Dismantling the Old Global Economic Order

Written By: Shahid Javed Burki

President Donald Trump’s on-going policies towards the established global economic order go beyond the dismantling of the rule-based system of world commerce. Increased protectionism is not the only price the world will pay for the election of November 2016 as a result of which Trump took over the American presidency. In the first six months of his residence in the White House he has inflicted a number of injuries to the old system. His moves cover a number of areas – among them the role of the state, the United States’ fiscal system, and international migration.


The unexpected rise of Donald Trump to the pinnacle of political power in the United States has been explained in several different ways. The developments that caused Trump to gain the office of the United States presidency also affected other parts of the Western world. Five months before Trump was elected, voters in Britain pushed their government to leave the European Union. The British voters' decision introduced a new word in politics – Brexit – and upended the economic order that had been built over several decades. There was general agreement among scholars and policy analysts that much of the political upheaval in the Western world was caused by the unexpected consequences of globalization. This was the process that allowed the almost unconstrained flow of capital, information, goods and commodities across national borders. Sometimes it also permitted to movement of workers who would leave the economies where jobs were scarce and incomes were low to those in which opposite was the case. There was large-scale migration of people from the less developed world to those that were richer and offered opportunities that were not available at home. People from Mexico and Central America flooded into the United States. North Africa and the Middle East pushed hundreds of thousands of people into Europe.

 

dismantlingtheold.jpgNot only people could move but companies also left their homes and moved to the places where well-trained workers were relatively cheap and labor market regulations were weak and therefore, more accommodating of those who owned capital. These moves were facilitated by the information revolution. Production processes could be divided and located in places that were more friendly. Responding to these developments, Apple for instance assembled its popular items in China from the components made in a dozen countries in East Asia. The designing of the various products, of course, was undertaken in Seattle in western United States. The largest market for what the company produced was in America. Apple produced large profits which it did not keep in the United States. Hundreds of billions dollars were parked in such tax-friendly countries as Ireland.


Globalization, in other words, was a highly disruptive process. It produced winners as well as large numbers of losers. Those who lost turned to politics to express their resentment and also with the hope that they could follow the leaders who would be able to turn the clock back. The result, as already indicated, was Brexit in the United Kingdom and the rise of Donald Trump, the Republican candidate for the United States presidency. The “leavers” in Britain wished to bring back policymaking from Brussels to London. Trump gained attention by promising to make “America great again.” It also became clear that the anger that drove voters towards seeking desperate remedies for their situation will not go even when their economic conditions improved. The U.S. Census Bureau’s annual report, based on a survey of 95,000 households is the latest evidence that 2015 was a good year for the United States’ economy.


However, dry statistics don’t always produce strong political trends. The widespread anger that resulted in the election of Donald Trump did not abate and the pressure on Trump to adopt unorthodox approaches to economic management did not ease. In at least three areas, Trump adopted policies that deviated in fundamental ways from what had resulted in the creation of U.S.-dominated global economic and political order. The new administration had a different view of the role government could play in economic matters. It withdrew support from the institutions that had supported the old order. It gave up on a rule-based system of global trade. Some of what Trump promised to do – and some of what he began to follow once he was in office – was firmly embedded in the Republican Party’s economic philosophy. And it took steps to reduce, if not totally stop, the arrival of foreigners into the country.

 

As Krugman points out, international trade is governed by rules – rules America helped to put in place. Breaking the rules will lead to other countries doing the same. The result would be a trade war. And it’s foolish to imagine that America will win such a war.

In explaining what happened to the economy, the Nobel Prize winning economist Paul Krugman argued that the Obama administration had the reverse of the traditional trickle down approach favored by the political right. There was an element of trickle-up economics in that administration’s response to the Great Recession. “Much of the stimulus involved expanding the social safety net, not just to protect the vulnerable, but to increase purchasing power and sustain demand. And in general the Obama-era policies have tried to help families directly, rather than showering benefits on the rich and hoping that the benefits trickle down.”


Trump’s policies would further aggravate the weaknesses in the United States’ economy. A weakened U.S. will not be good for the global economy. Economists such as Lawrence Summers have begun to worry that the United States' economy has entered the phase of what they term as “secular decline.” This is the consequence of a number of factors, among the aging of the population, not enough resources committed to education and training needed by an economy that was rapidly moving away from the traditional sectors, and neglect of physical infrastructure. The new administration will need to work on developing a new economic development paradigm.


The United States will need to develop a system of governance that caters to the basic needs for all citizens. The country has tended to give greater attention to individual action rather than the role of the state in having people provide for themselves. The enormous amount of effort devoted by the political right to do away with the system of health delivery that came to be called “Obamacare” is a good example of this belief about governance and the limited role that should be assigned to the state. The angry white men who provided the base on which Donald Trump was able to build his campaign had two contradictory demands. They wanted a limited state and yet a state that provided them income support through programs such as the Social Security system and health-care through state-subsidized Medicare program. In other words, the role Trump would like the government to play will not deliver economic goods to his political constituency. Instead, it will increase even more the share of the rich in national wealth. With this approach in place, his sojourn in the set-up may not last for very long.


International trade is the second area in which the Trump administration is bringing about immense changes. The policies being pursued are meant to bring back the jobs America had lost to the world. According to the news site Axios, Trump is “hell-bent” on imposing punitive tariffs on imports of steel and solar panels, claiming that other countries are taking advantage of America. This was the central theme of his campaign. Axios reports that the White House believes that Trump’s political base likes the idea of a trade war and “will love the fight.” But would such an approach win jobs for Trump’s supporters? Not necessarily for at least three reasons. First, a great deal of modern commerce is in intermediate goods – goods that make other goods, such as the components that go into the making of Iphones and Ipads. A tariff on steel may save steel jobs but will hurt jobs in the industries that use the product such as that manufactures of automobiles. In fact, trade and trade policy have little effect on total employment. They affect what kind of jobs are available in the economy but not much the total number. Then, as Krugman points out, international trade is governed by rules – rules America helped to put in place. Breaking the rules will lead to other countries doing the same. The result would be a trade war. “And it’s foolish to imagine that America will win such a war. For one thing we are far from being a dominant superpower in world trade – the European Union is just as big a player and capable of effective retaliation. Anyway, trade isn’t about winning and losing: it generally makes both sides of the deal richer, and a trade war usually hurts all the countries involved.”


Then there is the question of allowing foreigners to enter the country. During the campaign, Trump promised to build a wall all along the border with Mexico to keep out the Hispanic population. This was a popular move since there was widespread belief among the people who were attracted to the Trump candidacy that the migrants from Mexico and Central America had taken away the jobs the white, non-college educated population would have performed. The other migration-related promise by Trump concerned Muslims. Trump said that, if elected, he would ban the entry of all Muslims into his country. This also resonated well with one segment of the American population – people who were concerned that non-Christian migrants were hurting the old value system. Upon taking office, Trump issued an executive order that would have banned the entry of the citizens from seven Muslim majority countries in the Middle East. The order was challenged in the courts and declared to be unconstitutional. A revised version was issued but met the same fate in the lower courts. The administration appealed to the Supreme Court which upheld the order but in a restricted form.


How will history treat the Trump era? The answer will come later but the signs are clearly visible that his policies would have far reaching impact on existing international liberal political and economic order.

 

The writer is a former Caretaker Finance Minister of Pakistan. He also served as vice-president at the World Bank.

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