The Coming Age of De-Globalisation

President Trump’s announcement of tariffs on steel and aluminium was by no means unprecedented—Presidents Reagan and George W. Bush took similar actions. Yet it emphasises a reality that has become increasingly clear in recent years: the globalisation project, beloved of both classical economists and Davos Man big-government types, is falling apart. De-globalisation is here to stay and, contrary to Davos Man’s belief, it will be good for the world economy and for our living standards.

The theoretical case for free trade, and to a lesser extent free movement of labour, is simple and clear-cut, first expounded by Adam Smith and David Ricardo. By reducing barriers to the movement of goods and people, production is globally optimised, so that every product is produced in the location with the greatest comparative advantage, while workers move to where they are most valuable. In this way, global output is optimised. Mathematically, it is a very simple model, full of linear equations, which economists are good at solving.

Like all economic models, it rests on several assumptions, not all of which are valid in the real world. It ignores the fact that tariffs yield revenues to the governments imposing them, so that a free-trade policy imposes additional costs on that country’s citizens in the form of higher income taxes and other direct taxes. It assumes a Gold Standard world, in which the “optimal” global production structure, once found, is stable—in our world of fluctuating fiat currencies, comparative advantage is forever shifting, so the optimal structure is valid only for a nanosecond.

The Smith–Ricardo model also ignores the costs associated with large-scale migration. It assumes there is no cost to the economy from workers uprooting themselves from the environment where they have the best connections and cultural understanding to foreign countries in which they are rootless strangers. It ignores the huge cost to the global economy of modern phenomena such as the Bosnian doctor who works in New York as a janitor, earning a comparable wage to back home, but wasting his expensive and scarce medical education and depriving Bosnia of medical services.

Most important, the Smith–Ricardo globalist model assumes no government interference at any point in the process. Producers trade with each other between a large number of independent countries, each of which is free to impose regulations and restrictions if it wants, but damages its competitiveness, its export potential and generally its economic well-being by doing so. Just as tariffs are economically damaging in this system, so too are regulations limiting imports; a prohibition against an import makes its price infinite and is thus more damaging than even the largest tariff. In the theoretical model, all goods and services are freely traded and there are no non-tariff barriers blocking them, or international organisations adding costs to the system.

Since communism collapsed in 1991, the world’s governments have been trying to return to a free-trade world, or at least that is what they have been telling the public. In fact, the free-trade world to which they are pretending to return existed for only a very short time. The Cobden Treaty of 1860, freeing trade between England and France and implementing a British free-trade policy, was followed in 1862 by the US Morrill Tariff, passed by the new Republican Congress and setting tariff rates at far more protectionist levels than previous US tariffs. French and German tariffs followed shortly thereafter, after which the world was not one of free trade, but of protectionism, with one foolish sucker, Britain, losing industry after industry to foreign competitors and squandering its early industrial lead.

In addition to the fall of communism and integration of formerly communist countries into the world economy, globalisation after 1991 was facilitated by new communications technology. The internet and ubiquitous mobile phones made it possible to operate a global supply chain far more cheaply and efficiently than had been possible with pre-1990 technology. The IT department could be outsourced to Bangalore, and customer services activities could be outsourced to India or the Philippines, or any other country with fluent English-speakers. Meanwhile manufacturing could be outsourced to low-wage countries, with the necessary communication between product development, manufacturing, sales and finance accomplished through internet and mobile phones.

Thus post-1990 communications advances caused a collapse in the cost of international supply chains, and a corresponding improvement in their manageability. Improved supply chain capabilities have been the principal driver of globalisation and the reduction in wage differentials between rich and poor countries. For poor countries, the new communications technology has been a huge benefit. Not only have new employment opportunities with multinational companies appeared, but for the first time, their citizens can be fully connected to the world economy, even outside the big cities, raising their living standards many-fold.

The “globalised” world we lived in from 1991 to 2016 had several differences from the theoretical model, which made it economically unattractive, as evidenced by the prolonged period of poor economic performance from 2007 to 2016. First, after the North American Free Trade Agreement and the Uruguay Round of trade talks were signed in 1994, no further global free-trade deals were completed. Instead, the world indulged in an orgy of bilateral and regional deals. Even in theory, a world traversed by a cat’s cradle of bilateral and regional free-trade deals is not a free-trade world; flows of goods and services are diverted in numerous complex ways and are nowhere near optimised.

