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Economics for a Different Globalisation

Economics for a Different Globalisation

The long history of globalisation is checkered. Shifting political alliances, new technologies, migration, geopolitical frictions and a number of interlocking factors have fed into waves of trade liberalisation and protectionism across countries and over time. The current wave of challenges to international trade - spanning Brexit uncertainties, the US-China tariff war and WTO’s dispute settlement gridlock - has amplified voices demanding a redesign of global trading systems. This piece attempts to briefly identify the role of economists in transforming current trade architecture.

An important feature of 21st century trade policy is that it’s increasingly concerned with standards, rather than tariffs. This mode of liberalisation involves harmonising rulebooks across countries. Countries seek to adopt mutually compatible legal norms for food safety, data privacy, environmental and labour protections amongst others, in order to exploit economies of scale and reduce costs associated with conformity checks for exporting firms. These standards can be set such that they become instruments for protectionism but ideally, a country’s choice of standards is a democratic function of its domestic preferences and risk aversion. Given that international negotiations now involve these ‘behind-the-border’ issues like standards, placing communities and their preferences at the heart of trade debates becomes critical.[1]  In Raghuram Rajan’s latest book, communities constitute the ‘third pillar’ of modern society, alongside the state and markets. They are more than clusters of economic activity and their human networks are important to our social infrastructure. Economists should earnestly respond to the political realities of their discontentment with globalisation. Addressing geographic disparities in prosperity will need economists to engage directly with communities and reconsider the role of place-based policies in creating shared growth.

Second, economists can collect further evidence on the relationship between trade and market concentration. We now know from robust empirical evidence drawn from developed and developing countries that very few firms actually participate in international markets, either through exporting, importing or foreign investment. Of the firms that do, the top firms, labelled ‘superstars’ in the literature, account for the overwhelming majority of trade volumes. Freund and Pierola (2015) examined these superstars in 32 countries between 2006 and 2008 and reported that on average, the top firm alone held 14% of the country’s total (non-oil) exports. Globalization is hardly ‘global’ in this sense. Our academic and policy practice should reflect on the causes of this skewness and consequent power imbalances within markets and between the state and markets.

Third, disaggregated data on local infrastructure, enterprises, demographics and natural resources can be leveraged to provide deeper insight into the implications of globalisation for communities with heterogeneous characteristics. Policy-makers too should demand analysis that is based on micro-data at the firm or household level to evaluate the balance of opportunities and risks for communities under various trade policy options. While simulations with large-scale CGE[2] models provide an important, overarching view of different trade scenarios, they cannot yet engage with concerned voices at the local level. Communities need a context-specific plan to help them prepare for and take advantage of market openness. Using disaggregated datasets (being mindful of confidentiality) can assist in framing these plans. We can do better than just advocating for ex-post compensation of losses due to globalisation.

Fourth, economists can rethink their goalposts. What constitutes a successful trade policy? Is it one that delivers the greatest increase in trade volume and GDP growth? Or the one that generates more employment opportunities? Or one that provides the strongest incentives to innovate? Yet more, the one that furthers geopolitical interests and leads to strategic alliances? Policy options will perform differently along these various dimensions. The role of economists here can be to engage in critical and creative thinking on integrating these multiple objectives into future evaluations. 

Finally, institutions should experiment with new pedagogies that call on different disciplines - mathematics, physics, biology, anthropology, computer science and others - to inspire and train future trade economists. Insightful and impactful work has come from this cross-pollination of fields, such as the application of gravity models, network analysis and natural language processing to trade issues. However, economists still cite mostly from each other’s work and relatively few citations go to other social sciences (more here). This is problematic, given the vast scope of this discipline which extends beyond questions of money, employment and inflation. Our political positions on trade interact in myriad ways with our perceptions of identity and self-interest and as a young trade economist, I see increasing value in studying scholarship from other fields that examine the social and cultural dynamics of globalisation.

The nature of globalisation will continue to evolve in the future. Automation and 3D printing might bring back manufacturing to economies, but not factory jobs. More services will become tradable across borders with advanced telecommunications. Subscription-based forms of consumption, that value access rather than ownership (think Uber, Airbnb, Spotify), will also alter the organization of production. To shape a more inclusive future for globalization, economists must study these structural changes with new data and methods. It is equally vital for economists to embrace their public role, by being vocal about the aggregate and distributional effects of trade on society.

[1] Remember the chlorinated chicken? Protests erupted on this sensitive issue of food safety in 2015 during the (now stalled) TTIP negotiations between the EU and USA. Nearly 250,000 people joined the demonstrations in Berlin.

[2] Computable General Equilibrium (‘CGE’) models are used to conduct ex-ante evaluations of policy changes. The behaviours of different economic actors such as households, firms, government and banks are modelled and the resulting equilibrium from their interactions can be used to generate simulations of economy-wide responses to policy shocks.

Sonali Chowdhry (India & Merton 2015) is currently a Marie Skłodowska-Curie PhD Fellow at the Kiel Centre for Globalisation where she examines different modes of firm participation in foreign markets. At Oxford, she read for the MPhil in Economics and was co-convenor of the Rhodes Economics Forum.

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