What’s Next for Global Economic Governance?
Domestic Politics and Deglobalization

by July 2022
Photo credit: Shutterstock

Global events during the pandemic of the last two and a half years have exacerbated concerns about the future of multilateral cooperation on trade, finance, and investment. Governments’ inclinations toward beggar thy neighbor policies—benefiting their own economies, usually at the expense of others—loomed large during the pandemic, when national governments rationally focused on their own populations when it came to providing protective personal equipment (PPE) and vaccines. Russia’s invasion of Ukraine brought similar concerns: While many governments spoke out against Russia’s clear violations of international laws, many hesitated to halt oil and gas imports, given their internal energy demands. The trade tensions between China and the US, which remains unresolved even with a change in the US executive, and the collapse of the World Trade Organization’s dispute resolution process, exemplify the danger the multilateral economic system faces.

The average citizen in wealthy countries has been supportive of economic globalization over many decades and remains that way today.

What might the future therefore hold for globalization? Some observers suggest that, despite globalization’s benefits for many, the rules-based, US-led post-World War II liberal economic order may not have much of a future. Others express more optimism, noting that multinational firms remain committed to globalization-based strategies, or pointing out that crises can motivate renewed commitments to openness and cooperation.

Discussions regarding the future of economic globalization and of the multilateral economic cooperation that has sustained it ultimately are discussions about domestic politics; that is, to what extent do electorates in countries like the US support economic engagement abroad; and how do shifts in public sentiment change the incentives of political elites? As global trade, finance, and immigration have become salient issues in mass politics—often blamed for what ails some groups in wealthy countries—the prospects for multilateral economic governance have dimmed. Reinvigorating global governance requires shoring up popular support for openness. This might be achieved by better compensating those whose economic prospects have suffered in recent decades, especially in those countries which have acted as global leaders in the past.

But even a new “embedded liberalism” compromise may not be enough: Compensation sometimes provokes resentment for those who receive compensation among those who do not. Political elites on both sides of the political spectrum must play a role in reestablishing a commitment to openness. In the US, this requires that both Democrats and Republicans again embrace the benefits—to mass publics as well as to internationally-engaged firms—of global integration.

Globalization and Its Backlash

The post-World War II economic order has been characterized by a deep integration of national economies, as well as a dense set of multilateral institutions. Barriers to trade in goods and services have fallen worldwide, capital now flows quickly and freely, and in some parts of the world, people migrate across relatively open borders. This economic openness has been facilitated by a set of international institutions that create rules to guide and harmonize policies of member states; monitor behavior of member states; and limit governments’ incentives to take opportunistic actions. Globalization has been associated with higher rates of economic growth, as well as a dramatic decline in the percentage of the world’s population living in poverty. In many countries, domestic publics have been broadly supportive of globalization.

At the beginning of the 21st century however, this domestic consensus began to unravel. The rapid rise of China as an exporter of manufactured goods, accompanied by China’s predatory industrial, trade, and intellectual property policies, have exacerbated the longer-running decline of manufacturing activity (and the associated decline in real wages among manufacturing workers) in wealthy countries. This decline also was intensified by the emergence of cheaper long-distance transportation and communication technologies, which allowed for the creation and growth of geographically-dispersed supply chain production. Firms based in the US and Europe could source and produce goods and services in their most cost-effective locations, which often were in developing nations. Many individuals in wealthy economies, often accustomed to reaping the benefits of economic openness (including lower consumer prices as well as well-paying employment), found themselves increasingly exposed to competition from abroad, as well as to the worry that their jobs might be offshored or outsourced.

The average citizen in wealthy countries has been supportive of economic globalization over many decades and remains that way today. But the stability of mass attitudes masks the negative shift in opinion among a significant subset of voters—those who have experienced material losses and who believe that global economic forces (trade, immigration, and international institutions, to varying degrees depending on the country) are to blame. Political elites have responded to this shift, often implementing policies that limit global economic engagement. While such policies are a hallmark of right-wing populist parties and candidates, we have seen a range of governments take steps to limit their countries’ engagement with the global economy, via increased barriers to the movement of goods, services, capital, and people.

Changes in communication and manufacturing technology affect employment: Robots or touch screens replace workers with less formal education, while simultaneously enhancing the productivity of highly skilled workers. Growing income inequality exacerbates workers’ worries about their long-term economic prospects.

These policy shifts predate the COVID-19 pandemic, the war in Ukraine, or supply chain fragility. They include the UK’s withdrawal from the EU and the US implementation of tariffs in 2017 against a wide range of Chinese products (many of which remain in place). We also have observed declining support for the pillars of the “liberal international order,” such as the World Trade Organization and the International Monetary Fund. Vacancies in the WTO’s Appellate Body—undermining the effectiveness of the WTO’s dispute settlement procedures—persist; the US has refused since 2017 to approve new appointments; this refusal has continued under the Biden administration.

