Given free trade, migration & foreign direct investment promise far-reaching potential gains for all parties involved, Koichi Hamada asks will we allow ignorance & political opportunism to prevent us from realising them?

By Koichi Hamada*

From the Brexit vote to Donald Trump’s election as US president to rising support for populist parties in countries like Germany and Italy, much of the electoral upheaval in Western democracies in recent years has been attributed at least partly to a backlash against globalisation. But globalisation does not deserve voters’ ire.

There is no doubt that globalisation can leave specific groups within trading economies worse off. Those who work in industries that are susceptible to rising competition from foreign labour are especially vulnerable. Immigration increases the availability of workers who are willing to accept lower wages, effectively dragging down wages for local workers, particularly in lower-skill jobs. And offshoring enables companies to move, say, manufacturing operations to countries with larger pools of low-cost labour.

Overall, however, the case for globalisation, including free trade and at least some openness to migration, is strong, because it increases the total wealth of participating countries. All that is needed to mitigate its weaknesses is effective redistribution policies, including strong social safety nets.

Yet such countervailing policies are rarely taken, allowing frustration to mount among the groups that are losing out. Politicians then emerge to seize on that frustration, pursuing policies that are precisely the opposite of what is needed. Nowhere is this trend more apparent – or more consequential – than in the United States, where Trump’s administration risks provoking a trade war with China, for the sake of appeasing some elements of his electoral base.

The tariffs that Trump has pledged to introduce are aimed, first and foremost, at reducing America’s bilateral trade deficit vis-à-vis China. What Trump seems not to understand is that markets function well when one party buys more than it sells to a partner, and vice versa. If trade deficits are no longer allowed, the world economy will regress essentially to a barter system, and countries’ ability to capitalize on their competitive advantages will be diminished.

This is not new information. The Smoot-Hawley Tariff of 1930 – which raised US tariffs on more than 20,000 imported goods by as much as 50% – was supposed to protect American farmers and businesses. Instead, it triggered retaliatory measures by America’s trade partners, resulting in a 66% decline in world trade from 1929 to 1934, exacerbating the Great Depression. No wonder, then, that so many economists – including me – signed a letter to today’s US Congress that echoes one sent in 1930. One hopes that, this time, policymakers will listen.

But there is another dimension to the debate about trade balances that often gets left out of the conversation: investment. Last year, Japan’s trade surplus vis-à-vis the US rose 3.1%, to $69.7 billion – eliciting complaints from the US Department of Commerce. Yet this simplistic response overlooks the increase in Japanese companies’ investments in the US during the last couple of decades.

Investments by Japanese multinationals, especially in manufacturing, created 856,000 jobs in the US in 2015, accounting for $72.2 billion in total compensation to US workers – second only to the United Kingdom, which created 1.1 million jobs in the US, with $84.9 billion in total compensation. Meanwhile, investments by South Korean companies created just 45,000 jobs in the US; for Chinese companies, that figure is just 38,000. Japanese multinationals are top investors in ten US states, including California, Kentucky, Nebraska, and even the Rust Belt state of Ohio, where globalisation-averse voters contributed significantly to Trump’s victory.

Voters regard investment very differently from other modes of globalisation. The Japanese conglomerate Marubeni’s partial acquisition of the Omaha-based commodity-management firm Gavilon did not trigger the type of backlash that foreign imports or migrants often do. Perhaps people understood that the move would open up new markets (particularly in China) to Nebraskan agriculture.

This distinction is not exclusive to the US. In Hungary, anti-globalisation – and especially anti-immigrant – sentiment helped Prime Minister Viktor Orbán secure a third successive term in a landslide victory in that country’s election on April 8. Yet the investments being made in Hungary by Japanese firms, such as Subaru, are not merely tolerated; they are welcomed.

So the backlash against some aspects of globalisation is much stronger than against others – a situation that seems to be rooted, at least partly, in a lack of understanding of how trade functions or the benefits it brings. Free trade, migration, and foreign direct investment promise far-reaching potential gains for all parties involved. Will we really allow ignorance and political opportunism to prevent us from realising them?


Koichi Hamada, Professor Emeritus of Economics at Yale, is a special adviser to Japan’s prime minister. This content is © Project Syndicate, 2018, and is here with permission.

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18 Comments

Globalisation cost 7 million jobs in the USA, globalisation has died.

According to this guy all you need is to redistribute the money made via globalisation and everything is hunky dory.

Don't agree. It was the US's poor public education systems, and workers who failed to retrain that cost jobs. It was self-inflicted. (Others just took advantage of their weakness.) A large part of the 'blame' can be attributed to an older workforce who believed they were invincible and ignored tech reality. It happens that over 40 yr old people think their 'experience' is worth more than it is, so they stop accepting new ideas, stop real learning, deny other's research. I think that is really what happened to much of the American middle class. The world passed them by, and some are angry and are blaming others. It won't end well for them unless they start accepting they got it wrong.

btw, this is not a uniquely American problem; it is a boomer problem generally.

