A New Deal for Globalization

Kenneth F. Scheve and Matthew J. Slaughter

From Foreign Affairs, July/August 2007

Summary:  Globalization has brought huge overall benefits, but earnings for most U.S. workers -- even those with college degrees -- have been falling recently; inequality is greater now than at any other time in the last 70 years. Whatever the cause, the result has been a surge in protectionism. To save globalization, policymakers must spread its gains more widely. The best way to do that is by redistributing income.

Kenneth F. Scheve is Professor of Political Science at Yale University. Matthew J. Slaughter is Professor of Economics at the Tuck School of Business at Dartmouth and Adjunct Senior Fellow for Business and Globalization at the Council on Foreign Relations. He served on the White House Council of Economic Advisers from 2005 to 2007.

International trade and investment have spurred productivity growth, the foundation of rising average living standards. The rate of increase in output per worker hour in the U.S. nonfarm business sector has doubled in the past decade, from an annual average of 1.35 percent between 1973 and 1995 to an annual average of 2.7 percent since 1995. Much of the initial acceleration was related to information technology (IT) -- one of the United States' most globally engaged industries, at the forefront of establishing and expanding production networks linked by trade and investment around the globe.

Gains from globalization have been similarly large in the rest of the world. China and India have achieved stupendous rates of productivity growth, lifting hundreds of millions of people out of poverty. Central to this success has been the introduction of market forces, in particular international market forces related to trade and FDI. In Chinese manufacturing, foreign multinational companies account for over half of all exports. And in the Indian IT sector, Indian and foreign multinational firms account for two-thirds of sales.

Freer trade and investment can also enhance other foreign policy goals. The Doha Round was launched shortly after 9/11 because of the view that global poverty is intimately linked to international insecurity and instability. The Doha Round was also intended to remedy the widespread perception that previous rounds of trade negotiations had treated poor nations unfairly by failing to open the very sectors -- such as agriculture -- whose openness would most likely help the world's poor. Accordingly, it is believed that a successful Doha agreement would enhance the United States' image and promote its interests around the world.

There are three common explanations for why protectionism is on the rise in the United States even though globalization is good for both the U.S. economy and U.S. security interests. None, however, is convincing. The first is that a narrow set of industries, such as agriculture and apparel manufacturing, have been harmed by freer trade and, in response, have lobbied hard to turn lawmakers against liberalization. But the incentives for these industries to oppose globalization have not changed in recent years, and there are also many industries that have benefited from, and thus lobbied for, further liberalization. What is new today is that special-interest protectionists are facing a more receptive audience.

The second explanation is that policymakers and the business community have failed to adequately explain the benefits of freer trade and investment to the public. But in fact, public-opinion data show the opposite: large majorities of Americans acknowledge these broad benefits. If anything, the public seems to understand certain benefits better than ever -- for example, that its enjoyment of relatively affordable toys, DVD players, and other products depends on globalization.

Finally, there is the security explanation: that the need to balance economic interests with national security concerns has resulted in a more protectionist stance. This may help explain policy debates on certain issues, such as immigration. But generally, security concerns strengthen rather than weaken the case for further trade and investment liberalization, as long as such liberalization is viewed as fair to the developing world.

THE ROOTS OF PROTECTIONISM

The fundamental explanation is much simpler: policy is becoming more protectionist because the public is becoming more protectionist, and the public is becoming more protectionist because incomes are stagnating or falling. The integration of the world economy has boosted productivity and wealth creation in the United States and much of the rest of the world. But within many countries, and certainly within the United States, the benefits of this integration have been unevenly distributed -- and this fact is increasingly being recognized. Individuals are asking themselves, "Is globalization good for me?" and, in a growing number of cases, arriving at the conclusion that it is not.

This account of rising protectionism depends on two key facts. First, there is a strong link between individuals' labor-market interests and their policy opinions about globalization. Second, in the past several years labor-market outcomes have become worse for many more Americans -- and globalization is plausibly part of the reason for this poor performance.

Research on polling data shows that opinions about trade, FDI, and immigration are closely correlated to skill and educational levels. Less skilled Americans -- who make up the majority of the U.S. labor force -- have long led opposition to open borders. Workers with only high school educations are almost twice as likely to support protectionist policies as workers with college educations are.