seen whether this effort will work. If USMCA becomes the “DNA” of American trade policy in the future, as NAFTA did 30 years ago, it could well strengthen American dominance in global agribusiness markets, better defend American patents and trademarks, and open new markets for American creativity in financial services, consulting and other service industries.
Risks of moving production back home
However, the effort to push manufacturers to move production back to North America carries risks. At the end of the day, moving production back home implies paying more for inputs, since production only moved in the first place because doing so enabled producers to reduce costs. In fact, the most likely result of this policy will be to raise the cost of manufacturing in North America, imposing higher prices on American consumers and eroding the global competitiveness of American manufacturing – and with it the stability of millions of American jobs.
We see an early sign of these risks coming to fruition in the number of migrants desperate to enter the U.S., many from Mexico and Central America. While rampant violent crime is an important driver of these migrations, lack of economic opportunity also plays a major role.
Uncertainty as to the U.S. commitment to free trade with our neighbors, as well as barriers embedded in U.S. trade policy, have helped discourage job-creating investment in those countries, fueling the hopelessness that contributes to migration. It is telling that net migration between the U.S. and Mexico had turned southbound in the past decade or so, as many Mexicans living in the U.S. went home. That same uncertainty, coupled with the lagging post-COVID economic recovery in Mexico, has reversed that trend, and Mexicans are again heading north in search of job opportunities.
We see an early sign of these risks coming to fruition in the number of migrants desperate to enter the U.S., many from Mexico and Central America. While rampant violent crime is an important driver of these migrations, lack of economic opportunity also plays a major role.
It may sound counterintuitive to argue that de-globalization could cost jobs, given that globalization is blamed for eliminating many jobs. But the mechanism is the same: competition in the marketplace based on price, where the consumer seeks out the less expensive among a range of similar products. To keep a lid on the price of their products, manufacturers must find ways to control costs, driving them to source inputs from low-cost suppliers.
Innovate, innovate, innovate
The only way to escape this relentless pressure on costs is to innovate, because an innovative product is unique and therefore there are no similar products for the consumer to choose from.
From this perspective, neither globalization nor de-globalization has destroyed American jobs. Those jobs have been lost to a failure to innovate.
Of course, there have been marginal innovations on existing products, like broadband Wi-Fi or internet-capable smart phones. But the last paradigm-shifting innovation to come from the U.S. was the internet itself, 30 years ago. While the United States introduced fracking, making petroleum production more efficient, China and the Europeans captured most of the value of new energy sources – solar and wind – in the past 15 years. Meanwhile, having invented the internet, the United States is slugging it out with China to capture the “first-mover” benefits of AI. The only sustainable path to the job creation we need is innovation.
This de-globalization process, which began and took on its most concrete form in the Americas, just as the globalization process did, is a sharp reversal from the preceding six decades. Following the Second World War, as a series of multilateral and bilateral market-opening initiatives led by the United States reduced tariffs and regulatory barriers to trade around the world, global trade grew more rapidly than global GDP.
Trade was literally the source of most of the increases in the prosperity of the United States and the rest of the world during this period. At the same time, even as price-based competition was driving trade, the pressure to escape from competition based on price served as the main driver of innovation.
These are the stakes as we de-globalize: Closing our market to foreign competition will increase the cost of manufacturing in the U.S., driving inflation and making us ever less able to sell our products on global markets. At the same time, closing our markets may well limit price-based competition, but it will also reduce the incentive to innovate, further degrading our international competitiveness.
This de-globalization process, which began and took on its most concrete form in the Americas, just as the globalization process did, is a sharp reversal from the preceding six decades.
The last major cycle of de-globalization began in 1913, when trade as a percentage of global GDP peaked at a then-astronomical 21% and fell to just 9% in 1938. The global economy didn’t recover the degree of market integration it had reached in 1913 until after the fall of the Berlin Wall in 1989.
It is worth recalling that those 76 years were not a high point of human history: two world wars, a global pandemic, a decade-long economic contraction, a worldwide confrontation with a hostile, nuclear-armed superpower, and a series of proxy wars in Asia, Latin America, the Middle East, and Africa – all with a death toll exceeding 200 million people.
It has been said history may not repeat itself, but it does rhyme. Here’s hoping we can find our way to a positive-sum vision for the next decades that learns and applies the lessons of the last century.
