Globalisation and its discontents: The political economy of globalisation – from optimistic 1989 to fearful 2022

Text of a talk given to UGA at Oxford on July 18, 2022

Introduction

Thank you for this invite to speak on a day which might see the all-time UK temperature record broken. That such events are happening more frequently across the world should be a red alert for action on climate change, the solution to which must rely on global action, a sub theme to which I will return a few times.

?Rather less importantly, but pressing right now for the UK, what is happening with the race to be our next Prime Minister?

Both fit into the subject is modern globalisation and its discontents, how we got here, where we are, the fightback, and how the future may look. Among many other things this is a tale of the reduced power of national politicians such as in the UK, based on a failure to see the world as it is, something that tends to upset many of them.

This talk isn’t the textbook version of globalisation and modern trade, not least as this is scarcely settled. It is more about the world of trade we see around us, from the music we hear to the cars we drive, the sport we follow, the global supply of energy.

It is a big and complex subject to which doing any justice requires sweeping generalisations which are often highly debatable, but needed to advance our understanding.

So let’s start more easily with my own view, to say something increasingly rare.

I am a big fan of globalisation. I believe it to be wholly positive. I love the products and services I can buy from around the world, I love living in London, the home of globalisation, I love that we can offer education here to people from around the globe, I listen to music from around the world, eat global food, drink in moderation wines and beers, and was very grateful for scientists working globally to develop treatments and vaccines to the covid pandemic.

Of course, in all of that there are wonderful domestic people and products, but why be limited just to those?

To which may reasonably be asked, but what about the climate change implications of that, what about the damaged communities, the death of manufacturing, losing out to China not following the rules, a dependency on Russian energy, people trafficking, and so much more that is wrong?

And what about the way that globalisation is now in reverse as politicians seek to overcome the problems by taking back control, to use a phrase from the UK?

Simply, there is no system of economic and political organisation that is without challenges, but limited at best evidence globalisation brings any more than national solutions would, and much more in the other direction. As for the death of globalisation, that has been frequently been foretold, whether in the 2008 financial crisis, the election of President Trump, or the covid pandemic.

Let’s ask another question, why are we assuming that globalisation can be turned round by the politicians of open economies? That is to assume that it was invented, as some suggest, perhaps by some secretive group of folk at the World Trade Organisation in Geneva, people like me in fact, bringing something called hyper-globalisation.

If only we’d had the power to do that. James Bond may save the world, frequently, and with great value to the UK economy, but even our sadly fictional spy has only ever saved the world, not single-handedly changed it.

I tend towards the free markets view of globalisation. The real culprit, as so often is the case historically, is technology. Government decisions, as we shall see, were often supportive. But globalisation is largely uncontrolled. We all need to understand the implications, and to do so by recalling what has happened.

That then is the subject of this talk, how we got here, and indeed where here is in terms of globalisation. Then via a diversion into UK politics and economics to talk about national attempts to control globalisation, and indeed what happened to Boris Johnson, talk about what comes next. There are optimistic scenarios, of a new generation of younger leaders understanding technology and globalisation, and pessimistic ones, of power and fragmentation.

What we can be clearer about is that this is a time of change. In my late teens I was lucky enough to live through the fall of communism, a period of excitement that played its own role in the development of globalisation. This one is right now more fearful, of war and climate emergency, and ageing societies trying to put limits on global exchange.

Global situations, though, can change rapidly.

The road to modern globalisation

Let us go back to the late 1980s, the reasonable point in time when we can consider the previous model of managed economies and globalisation was ending.

For a number of countries, most significantly China and Eastern Europe, there was a rejection of the communism that meant all production was under the control of the state. Even in the developed economies of North America, Western Europe, Australasia and East Asia there was a roll back of state activities, a deregulation that removed all manner of state monopolies, together with stronger moves towards freely floating currencies. In Europe, there were discussions of the creation of a true free trading single market, in which national product and service standards would become continental, to be launched in 1992.

Members of the General Agreement on Tariffs and Trade had already agreed in 1986 to look at extending coverage to services and Intellectual Property, though the WTO that thus formed would not go live until 1995. Already many western countries had reduced tariffs significantly.

