The perfect storm: Deglobalisation’s headwinds

This article was produced by AXA Investment Management as part of their valued industry partnership to Insurance Investor.

By Olivier Blanchard, Senior Fellow at the Peterson Institute for International Economics, and external advisor to the AXA IM Investment Institute.

Globalisation - the rising interconnection of the world's economies and populations, driven by international trade in technology, services, goods as well as the flow of investment and information - is facing at least five different headwinds.

Let me discuss them in turn and indicate how I believe they could be tackled.

Distribution effects

This is an old theme in the discussion of trade. Trade makes countries better off but some workers and some companies lose from it. This not an incidental implication; trade is about producing where it is cheaper to do so, with the implication that some, more expensive, domestic producers will suffer.

We know that trade is not the only, or even the main source of job losses. But it is easier to identify the source of the losses and attribute the blame when it comes from higher imports or from the relocation of companies to other countries.

Why is the argument more salient now?

One reason is the overall failure of the programmes designed to help those workers who lose jobs because of trade. Another is that the culprit behind the job losses is easier to identify when one can point to a specific country, as has happened with the ‘China shock’ narrative. 

Reputable estimates suggest gross job losses as a result of rising Chinese import competition during the 1999–2011 period were in the range of 2–2.4 million - and given the distribution of these losses across states, plausibly resulted in Donald Trump’s election win in 2016. Another example is that of French farmers mobilising against cheaper agricultural imports from Poland and Hungary and blaming European Union rules.

As is the case with the other forces discussed below, these concerns cannot be dismissed. Trade adjustment assistance programmes have not worked, and probably cannot work. And it may make sense to protect some sectors or workers on distribution grounds. For example, it may make sense to protect small French farmers, even if their products are more expensive. This translates into higher prices for French consumers, but maybe this is still a socially acceptable price to pay to keep the French countryside alive and avoid the rise of ‘geographic deserts’.

The obvious issue is how to do it without losing most of the gains from trade. 

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