More important, the bilateral and regional deals that were signed were not true free-trade deals, because they related mostly to labour standards, environmental standards and above all, the protection of intellectual property. Patents and copyrights are not instruments of free trade, they are barriers to it. Just as free competition minimises prices and produces an optimised economy, so patents and copy­rights increase prices, divert trade and make the economy more sub-optimal.

In the United States, the importance of patents and copyrights has enormously increased since the 1981 Supreme Court decision allowing software to be patented and the Digital Millennium Copyright Act of 1998, which gave ninety-nine-year copyrights on everything written since 1923. This legislation, together with the proliferation of patented pharmaceutical products, has resulted in an incredible tangle of “intellectual property” mostly held in offshore tax havens. By the trade treaties since 1998 in which the United States has been involved, these excessive protections have been extended to its trading partners, increasing costs everywhere.

The Trans-Pacific Partnership treaty, abandoned last year by President Trump, was another such boondoggle. On Congressional Budget Office figures all the benefits to the United States came in the form of $79 billion of patent and copyright fees, while US manufacturing suffered a loss of $44 billion. While there needs to be some protection for intellectual property, the fourteen years granted by the Copyright Act of 1709 seems ample; enforcing the grossly excessive US protections merely encourages rent-seeking on a global scale.

A second way in which the “globalisation” of 1991 to 2016 differed from the classical free-trade model was in the proliferation of global organisations and regulatory agreements. Regulation in a single country hurts mostly that country’s economy; if there are many jurisdictions, a beneficial competition between those subject to national regulations removes many of the most damaging impositions. However, global regulation is a different matter; there is no escape from it and no possibility of seeing how much richer we would be without it. The global-warming regulatory hysteria, in particular, was responsible for a significant part of the economic malaise of the last decade. There is now a movement to increase greatly the flow of costly and disruptive refugees that countries must absorb, all in the name of a climate change that appears not to be happening.

The modest benefits of complete free trade (as distinct from an orderly system of moderate tariffs) can very easily be swamped by the costs of global regulators and bureaucrats, loosed from any democratic or economic control. Free trade that requires a World Trade Organisation to enforce it is not true free trade, and the existence of the World Bank, the IMF, the OECD and countless other international organisations counts heavily against the arguments for globalisation.

For example, IMF bailouts, which have forced a mountain of excess regulation and higher taxes on countries unfortunate enough to receive them, are nowhere near free-market reforms and have done untold damage. You only need look at the unhappy last decade of Greece’s existence. That country would happily have righted itself and prospered thereafter had it been allowed to fall immediately out of the euro and devalue to a market-clearing exchange rate when its budgetary frauds were discovered in 2009. OECD attempts to quell harmful “tax competition” and BIS and other attempts to harmonise financial regulation and eliminate tax havens and bank secrecy have likewise been a drag on freedom and business efficiency.

The ultimate globalist goal, of a world government imposing politically-correct regulations on every single citizen and socialist regulations on every economic activity, with no possibility of escape, is the worst current nightmare of the future short of nuclear holocaust; it needs to be stopped.

Globalisation also appears to do more harm than good in the information area, which was not a significant consideration before the 1990s. The economies of scale in collecting information about everybody have led to a disquieting aggregation of market power among a very few huge internet companies, which have personal data on a large percentage of the world’s inhabitants and which are thus vulnerable to hacking by “bad guy” governments and criminals generally.

Here the new de-globalisation and national regulation may break up this cartel; if the EU, China, Japan and other countries impose balkanised regulations, producing a “splinternet”, the internet behemoths will operate at a huge disadvantage outside their home markets. Moreover, a decentralised internet, as appears to be on the way, will further fragment the market for information as well as allowing new and smaller companies, possibly with better algorithms, to compete with the behemoths.