Just as significantly, Microsoft Windows 3.0 and Office were launched in 1990, as personal computers became standardised around the PC. This also coincided with the development of a user friendly front-end on the internet technologies that had already developed in academic settings. Enterprise Resource Planning systems such as SAP were also becoming maturing.

The elements were thus in place for twenty years that would change the nature of the world economy profoundly, and to an extent that most people have still not realised. Most obviously we can look at the rate of growth of goods trade, which grew from 30 to 50% of GDP, at a time when global GDP doubled. Throughout this time, services trade was also growing.

Millions were lifted out of poverty, particularly in China, but also across Europe and in other countries. There was a step change as well in the quality of goods offered for sale across the world, as cars went from being polluting death traps to far safer, cheaper, and environmentally friendlier. Computers went from low power luxuries to home and office essentials, and numerous other consumer electronics became widely available. We were able to obtain what we wanted next day, rather than hoping for some time in the future.

There are downsides to all of this, of course, to which we’ll return. But these should not dominate the conversation to the extent of overshadowing the extent of change, as can often be the case.

Underpinning all of this change was the power that companies had to source the products or services that go into their final consumer offering from anywhere around the world. In no industry was that more obvious than cars, where the formerly huge plants making everything from seats to windows were downscaled to assembly of thousands of products sourced from the same country, region, or even further afield.

For smaller consumer products, that often meant western brands taking advantage of China’s willingness to establish and staff new factories and the infrastructure to support them, which had started in the 1980s but accelerated in the 1990s. When it seems that everything is made in China, actually over 50% of UK imports from China are various electrical products, textiles and various manufactured goods.

The fall of employment in manufacturing which has been seen across the western world[1] wasn’t in fact because everything moved to China, but that the production of cars and much else besides became so much more efficient. Despite increasing product sophistication, it became cheaper than ever before to buy goods. Equally, western brands from clothing to phones continued to be dominant, which tells us where much of the higher value, and indeed higher paid, activities were happening.

This wasn’t primarily driven by politicians. It was driven by consumers around the world asking for more, spending less, and getting that. This is to be remembered when we consider how to change what we have now.

In particular consumers demanded much safer and less polluting products, which governments felt more able to regulate now they weren’t also the producer. Yes, we can also argue that effective modern regulations are a product of a free market.

We also wanted good value. In short, we demanded companies sought out new ways to achieve everything we wanted, and often establishing new production facilities in other countries was the answer.

Politicians at least in theory welcomed open markets, and had been persuaded that tariffs and capital controls were not a good idea. They wanted to be able to take advantages of other markets such as China, as well as create a new liberal world with trade deals such as NAFTA. But many never fully embraced free flows of imports, particularly in areas like food and drink. Certainly the US retained plenty of domestic market protection, contrary to what has become the established narrative.

The creation of the WTO in 1995 was a milestone in showing a world open for trade, but China didn’t even join until the end of 2001. There is still no global trade agreement on e-commerce, though ebay has been going for more than 25 years.

By which time we were only a few years from the financial crisis that clearly marked the end of the period of liberal optimism to an end. That financial crisis, a function of policy laxness and over-exuberance, in turn was to expose that there had been winners and losers of two decades, changing politics in many countries.

Where we are and why we’re unhappy with globalisation

In 1990 we had few regulations on the safety and environmental features of a car, but around the world quite a lot restricting who could make and sell it, and how. Now we have the opposite. As consumers, we have never had it so good.

As workers, however, it is not quite the same story. That squeeze on prices put a premium on managing and optimising the supply chain, but assumed much production within it was interchangeable and thus potentially to be squeezed. There was little loyalty to location, except as a way to seek benefits from the public sector, or corporate welfare as it is often seen.

It was experienced differently across developed countries. Headquarters business in cities won, small towns reliant on single factories lost, particularly if it was a manufacturing facility somewhere with otherwise fairly poor infrastructure and connectivity. University towns associated with research and innovation won, those without strong learning infrastructure lost.

Many have blamed a cosmopolitan elite, in a rather uncomfortable echo of times long ago, suggesting that there are some people comfortable with being flexible about where they live, while those attached to a single place are losing out. But in truth, again, this wasn’t about a government and business elite controlling where jobs were located.