Progress won't be made until public policy making is in the hands of a younger generation, willing to accept they don't know it all and prepared to research the realities. Electing 60-70 year olds who pine for yesterday won't solve anything.

That would have required moving away from family and community support, also to areas with much more expensive housing and higher taxes. A lot of people I know in the States and Canada live local, local papers, local sports teams,local schools, they don't ever get out, a trip to another State is a big deal.

Countries get rich and then get good education, the education comes after the wealth. Some areas just never made it.

They have a lot of community colleges and sometimes courses are as low as $75, some people just don't get much of a start in life others come of the rails further down the track. New jobs are often low wage in the gig economy or pouring coffee at starbucks on min wage.

This is the documentary, ' the house I live in'

https://www.youtube.com/watch?v=QlPNRaXj2OQ

Yesterday I believe was something to be pined for if you were/are Middle Class whether you be American or Kiwi. The worries that a Kiwi or American had in 1973 did not centre on a Job, Housing, Violence, or Drugs for the average and below average. Foreign competition did not undercut jobs or status of living--all those changes came with Globalization in the 90's. In the US 4 cyclinder cars long manufactured in Japan were a ready solution to tripling of petrol prices in the 70's, but outside of the auto industry imports killed few jobs, and the same was true in New Zealand. Having had to secure an Import License in 1974 I soon learned the law of the land was "what can be made in New Zealand-must be made in New Zealand:. It was happy days for every body back then and if you didn't like the solid social egalitarianism and a desire for more consumer goods and higher wages then the door was open to head out into the world and make your fortune, but back home in Godzone there were no worries for the average.
Certainly the inflating of "hard commodities" worldwide in the 70's and the inability of New Zealand's "Soft Commodities" (of which 85% of foreign earnings were dependent upon) resulted in 10 years of steady erosion to national earnings followed by the bust up and revolution of Rogernomics. But like in the US the politicians went too far in trusting in Free Trade and who could blame them in the decades of the 80's and early 90's, but by the late 90's it was becoming clear that never in the past 100 years of Free Trade had a tornado of cheap labour using the West's manufacturing machines and trading channels been unleashed on the 1st world by the 3rd World. Henry Ford in 1908 lifted the labouring class into the Middle Class, and now suddenly to compete the 1st world's labouring class needed to go back to the days of their Great Grandfather's -a time that Upton Sinclair poignantly portrayed in the novel "The Jungle". American & New Zealand were long past 6 day /10 hour work weeks and living in dormitories fresh off the farms like their ancestors and working for $.50/hr. So yes the transplanted Western Corporate giants got there costs down but outside of the cost to their former Western Workers we are now learning the hidden cost to the foreign company moving to China is to have its Intellectual Property drained and handed over as an subliminal implied tax for being given the opportunity to get rich operating in China.
If the US lost 7 million factory workers that is only the beginning of the loss for those of us who worked in the manufactoring support businesses (as I was an Industrial Distributor in the US for 30 years as well) know that there were 7 additional spin off jobs for every factory job--that's a total loss of 35 Million good paying jobs. I'm far from certain of the total impact but lets just say it was far more than the 7 million.
As far as Education goes the capable will do well with a good education, but in every school there will be the top of the class and the bottom of the class. Both American and New Zealand used to do better looking out for those who came out of school at the bottom of the class. There will always be a bottom-and ultimately that is how society will be judged, and for us from the 70's yes we do pine for that type of society again--but not possible with Globalization as it has been practiced so far. No evidence that the Far North, East Cape, or West Virginia for that matter are going to be high achievers in a Tech World-but they did just fine with their hands in the past, and a "hand out" is not the solution-they just want a job that paid the bills like in the past. The US was willing to take a chance on electing someone who would take a crack at reversing course. The jury is out yet. Buckle up it could be a wild ride..

"The US was willing to take a chance on electing someone who would take a crack at reversing course. The jury is out yet"

What are you smoking? The Jury isn't out, they are trying desperately to patch up the terrible self-inflected wound.

Progress is like bus heading down the highway at 100km/h. You can gently guide in a direction that suits or you can try and slam on the breaks. The US choose the brakes and shoved someone who how gears work in the drivers seat. You're about one think though, they are in for a wild ride. Just hope they don't take us all with them.

DC,

Your analysis is,in my view,far too simplistic. it totally fails to take account of the increasing concentration of political power in a corporate and financial elite,which has been able to influence the rules by which the economy runs.This is reflected in the huge decline in labour unions,it is reflected in the laws governing bankruptcy,in enlarged and extended intellectual property rights and other areas.
I strongly suggest that you read some or all of the following;Saving Capitalism by Robert Reich,The Price of Inequality by Joseph Stiglitz,The Age of Fallibilty by George Soros,That Used To Be Us,by Friedman and Mandelbaum, The Glass House by Brian Alexander and The Unwinding by George Packer.try the last one first.

Here is a very good perspective on the topic from Niall Ferguson

http://www.mauldineconomics.com/landing/the-five-people-shaping-my-world...