Most important, the globalisation of 1991 to 2016 differed from the classical model in being fuelled since 1995 and more especially since 2008 by artificial non-market-determined ultra-low interest rates and government “quantitative easing” programs pumping money into the world economic system. This has over-inflated stock and asset prices, caused a dangerous wave of stock buybacks which have decapitalised major companies, and made all kinds of boondoggles appear attractive investments. Crucially it has also artificially sped globalisation by compressing credit spreads. In the world of cheap money, emerging-market debt is almost as cheap as rich-country debt. This has led to an orgy of building manufacturing facilities (as well as Pharaonic infrastructure) in emerging markets, expanding their production capacity. With massive ultra-modern production capacity and cheaper labour, these new plants have forced out of business Western facilities that should have survived for years or even forever in a truly free market without phoney government “funny money”.

Trump’s proposed introduction of tariffs on steel and aluminium is squarely in the Republican tradition of William McKinley and all Republican presidents before 1929. It marks the beginning of the reversal of globalisation, which has a number of advantages. In the tariff area, it will reduce the massive swings in trade flows resulting from currency abnormalities—going back to the Gold Standard would achieve this also, but that’s not going to happen. De-globalisation will also prevent trade treaties that impose massive spurious “intellectual property” costs on consumers. This will force Disney World, Apple and the drug companies to price their products on a free-market basis. Tariffs will raise revenues for governments, almost all of which have huge budget deficits caused by foolish “stimulus” spending in the downturn.

De-globalisation is also happening in areas other than tariffs. In several countries, additional barriers are being erected against immigration, in some cases literally, with President Trump’s proposed “wall” and the similar barriers that have been erected in Central Europe. The flow of “refugees” has lessened since its 2015 peak, and visa schemes that admit foreign labour on a tied contract basis are being looked at more carefully. While attractive to employers, such schemes depress domestic wages in high-skill areas and may even deter many of the best students from specialising in STEM subjects—if a newly minted lawyer, protected by state bar restrictions, earns two or three times as much as a computer scientist, why not apply to law school?

The extreme Ricardian view of international takeovers is also increasingly meeting opposition, as we saw with President Trump’s blocking of Broadcom’s $125 billion bid for Qualcomm. This is a good thing for both developed countries and emerging markets—too often a “national champion” in a sector such as pharmaceuticals, with special skills that have been gained through scientists trained at non-standard colleges, has been swallowed up by a multinational and its special skills lost. The Croatian company Pliva, acquired by Teva Pharmaceuticals in 2008, is one such example. Deterring international takeovers fights both size and homogeneity, the twin enemies of innovation.

Finally, interest rates are at last beginning to creep up, at least in the United States. This is likely at some point to cause a financial crash, which will doubtless be blamed on President Trump and his de-globalisation policies. In reality, the crash will simply be an unwinding of a decade of excesses, as the appalling investments made all over the world since 2009 are painfully liquidated. After it, we can hope that interest rates return to a more natural level, significantly above the level of inflation. This will deter boondoggle investments; it will also slow the destruction of Western jobs by the mad rush to cheap-labour global sourcing.

Thomas Friedman’s vision of a “flat” world is thoroughly unattractive. It eliminates diversity and local specialisation, as well as homogenising lifestyles to an unattractive extent. We have only one planet; we are much better off if it includes a multitude of different political, social and economic arrangements, competing against each other so that as a species we become steadily cleverer and more capable. Even emerging markets, which have benefited so much economically from modern global communications, will benefit more if they retain their own cultures and skills and do not become merely branch-plant operators for the big multinationals. Foxconn’s 300,000-person factory in China is not a future even the Chinese should wish on themselves, and indeed it is becoming increasingly clear that they do not wish it. Finally, de-globalisation will disempower international bureaucrats, and eliminate the nightmare of a “globalised” world with a monopoly global government.

Like most panaceas beloved of economists, globalisation produced much less benefit than it claimed, at a much higher cost. While not un-inventing the internet or ignoring the genuine gains from careful application of the Smith–Ricardo model, we should wholeheartedly welcome the reversal of a globalisation led by bureaucrats and politicians, and the re-establishment of a multitude of separate decision centres, all thinking for themselves.