The world is retreating from globalisation. What does it mean for us?

by Admin
May 20, 2024

The evidence is everywhere, the trend clear.

From riots among farmers from Europe to India, to a shift towards the political extremes across the developed world and ongoing conflict in the Middle East and Africa, political unrest appears to be on the rise.

In the US, once the bastion of free market enterprise, a man facing multiple criminal charges with a patchy track record in office is shaping up as the favourite to win this year’s presidential election and turn America’s gaze firmly inward again.

After a 40-year hiatus, global superpowers once again are openly muscling up against each other. And it isn’t just military might that is being employed. Trade increasingly has become the weapon of choice, either via sanctions and tariffs or through favoured-nation agreements, which is increasingly segmenting the globe.

Australia felt the sharp end of that shift when China turned its back on all our exports apart from iron ore, but only because it couldn’t source it elsewhere.

What some believe was the golden era of globalisation has now splintered and the world is retreating to a time when uncertainty, suspicion and fear dominated discourse.

It’s a development that has fuelled the rise of populist leaders promising salvation that, in many cases, simply can’t be delivered.

And it won’t come without cost. Military build-ups may be expensive but a withdrawal from open trade carries the risk that the 30-year era of benign inflation also was just a passing phase.

Even we have begun the trek. One of the most open trading nations with little in the way of tariffs and protection, we’re now embracing the new global mood with the recently announced “Future Made In Australia” policy.

But what caused this reversal of fortune? And have we learned anything from the successes and failures of the past 30 years?

Whatever happened to the trickle?

They operate largely behind the scenes, but economists help shape the world in which we live. Armed with models, they influence politics and public thought with the certainty of their arguments.

What many fail to realise is they often can be wrong, that they are dealing with human beings who can be entirely unpredictable. Like all of us, even the brightest economists fall for one of the human condition’s greatest shortcomings.

Just because some may be good doesn’t necessarily mean that more is better.

On paper, the shift towards free markets and open trade is undoubtedly good for everyone. We all make or deliver what we’re best at and benefit from the efficiencies that flow.

That’s what economists call the theory of comparative advantage.

But as New York Yankee great Yogi Berra once noted: “In theory, there is no difference between theory and practice. But in practice there is.”

There is no dispute that decades of deregulation, privatisation and dismantling of trade barriers delivered huge dividends to the global economy.

But economists, in their fervour to push ahead with ever-accelerating changes, overlooked a key component of their science. They forgot to consider just how the benefits would be divvied up.

Instead of concerning themselves with ensuring everyone would share in this new-found wealth, they rationalised that in a deregulated, small government world, the riches would “trickle down” through society.

Globalisation helped lift millions of people from third-world economies out of poverty and made consumer goods across the West incredibly cheap. But it also resulted in a sudden and huge shift in industry from West to East.

Having access to cheap goods is terrific. Having no income isn’t.

Removing trade barriers paid huge dividends to the global economy, but it fundamentally shifted industry.(ABC: Jack Fisher)

Easing the pain

Harvard economist Dani Rodrik was among the first to raise concerns. His first book, back around the turn of the century, was titled Has Globalisation Gone Too Far.

About six years ago he wrote another, Straight Talk on Trade, which began with this question: “Are economists responsible for Donald Trump’s shocking victory in the US presidential election?”

He’s not well-liked among his peers, as you can imagine. But his argument is undeniable, that national governments failed to look after the people who elected them in their rush to fuel global trade and growth.

Across the United States, heavy industry shut down and moved offshore, laying waste to communities throughout its manufacturing hub and rising inequality.

The Biden government’s huge fiscal boost, via its Inflation Reduction Act which plans to pump $US5 trillion ($7.48 trillion) into the economy between now and 2050, is an effort to reverse those trends.

Biden’s Inflation Reduction Act set the scene for our government to follow with its Future Made in Australia policy.(Reuters: Elizabeth Frantz)

It has also employed tariffs and other protectionist measures against China to thwart its technology advances and it last week imposed extra tariffs on $US18 billion worth of goods. The world is awaiting China’s retaliation.

Australia has fared better than most nations despite drastic cuts in protection that began with the Whitlam government’s decision to slash tariffs in the early 1970s. In 1960, manufacturing accounted for 29 per cent of GDP. That’s now fallen to about 5 per cent.

Perhaps our decision to start early helped spread the pain. The decline of manufacturing here was far more gradual than in other developed nations.

Mining now accounts for more than 14 per cent of our output while service industries such as health and education are close behind. And much of our employment gravitated out of making things and into services.

Mining jobs pay well, particularly during construction when they are labour-intensive, but once up and running they are highly mechanised. Housing construction, at about 7 per cent of GDP, tends to pick up the slack.

Mining makes up a significant portion of Australia’s total output.(ABC News: Michelle Stanley)

Can Australia play that game?

The federal government seems to think so. It has earmarked $22.7 billion to its showcase Future Made in Australia policy in last week’s budget, the vast bulk of which will be dedicated to transforming the nation into a renewable energy superpower.

Most of the spending will be in the form of tax incentives, directed towards green hydrogen, green metals, low-carbon liquid fuels and critical minerals.

But there will also be cash directed towards helping establish new industries. And that has some economists worried, particularly since we’ve devoted so much time to selling off everything from power generators and roads, to banks, insurance companies, government laboratories, telecommunications and airlines in the past 40 years.

Citing the old Theory of Comparative Advantage — the poorly applied theory that has dominated policy all this time — they argued we just couldn’t compete against China with our own solar panels.

The government’s plan for direct investment isn’t without risk. And it can lead to ongoing demands for continued support.

Even before the mining boom sent the Australian dollar to the Moon 15 years ago and killed what was left of our manufacturing base, the Detroit three and Toyota had successive Australian governments over a barrel when it came to making cars here.

Pay up or we’ll leave, they continually threatened. Eventually, they did.

So far, America’s protectionist shift has benefited us. Its search for supplies of critical minerals and its determination to decrease its reliance upon China has seen the US government bestow grants on Australian corporations.

But we remain in the crossfire in any escalation between China and the US, given China is our biggest trading partner.

Ultimately, we may be forced to choose sides. And we may need to become more self-reliant.