Colin,

I have several of his books,with my favourite probably The Ascent of Money.I may be biased,as we are both Glaswegians.

The world order was written by the US for its benefit alone.

Now, the old rules cannot ensure US's benefit therefore it needs to rewrite it, which will cost others.

Simple as.

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We might be better off trading with some countries but that does not mean we must have open borders immigration too. Japan wouldn't have it.

What would be the alternative to globalisation and free-trade? I have yet to hear a coherent articulation of anything approaching any sense. The only alternative is how it was before free-trade - colonies and spheres of interest.

Overall, however, the case for globalisation, including free trade and at least some openness to migration, is strong, because it increases the total wealth of participating countries. All that is needed to mitigate its weaknesses is effective redistribution policies, including strong social safety nets.

Yet such countervailing policies are rarely taken, allowing frustration to mount among the groups that are losing out.

Good point. Governments need to work for reasonable outcomes for their own population. Not just one or two generations of that population, but the entire population.

I simply cannot see how immigration can benefit a country when it brings in low wage workers.
Taking an extreme example I worked in PNG for many years as an IT professional. Even 30 years ago PNG had its own IT professionals but only one or two in the entire country so employers brought in the best they could find worldwide and paid considerable govt fees for work permits and they had to pay a generous wage to get the best staff to work in a dangerous 3rd world environment. Often Kiwis were the cheapest to recruit and they had a reputation for being culturally adaptable and willing to train locals. Although we were paid far more than the national staff we certainly dragged their wages upwards. At much the same time Asian controlled logging businesses were bringing in their own nationals and paying minimal wages; minimal by western standards but better than they could get at home. These timber workers included cooks and book-keepers and they had a reputation for being unwilling to pass on whatever skills they had. So the well paid clearly helped the country but the badly paid did not. Is it different in NZ? Even if your immigrant has a degree if he is earning his living driving taxis how does that help NZ? Surely it just drags wages down for all and the only benefit is a slightly cheaper taxi. It is unlikely any govt will share the benefit the low wage immigrant brings but even if they did surely the amount of benefit is trivial. Bring in professors, surgeons and chartered engineers and I can see a benefit which could be taxed and shared.

[ This comment is nothing but an insulting smear. Argue the points being made; please don't stoop to partisan bagging the author. Ed ]

Globalisation was mis-sold to the US workers as being something that would benefit them when it patently didn't. It has been deliberately used to undercut their pay and conditions. The general public rely on academics to give an honest assessment of free trade and academia was silent on a major foreseeable impact.
The rise of Trump was eminently foreseeable and in a certain light, morally justifiable. A significant group of the US population is attempting to reclaim their political power. Instead of attmpting to accommodate this large group, academics and public servants appear to be trying to marginalise them and smearing their elected representative (not that he needs much help).
I am not a partisan. I deeply dislike all sides. I just don't like hypocrisy..

Agree. An American comedian said it well recently: "What's amazing is that Trump was in touch with Russia while Hillary wasn't even in touch with Michigan!"

Both the Democrats and the traditional Republicans have spent too much time ignoring the lot of many in the USA, those who have seen their jobs disappearing, and they've seen the subsequent rejection of them and selection of an outsider.

BS. Big time and ditto for Brexit imo.

It has long been my belief that globalisation and its affects should have been on front and centre of political agenda for at least 20 years. But where were the academics to present it? Where were the mainstream political discussions and policies for and against? Why weren't there discussions about the possible affects of opening up real estate markets to foreign buyers before it happened? Why weren't studies on the psychological affects of different rates of immigration growth on native populations? On infrastructure? etc etc, discussed in advance? The arguments against globalisation were shunned and silenced by serious academia and politics until only very recently. Nationalist/protectionist political parties haven't always even helped bring this discussion or have a clear agenda to do so, but were nonetheless forced to the fringes of politics in most countries anyway.

So the negative and UNSPOKEN affects of globalisation built and built, yet no one was discussing it, describing it or debating it. Obviously not all the affects of globalisation are negative but my point is, that the balanced discussion about affects has been mostly absent. There was just a relentless campaign towards globalisation from governments.

Arguably globalisation is one of the biggest social changes to ever face economies and citizens, but f$%k all of the affects of it were ever central to any discussions or voting options until much more recently. Over the years, as the negative affects built, and yet remained unnamed, dissatisfaction grew among the groups who were most negatively affected by it... the poor and the working poor. Yet the parties on the political spectrum who traditionally campaigned for the rights of workers (left leaning parties) were the LEAST likely to address globalisation-related affects.

In the UK, Euroskepticism was never about globalisation, but about problems with the UK relationship with EU, and probably some vestiges of imperial pride/ego within the Tory party.....yet Brits dissatisfaction with globalisation was easily channelled in that direction,especially after the GFC when the austerity programme and recession decreased quality of life for the poorer, even further.

Personally, I *would* be pro-globalisation and pro-immigration if the affects of both had been much more rigorously researched, debated and planned for but that didn't happen, and it's a mess.