Rather, another factor of the cut-throat consumer led competition since 1990 was the strengthening of multi-national organisations to the point where they have become as powerful as governments. The scale required to optimise global production around a plethora of national regulations lent itself to a market structure of fewer major players.

At a global or national level, this also meant an economy run according to an intricate network of connections that nobody could really map. That was of little interest until first covid required swift changes in production, then the aftermath saw the fragility of various connections exposed. Though it is worth noting that by and large those linkages have continued to deliver, but one can understand why questions are asked.

These large organisations aren’t necessarily all corporates like Google, Amazon and Nike, we’ve seen it in sporting brands which have gone global such as EPL, NFL, IPL, universities, drug companies and many more. Many have thousands of suppliers, as well as multitudes of lobbyists to influence the regulations modern consumers demand. Indeed, battles over regulation are often competitions between these large organisations.

It is worth noting at this point a renewed debate about anti-monopoly rules, but the structure of the modern economy in any case has leant towards the large against the small company.

All of these trends were probably already under way in 2008, but have if anything strengthened since then. For the policy decisions made in the aftermath of the 2008 crisis would enshrine the worst of the globalisation that was developing.

The big fear at this time was of a 1930s style global depression, and accompanying closure of global markets. Policy-makers thus sought to prioritise keeping markets open, while pumping money into the economy, particularly through monetary measures. The key effect of this was to bolster corporate balance sheets and asset growth, without an accompanying growth in personal incomes in many countries, for example the UK.

Advantage large companies, again, disadvantage public realm through considerable cost cutting, advantage asset owners, often the elderly, disadvantage those new to the labour market.

We can add immigration as another factor, in which both cheap and specialist labour are an essential part of the economic story of developed countries, and we begin to see that something was inevitably going to break. In the UK, that was the 2016 vote to leave the European Union.

The UK’s failure to escape globalisation

Compared to many other countries, the intrinsically UK believes in open trade and globalisation. In the halcyon days of the British Empire, the 18th and 19th centuries, our academics such as Adam Smith and David Ricardo constructed the theories that lay behind free trade. That association persists now, at least loosely.

Our place in Europe and the world in the 20th century, as the Empire diminished, has been rather more controversial. There has always been a feeling that while Europe is important, we are an island (or more than one), and rather more global than those on the main continent. That could be news to countries such as the Netherlands, or indeed those studying the last 1000 years of European history, but then there has always been an element of insularity to us.

As such, it was unsurprising that we chose not to join initial efforts towards European economic and political integration in the wake of the Second World War, which in the 1950s saw the creation of the European Economic Community, forerunner of the EU, between France, Germany, Italy, and Benelux. It was equally unsurprising that we then chose to join, in 1973, encouraged a deepening through the creation of the single market for goods and services in 1992, broadening through accession of many Eastern European countries in the 2000s, then voted to leave.

There are plenty of people in the UK who care deeply about whether we should or should not be part of the EU project, but for many voting in 2016 it was a referendum on our economic system. In particular, on the number of east Europeans working here and perceived to be depressing wages, the state of many town centres in some of our ‘left behind’ areas, or conversely about whether being European was or was not consistent with a global UK.

2016 was above all a vote of discontent, a rejection of the prevailing economic system, whatever that might have been, and above all in the genius of the phrase for the leave side of the vote, to Take Back Control. That control may be exerted by large companies or the bureaucrats of Brussels, or even the UK government in Whitehall, but it certainly wasn’t exerted by us.

It was a narrow vote, 52:48 to leave, and the rationale was muddy. The aftermath, however, as politicians tried to work out how to respond and deliver Brexit, has been much worse.

As a customs union with single external tariff and single market with shared regulations there are few barriers to trade within the EU, perhaps even fewer than the US where various state restrictions hold particularly for example on professional qualifications. UK politicians wanted to keep trade free of barriers, while politically leaving the EU, its court and other institutions. This became part of what seemed a prevailing political philosophy called cakeism, as in having a cake and eating it, which very much centred on Boris Johnson, who campaigned for leave, became Foreign Secretary, resigned and then became Prime Minister.

There was never much evidence that Johnson understood the need for the UK to make choices in leaving the EU, that changing our trade and regulations would mean barriers to trade with the EU. When in late 2020 the UK and EU agreed a Trade and Cooperation Agreement, he didn’t necessarily realise this would mean extensive border controls, and indeed many of his supporters seem still in denial.

