A Platform to Defend Free Trade

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Written by Julija Simionenko-Kovacs 

The future of globalization is at risk. The United Kingdom’s decision to withdrawal from the EU single market, President Trump’s resistance to free trade, and the surge of nationalistic anti-immigration populist movements in Europe are just a few threats to the global economic order. During the World Economic Forum’s annual meeting in January, globalization was among the top five priorities. The upcoming G20 Summit in July will provide another golden opportunity for heads of state and government to make the case for the benefits of free markets and to encourage countries to avoid harmful protectionist policies.

The eroding support for free trade and open borders has put globalization on the verge of retreat. Protectionists view the free flow of goods and people as a source of inequality and a threat to local jobs. This misconception arises because the gains from globalization are widely dispersed, while small losses are highly concentrated and more tangible. Governments often tend to reverse economic integration to protect the special interests that lose from globalization. Yet according to the Peterson Institute for International Economics, the overall gains from globalization outweigh losses by a ratio of at least 10 to 1. Countries should not undo years of integration, because the benefits from globalization are much greater for economies as a whole.

Defending globalization is in the best interest of the G20, which has dedicated special attention to global economic growth and international trade. Crucially, globalization would improve the sluggish global growth rate. Over the last six years, the global economy has on average been growing at only 2.6 percent per year, compared to 4.4 percent in 2010. One of the reasons behind this economic slowdown is a decline in global trade growth. Indeed, 2016 marked the fifth consecutive year of slow trade growth, witnessing only 1.9 percent trade growth, the weakest trade performance since the global financial crisis. The World Bank estimates that world trade grew at approximately 3 percent per year from 2012 to 2016, which is much lower than the pre-crisis average of 7 percent from 1994 to 2008.

Another reason for poor global economic performance is diminishing productivity growth. This is especially important for advanced economies, which experienced a sharp decrease in productivity growth over the last decade. For example, the United States ten-year average productivity growth rate declined from 2.4 to 1 percent over the last decade. Global efforts to liberalize trade and immigration would increase economic efficiency through higher competition and fewer skill gaps. A common concern is that immigration and cheaper imports from abroad drive native-born workers out of jobs and put less productive local companies out of business. Immigration and higher competition, however, reduce labor shortages and encourage local businesses to search for new supply chains and more effective ways to use their resources, which increases productivity and economic growth.

In addition to leading to cheaper imports, greater investment, and higher productivity growth, promoting globalization would help the G20 address other issues on this year’s agenda. Some of the most pressing challenges today include global security and escalating political tensions. International economic integration plays a significant role in reducing the incentives for conflict. As investment and business supply chains become more global, the costs of conflicts increase. Political disputes cause instability and uncertainty, which harm foreign and local businesses by disrupting production and distribution processes, and reduce foreign direct investment, thus decreasing the number of local jobs and government tax revenues. Higher participation in trade and investment therefore makes it unprofitable for countries to pursue confrontational policies.

Globalization benefits the global economy as well as individual countries. The G20 Summit is a great opportunity to remind the world that free trade not only increases global well-being, but also makes for a more peaceful world. The G20 countries produce around 80 percent of global gross domestic product and account for three‑quarters of global trade. The summit could therefore have a considerable influence on countries’ trade policies and could provide significant impetus for binding agreements. G20 leaders should therefore use their influence to encourage policies that capitalize on the benefits of globalization by promoting immigration, greater global investment, and free trade deals.

About the author: Julija Simionenko-Kovacs is the Economics & Trade Fellow at Young Professionals in Foreign Policy (YPFP). She is also a policy analyst focusing on international investment and competitiveness. Julija graduated with a MSc in Economics from the University of Amsterdam in 2014.