By Manasa Gummi

 

What?
The end of the Second World War marked the beginning of a new era for the world economy. Policymakers embraced international trade as essential for economic growth, shifting away from the isolationist policies of the interwar period. Countries across the world worked to create stronger economic and political structures by forging alliances through the United Nations, the World Trade Organization, the European Union, multilateral trade agreements and, more recently, the Trans-Pacific Partnership. For the most part, these efforts have had a net positive impact in both the developed and developing worlds. However, nationalism has resurfaced in the recent years, questioning and attacking the very foundations upon which international alliances were built.

Brexit and the Trump election brought attention to the new nationalism that evolved from a long-felt discontent with the impacts of globalization and immigration. Further, the intensifying power of Austria’s Freedom Party, France’s National Front, Italy’s Five Star movement, and the UK’s Independence Party indicate that these sentiments aren’t going away anytime soon. This turn towards nationalism in developed nations has changed attitudes towards globalization and international trade in ways that are counterproductive and detrimental, not just to their own interests, but to the world at large.

The growing support for political parties with right wing ideologies has framed the public’s perception of world dynamics, thereby redirecting domestic policy in the West. A recent survey of 19 countries gauged people’s attitudes towards immigration, trade and globalization, revealing a split between emerging markets and the West.

Why?
In 1997, the Trade and Development Report by the United Nations Conference on Trade and Development argued that a return to faster growth and full employment in developed economies is a prerequisite for tackling the problem of rising inequality, and warned that failure to achieve this could provoke a “backlash against globalization, which might put the gains of global economic integration at risk”. While Western nations experienced ups and downs for long periods of history, they have in the recent past suffered from slow growth, low investment and decreasing productivity. But increasing income inequality has been the biggest contributor to the rising skepticism of globalization, a crucial factor that the UN report missed. In real terms, the current US per capita household income is back to the level it was two decades ago. Similar trends of rising inequality across Western nations have led the average citizen to feel unsuccessful and deprived, despite overall national economic growth. This, in turn, has led to a backlash against globalization, and a shift towards protectionism.

How?
One indispensable aspect of international trade that nationalist leaders have failed to grasp is the ‘comparative advantage’. The concept of comparative advantage, that virtually all economists agree on, says that it pays countries to trade because they are different. While we must accept that poorly constructed and weakly regulated trade deals can have negative impacts on the trading countries, withdrawing completely from wide-reaching partnerships and relying on isolationist policies can be significantly more damaging.

A clear example of this is the Trans-Pacific Partnership (TPP). President Elect Trump has stated his intent to withdraw from this agreement. It is important to note that this will limit the US government’s negotiating options, reduce the effectiveness of its other trade goals, and ultimately hurt the US economy. With regard to negotiation options, the absence of US ratification of TPP will lead trading countries to craft other agreements, such as the Regional Comprehensive Economic Partnership (RCEP). These agreements will open up the participating emerging markets to each other’s economies, while restricting access for US. This potential and very likely scenario demonstrates how agreements like the TPP not only confer economic gains, but also determine the countries’ access to and bargaining power with each other. Therefore, economic nationalism that advocates opposition to trade and inclusiveness are bound to backfire, resulting in slow growth and a weakened position on the world map.

What next?
At this juncture in international policy, the battle between nationalism and globalization has deepened the divide between countries, leading to ‘us versus them’ rhetoric. However, the interdependency, complexity, and size of the world economy make the reversal of free trade a serious economic threat. As UK Prime Minister Theresa May said on her post-Brexit visit to India, “free trade creates a rising tide that lifts all boats, it makes all richer, it creates jobs, it increases investment, it improves productivity, it transforms living standards and creates opportunities for all our citizens.” Hence, in order to strengthen domestic economies and at the same time improve the Western nations’ standing in the world, policymakers should negotiate and craft trade agreements that better respond to the interests of their citizens. Effective management of international relations rather than withdrawal from the world is the path to achieve a nation’s economic and strategic objectives.

Manasa Gummi is a Masters in Public Policy candidate at the Goldman School of Public Policy. Before coming to GSPP, Manasa was a Fellow and Project Manager at New Markets Lab, a legal and regulatory think tank focused on International Trade and Development.