That wasn’t the only denial. There are two crucial broadly accepted rules of economics affecting Brexit. Gravity, that you trade more with nearer countries, and applies to services as much as goods. Free trade, that trade barriers reduce growth. Putting up trade barriers to your nearest markets inevitably has an economic cost.

Other factors, reducing trade barriers elsewhere, might offset this. The UK can do a trade deal with the US, but it won’t replace what we have lost with the EU, though it could help. But advocates of the UK leaving the EU even denied the fundamental rules.

This is complicated further by the EU being the world’s leading regulator of goods and services. There are international, national and state level regulations, but by virtue of its market size and integration, what the EU chooses to do becomes relatively a global marker, at least for those that want to trade, not least as all developed countries have governments broadly regulating for the same reasons of health, safety, environmental and labour protection, and so on.

This is awkward for Brexit supporters now in government who thought only the EU really regulated, and the UK could either skip or do it better. But in areas as diverse yet crucial as data flows and environmental regulations we can do neither.

Countries do find their own regulatory paths, but only with care, and considering the likely trade and investment effects. For why invest in the UK if you may not be able to sell to the nearest markets, and when the nearest 30 markets have better access to each other?

What had then seemed in some ways like a return to the old life, leaving the EU, a move away from modern complexity, has actually served to show that global integration and national control are increasingly incompatible, or at the very least must be traded off.

That is even without considering the additional complexities of Northern Ireland. The only part of the UK to share a land border with the EU, it is also contested territory, a long period of troubles only brought to an end by the 1998 Good Friday Agreement which rested on a sense of ambiguity as to communities which wanted to be part of Ireland or the UK. Unfortunately in leaving the customs union and single market, checks on goods would be needed somewhere, which would inevitably be a problem for nationalists if on land, or unionists if between Great Britain and Northern Ireland.

This was the issue that Boris Johnson claimed to have solved in 2019 when he said he had ‘Got Brexit Done’. It was the first of his many misleading claims, not the one which brought him down, but one that will bedevil his successor.

Meanwhile, the underlying unhappiness that delivered the Brexit vote has not gone away, indeed with an impending recession brought about by rising fuel prices, Russia’s invasion of Ukraine, and increasing supply chain problems in the wake of covid, they stand to get worse. Not just the UK, but many countries of the west now face a reckoning as to how to handle globalisation.

What comes next for the UK and for globalisation

In the first televised debate of candidates to become the next Conservative leader and therefore Prime Minister, they were predominantly asked about the economy, particularly on tackling the immediate problem of flat wages, an issue for much of the last 15 years, and rising prices, of energy and food in particular. The answer their party wanted to hear was that tax cuts would solve the issue, and that deregulation will then put the country back on the road to growth.

There is a problem that this answer is cakeist. Rising public spending has been driven particularly by the health and pension needs of an ageing population. Deregulation or divergence from the EU is difficult if you want to keep trading. In such circumstances, tax cuts are merely likely to deepen the public sector deficit. Increasingly, and rightly, Brexit is being seen as a factor in the UK’s economic struggles.

The far bigger problem is that there isn’t a good answer for the UK or any other economy as to how to guarantee growth, or fix the issues of globalisation as they are felt in the nation state. Whether it is a worker centred trade policy or the EU’s open strategic autonomy, governments are finding that they don’t have the power to make fundamental changes such as ‘bringing back manufacturing’.

They have money, and we are seeing efforts to use it at least for crucial semiconductor manufacturing. We can certainly expect to see governments try to understand more broadly modern supply chains at least as they pertain to crucial products, and seek to intervene. Whether that makes the situation better or worse is a reasonable question.

It is in any case hard to bring back manufacturing that never went away, just employed less people, and it is hard to see companies turning their back on efficiencies to employ more people. There is also a reasonable suggestion that much of China’s growth has been catch up, and that their unfair subsidies and theft of intellectual property does not help them go from their current position to overtaking the west.

Related to that, an authoritarian politics is not conducive to companies developing a trusted brand in the eyes of consumers, which is increasingly important in global competition. China has been a manufacturer more than a builder of major companies, since the ruling party does not want too much independence, though the US led attack on Huawei, possibly fairly or not, has been a contributory factor.

