Has Globalization Passed Its Peak?

Rawi Abdelal and Adam Segal

From Foreign Affairs, January/February 2007

Summary:  Not long ago, the expansion of free trade worldwide seemed inevitable. Over the last few years, however, economic barriers have started to rise once more. The forecast for the future looks mixed: some integration will probably continue even as a new economic nationalism takes hold. Managing this new, muddled world will take deft handling, in Washington, Brussels, and Beijing.

Rawi Abdelal is an Associate Professor at Harvard Business School and the author of the forthcoming Capital Rules: The Construction of Global finance. Adam Segal is Maurice R. Greenberg Senior Fellow for China Studies at the Council on Foreign Relations and the author of Digital Dragon: High Technology Enterprises in China.

On one side of the ideological split stood the United States. Washington's approach to globalization has long been ad hoc, meaning that it has relied on the preponderant power of the U.S. Treasury and of private U.S. firms to strike bilateral deals directly with other countries. U.S. policymakers tend to be skeptical of global rules and international organizations, favoring individual and specific trade and investment treaties instead. Admittedly, the United States has offered modest support for international organizations at times, but never at the expense of its own preeminent role in the world economy. This approach has been effective from the United States' perspective, as it has placed the country firmly at the center of global markets.

European policymakers, meanwhile, have favored a different tack, trying to drive globalization by creating new overarching rules for the world economy and by empowering international organizations such as the European Union (EU), the Organization for Economic Cooperation and Development (OECD), the International Monetary Fund (IMF), and the World Trade Organization (WTO). The European doctrine of managed globalization envisions a world of multilateral rules that will supersede U.S. power. Over the years, the EU alone has compiled over 80,000 pages of regulations to ensure the interdependence of its members -- the greatest body of such rules ever produced.

These two very different visions of how globalization should progress have never been harmonized, and this conflict has weakened the foundations of globalization in recent years. Consider the role of capital. In the last few years, restrictions on the flow of investment between countries have increased despite some regional attempts to move in the opposite direction. The EU, for example, forbids its members from restricting the movement of capital within Europe, and the OECD requires its members to maintain open capital accounts. But there is no global rule requiring all countries to permit unhindered foreign investment. That institutional void is not for want of trying; during the 1990s, the IMF's management attempted to get its members to give the organization the authority to mandate the lowering of investment barriers. But the proposal lost steam after the financial crises of 1997 and 1998, and its fate was ultimately sealed by the skepticism of the U.S. Congress.

The closest the world ever came to a consensus that capital should be allowed to flow freely between countries was in the autumn of 1998. Since then, practices have changed dramatically. The IMF is now much more cautious about encouraging countries to liberalize their foreign investment rules, and it often warns developing countries not to move too quickly. The OECD has also retreated from its unqualified support for such measures. These days, the two dominant credit rating agencies, Moody's and Standard & Poor's, often warn developing states about the risks of capital liberalization, and they have praised China and India for moving cautiously.

DOHA DECLINE

A similar retreat has occurred with trade in goods and services. In the last few decades, a variety of regional agreements have been struck in North America, South America, and Europe to promote the liberalization of trade. The IMF, under its original mandate, has encouraged governments to eliminate foreign exchange restrictions that hamper the growth of trade. And the WTO has been strikingly successful in its first decade of existence as the world's primary authority on facilitating global trade. But the organization seems to have reached the zenith of its powers.

This is unfortunate, since many of the WTO's existing mechanisms -- especially those relating to rule enforcement -- are highly imperfect. The problem is not with the WTO's rulings about violations of free-trade rules; these are generally thought to be fair. The problem is that when countries found to have broken the rules refuse to change their policies, the WTO cannot force them to; instead, it leaves it to the country that won the dispute to take matters into its own hands by applying WTO-sanctioned retaliatory tariffs. Not surprisingly, this strategy tends not to work when the winner is much smaller than the loser -- especially when the loser happens to be the United States or the EU. Indeed, U.S. and European intransigence in the face of adverse WTO decisions has weakened overall faith in multilateral trade regimes. Countries around the world are instead showing a new preference for bilateral and regional trade agreements; according to The Economist, the total number of such agreements -- 250 -- has doubled in the last ten years.

Meanwhile, the crisis in the current Doha Round of trade talks has highlighted another deepening divide: between rich, developed countries and poor, developing ones. For years, developing countries have been frustrated with the hypocrisy of U.S. and European governments, which constantly push for greater market access while protecting their own agricultural and light-manufacturing sectors through tariffs. Now these developing states have had enough, and the talks have broken down, primarily because the United States and the EU have failed to offer a constructive way forward. The damage to Doha will not necessarily be fatal. After all, the Uruguay Round took more than seven years to complete, and behind-the-scenes negotiations will continue. But the days of clear progress and the ever-broadening mandate of the WTO seem long gone.

Tension has also increased over the free movement of labor. The current era of globalization has not even approached the cosmopolitanism and openness to migration that characterized the pre-1914 phase. According to James, who teaches at Princeton, 36 million people left Europe for the Americas between 1871 and 1915. Nothing approaching that kind of population shift is likely to occur today. The European public has grown highly skeptical about the EU's ability to absorb and assimilate new immigrants from Muslim and African countries. Indeed, even within the EU, barriers have started to go up as the union's older members have restricted immigration from new members such as Poland, Hungary, and Slovakia. In the United States, meanwhile, immigration -- especially the status of the 12 million illegal immigrants already inside the country -- has become a similarly contentious issue. President George W. Bush has, at some political cost to his administration, proposed to address the problem through a package that would include better border enforcement and an offer of earned citizenship for the illegal immigrants already inside the country. But so far, Congress has failed to move any legislation forward, and the most likely outcome appears to be the construction of a massive fence along the border with Mexico.

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