Which side will win out in the current confrontation playing out across the world? The inward-looking attitude that has been so widespread these past months aims at taking power back locally. Meanwhile, the more cooperative approach involves joining forces to address global challenges and is based on continued dialogue. The choice between these two world views will be the key challenge for 2018.
The world is no longer quite so unanimous in its enthusiasm for globalization.
The cooperative dynamics we saw before the 2008 crisis are no longer the dominant force, and this shift was laid bare during the various elections and the referendums of recent times, as globalization and its cooperative approach did not lead to even distribution of wealth, particularly in developed countries. Branko Milanovic’s famous elephant curve was often held up as an example to demonstrate that the most badly off workers in the western countries had paid the price of globalization and swift growth in emerging countries, such as China and India.
This globalization was long seen as a cooperative phenomenon, as it occurred simultaneously with a redistribution of production worldwide, with the notion that everyone would benefit from it. Developed countries lost manufacturing activity to emergings, but this went alongside a sharp surge in services. Emerging countries’ unprecedented development lent credence to this view of the situation as the number of poor worldwide plummeted spectacularly.
This implicit global cooperation has had its day.
The Brexit referendum, Trump’s election to the White House along with elections in Austria show that a great many citizens feel hard done by, with the impression that they have missed the boat on world growth and feel threatened by competition from foreign workers. These feeling also reflect their impression that “the others” are not playing by the rulebook, creating excessive competitive from emerging countries.
This malaise led to a vote implying that a more inward-looking stance was the answer: this is the very clear and direct interpretation we can make of the Brexit referendum. The rare economists who supported this move suggested that the great Great Britain of yesteryear could stride out on its own and conquer the world again.
The same reasoning can be applied to Trump voters in the US, who saw the swift growth in China and Asia as a source of vulnerability. The new US President’s first move was tellingly to back out of negotiations on the TPP.
This all reflects the strange notion that economics is a zero-sum game and that stolen jobs need to be moved back to the US…a strange notion as it implies that improving the well-being of some comes primarily at the expense of others. This is the exact opposite of what history has told us at least as far back as the industrial revolution.
This US version of the narrative suggests that nothing can be gained from working with the outside world.
In practice, this view of the economy as a zero-sum game is played out in the shape of taxes on imported goods, like those the US administration has just applied on solar panels and washing machines, ahead of potential measures on aluminum and intellectual property.
The United States is setting the stage for a fragmentation of trade in order to hamper globalization while hoping to derive some benefit from it. The country is assuming that it will be able to react swiftly to the imbalances this creates: but this is far from a sure thing. The world has changed since Friedrich List as a lot of traded products are now not produced locally, so what will happen on basic products that become more expensive?
This isolationist approach also involves a neglect of worldwide issues, such as the climate, security and terrorism…acting like the world has no overarching problems that it needs to pull together to solve.
In striking opposition to this world view we have the vision put forward particularly in Europe, suggesting that these shared questions that cannot be solved locally must be addressed by a coordinated and unilateral strategy.
Globalization has led to a whole range of inequalities. This can be seen in the distribution of wealth within each individual country. These situations we are witnessing today create power struggles that can have disastrous consequences: for example revenue inequality does not lead to any improvement in growth and even casts doubt over the very necessity for growth if it only benefits a small minority. Looking inward instead of out is not the answer: the UK example shows that this approach reduces wealth instead of boosting it. Since the Brexit referendum, the UK’s growth trend has shifted, costing the economy £300m each week, which is a vast amount.
The path of cooperation
Each country believes it can bring its own contribution to the table to address the matters at hand. This means that each country must take an active role in defining its strategy and putting forward potential responses. This approach leaves no room for shirking. This strategy recognizes that global challenges, such as the climate, education and terrorism, can only be addressed with global answers. Each country must create the necessary conditions and implement the required reforms to work in sync to produce a better outcome.
I raise these various points because I think that 2018 will be a transitional year. Donald Trump has already paved the way for a trade war, particularly with China, which retaliated by threatening to reduce its Treasury purchases. The framework of yesterday will not be the context that shapes the economic and political dynamics of tomorrow. But this year will be a year when choices have to be made between this isolationist inward-looking approach and a resolve to find worldwide solutions to worldwide problems. Trump vs Macron will probably be the clash of the year as their outlooks are diametrically opposed and would create two very different versions of the world. A world that looks in on itself is generally one where conflict is widespread, and this is not the ideal path to take, as an analysis of history will tell us.
Optimism on world growth can only hold up if there is a cooperative outcome.
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This is the translation of my weekly column for Forbes.fr. You can read it here in French