Current geopolitics raises the disturbing prospect of a renewed global economic split if China attacks Taiwan, something which would have far greater costs than the decoupling from Russia, across the world. For this reason alone, this is not the central case, which is more for a gradual fragmentation of global economic ties, in which companies find it more difficult to operate in both China and the west.

EU and US regulations are headed in this direction. There is also a new concept of friend-shoring which may not come to mean much, but at the very least symbolises renewed attempts to strengthen ties among the broadly like minded countries of NATO, EU, and various countries now members of the Trans Pacific Parnership.

Hopes that India will be a part of this are I suspect liable to be disappointed, given a long history of non-alignment in its foreign policy, which will take some shifting.

None of which still provides the answer to the discontents of globalisation, whether in the UK or elsewhere, and there is a negative view that the future is one of retreat, as divisions increase within our countries, and international cooperation is gradually reduced. There are however at least a couple of reasons for optimism, to believe we can find solutions.

The first is that we aren’t actually doing too badly in aggregate. The US has phenomenal economic strength, the EU single market remains a unique experiment in removing trade barriers to improve economic performance and offer a counterweight to large company power, and the UK for all of our issues is a services superpower from education to consulting, culture to finance, and research to major program management. It has indeed been heartening to see a UK economic debate mature in the sidelines, emphasising how we can focus on our strengths, while seeking more effective domestic distribution. As yet, that isn’t transmitting to politicians, it perhaps lacks a defining big idea, but there is thinking.

Russia’s invasion of Ukraine has also helped in emphasising the value of open markets, at least for the EU and US. The UK will always be instinctively be open to trade, it is one of our jobs post-Brexit to turn that into something globally useful. Inevitably at some point the UK will have a less antagonistic relationship with the EU, recognising the trade essentials, even if that doesn’t necessarily mean rejoining. Taken together, the power of trade is something we can offer over China, which believes first and foremost in political power.

We may also need to look at domestic distribution of rewards, but that brings us onto the second reason for at least some optimism. It relates to one of the oddities of globalisation, which is that the younger college educated cohorts appear not to be the ones angry, even though they are relatively losing out to older conservative asset-owners. Undoubtedly, there is an issue of voting numbers. But there may be another reason that is being missed.

Accustomed to the pursuit of economic growth, we may not be seeing that the battle against climate change is taking priority among younger voters, and that politicians are in fact responding to this. As some far-sighted commentators have noted, net zero requires a fundamental rethink of the industrial revolution, reimaging it for a low carbon future. We see signs of this happening in so many countries, perhaps not enough, but it is under way.

For sure there is a well-funded campaign of climate change denial, and indeed trying to paint corporates as increasingly too socially progressive. But that is because business and governments are actually responding to young people on this, just as they are to older voters on health and pension spending.

We showed with the development of covid vaccines in record time that there is huge potential for global cooperation to tackle pressing issues. Climate change is certainly that. Such cooperation can never make for a perfect world, the nostalgia towards the past is largely for an imagined one, whether of happy manufacturing workers or a UK bestriding the globe. The big idea of the future may thus be the one that is already obvious to us, that of the sustainable country and planet.

Conclusion

This presentation has come full circle, from optimism to pessimism and concluding with a measure of hope again. In such a big picture there will always be generalisations, too many sweeping statements, much that can be challenged justifiably.

Yet, this is a time of change just as was the case in 1989-1990. We enter this one less positively, but perhaps with the sense of an existential cause that we didn’t really have then. Climate change isn’t going to save globalisation, but only global cooperation can tackle climate change.

Upon such a vision could we also discover a renewed sense of domestic unity, or perhaps more realistically something less divisive. Whether in the US or the UK, that looks hard to imagine, as the technology that shrunk the world now shrinks our horizons. Yet, what we are really missing for it to happen are the visionaries for the next generation, the storytellers and the fixers that will create the new sustainability.

Utopias are rightly out of fashion, and those selling them are rightly subjects of suspicion. But a new generation of leaders resetting our expectations of the political economy of globalisation, that is something that might just be overdue. At the very least, the future is never pre-ordained.

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[1] https://www.cato.org/publications/policy-analysis/manufactured-crisis-deindustrialization-free-markets-national-security#us-productive-capacity-remains-high