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.

Both sets of states in the oil market -- those countries that have oil and those that do not -- have changed the way they do business in recent years. Among the haves, the rising price of oil has increased the temptation of governments to assert control over the resource. Throughout Latin America, governments have reasserted their authority over extraction projects that they once had ceded to foreign firms. Moscow has similarly muscled its way into direct control over Russia's vast oil and gas wealth and has used that control to extend its strategic influence.

In response, a number of the oil have-nots have taken measures to insulate themselves from a disruption in their oil supply. This helps explain China's seemingly illogical drive to acquire stakes in oil production facilities abroad. So long as oil remains a global commodity, consumers need not own the means of its production; they can simply buy all they need on the world market. China, however, seems to be preparing for a day when oil becomes far harder to acquire and transport and has thus signed various oil and natural gas agreements over the last five years with Angola, Brazil, Iran, Nigeria, Venezuela, and Sudan. This strategy makes so little economic sense that it can only be explained by an expectation that global oil markets will at some point break down, due to either a worldwide recession or a conflict between China and the United States.

SAVING GLOBALIZATION, SLOWING DOWN

Globalization in its last great era, which ended in 1914, occurred in a completely ad hoc way; that is, it lacked the institutional foundations that have helped cross-border markets flourish during the past 30 years. These institutional foundations may have been weakened of late, but enough rules and organizations remain to ensure that the current global economy is unlikely to suffer the same fate as the last. In other words, although globalization has passed its peak, it is unlikely to unravel completely.

Still, the flaws in multilateral institutions such as the WTO and the growing discontent with globalization will make it harder and harder for politicians to pursue free markets. If the United States, in particular, fails to do more to ensure that the benefits and opportunities of an internationalized economy are spread as widely as possible, there could be an even more potent backlash.

This is where smart policies should come in. The U.S. government must work harder to convince the American public -- particularly those Americans who fear losing their jobs to international competition -- that the costs of undermining or reversing globalization would be worse than the benefits. There is plenty of evidence to point to. Wal-Mart, for example, may have wreaked havoc on the U.S. retail sector with its relentlessly competitive business model, but it has also brought American consumers declining real prices for their mobile phones, DVD players, and televisions. Similarly, the Chinese manufacturing juggernaut may worry some Americans, but without it there would be no lower-cost products for Wal-Mart to sell.

Washington must also do more to ensure that theUnited States remains competitive in the global economy. Legislation has been introduced in Congress to enact President Bush's American Competitiveness Initiative, which would double federal support for fundamental research in the physical sciences and engineering, make the R & D tax credit permanent, expand math and science education, and ease immigration for highly skilled workers. But this legislation has not been passed, and its fate remains uncertain. Too little has been done to retrain workers who have lost their jobs to outsourcing. The corporate sector can and should help, not only by publicizing the benefits of openness but also by bearing some of the costs of the resulting dislocation.

Internationally, the United States must resist the temptation to continue down its path of ad hoc globalization. Bilateral treaties have been an effective and convenient way to advance short-term priorities, but they have undermined vital multilateral processes and institutions. Were Washington to embrace the rule-based European approach, it would reinforce the institutions that all countries depend on to preserve the gains of globalization.

Meanwhile, as skepticism about global markets continues to increase, U.S. corporations should prepare for rough going in their international operations. U.S. managers may once have assumed that understanding the politics and rules of the countries in which they traded and invested -- and the international organizations of which those countries were members -- was a luxury. Such knowledge is now essential, however, and U.S. business leaders should prepare themselves for the new rules and restrictions that they will face -- and that the United States itself is considering adopting in the wake of the CNOOC and Dubai Ports World debacles.

Other key stakeholders in the globalization project must also do their part. The multiplicity of EU rules governing the liberalization of markets has come to feel increasingly onerous to Europeans -- and too far removed from those rules' original social and political purposes. Last year's constitutional crisis was just the latest symptom of the growing public fear that the EU is causing the marketization of daily life (as opposed to the protection of traditional European practices). Politicians and European Commission officials must start interpreting the EU's rules more flexibly if they are to legitimize the organization and its integrated model in the minds of their constituents.