Is Globalization Really to Blame?

It is clear that the job and income prospects for less-skilled workers in manufacturing (and services) have declined markedly in wealthy economies. De-industrialization has brought a decline in manufacturing jobs and labor market difficulties for those with less formal education. This longer-run process has been exacerbated by increased import competition, especially pronounced with China’s economic liberalization and its subsequent 2001 accession to the WTO.

Despite the attention given to the “China shock,” or to immigration from east to west within the EU, economic globalization is often not the only—or the most important—source of income shocks. Changes in communication and manufacturing technology affect employment: Robots or touch screens replace workers with less formal education, while simultaneously enhancing the productivity of highly skilled workers. Growing income inequality, made especially visible after the 2008 global financial crisis, exacerbates workers’ worries about their long-term economic prospects.

Yet many individuals assume that trade and/or immigration are to blame for the economic risks and ailments they face. Some recent research indicates that individuals are indeed more inclined to blame industrial decline on trade and immigration, rather than on innovation or automation. Voters believe that policymakers can reverse, and are responsible for, trade-induced job loss, whereas they are not responsible for the (perceived to be irreversible) employment effects of automation.

Workers within the same firm may be differentially exposed to risk, as a result of the occupational tasks they perform. Those individuals whose jobs can be easily offshored, and who have few other options in their geographic area may be particularly likely to express anti-trade and anti-immigrant sentiments.

The political will for larger social safety nets and unemployment insurance—funded through higher levels of taxation—is largely absent

In both the US and Europe, local regions that have suffered de-industrialization have voted out incumbents in favor of political outsiders. Such outcomes require only that a (relatively small) subset of voters shift their views related to economic globalization—and this is especially true in countries with majoritarian (versus proportional) electoral rules. In Europe, much of support for populist, nativist right-leaning parties is grounded in anti-immigrant sentiment. In the US, Donald Trump made anti-trade (as well as anti-outsider views more generally) a key part of his appeal. Political elites have benefited from blaming material woes on globalization, as well as on the multilateral institutions that facilitated globalization.

Where Do We Go From Here?

Are there policies which might address some of the dislocations related to de-industrialization and globalization and restore support for integration and engagement?

Many observers have attributed the backlash to the failure to enact or sustain an “embedded liberalism” compromise, in which those who gain materially from openness compensate those who lose. By sharing some of the gains from openness, the “winners” can buy the political support of the “losers.” This compromise, which facilitated the restoration of economic liberalization in European countries in the post-World War II era, was always more limited in scope in the US. Public policies that retrain and upskill workers could address worries about offshoring, de-industrialization, and import competition; these could shift domestic political environments in ways that allow the US and EU countries to re-engage with multilateral economic institutions.

The political will for larger social safety nets and unemployment insurance—funded through higher levels of taxation—is largely absent, however. The degree or redistribution needed to compensate those displaced by foreign competition is far more than is politically feasible given demands for reduced government spending, reduced deficits, and inflationary fears. Governments might have taken advantage of low interest rates to borrow cheaply and fund social protection as well as infrastructure investments, but most did not. Governments fear that, in the absence of a multilateral effort to tax large corporations, higher taxes on businesses or wealthy individuals (likely necessary for expanded redistribution) will generate capital flight.

Domestic sentiment in favor of a return to embedded liberalism policies is by no means guaranteed. The expansion of health insurance coverage in the US, via the Affordable Care Act, made few beneficiaries more supportive of global engagement. Often government interventions in the US and Europe are viewed through a racialized lens; those who do not receive expanded government benefits may resent those who do, hardening support for “smaller government.”

The absence of a social safety net is compounded by individual under-investment in education and under-saving more generally. Those with preferential access to good paying manufacturing jobs, protected by unions, found little need to save or get a college degree—both of which would be crucial when jobs disappear. In both the US and EU, evidence suggests that it is these workers (and their families and communities) that predominantly rushed to support political candidates promising to reverse the effects of globalization.

Rescuing multilateral economic governance may require that elites, firms, and mainstream voters who have benefited from openness to become more politically engaged. That is, a “backlash against the backlash” is necessary to rescue globalization. Multilateral governance must shift too: While the nearly-global multilateral institutions of the post-World War II era generated substantial sovereignty costs for governments, “plurilateral” or bilateral arrangements, involving smaller groups of countries and based upon voluntary commitments by government bureaucracies and private sector actors, may be more politically acceptable within countries.

These new forms of global economic governance are not without costs: Governance via more limited “clubs” raises concerns about opportunistic behavior. Governments may worry that investment screening, carbon-focused trade adjustments, or labor-related trade restrictions are veils for protectionist motivations. Moreover, governance via networks and voluntary standards may raise worries about the influence of large firms on policies, or about democratic deficits in trade policymaking.

Absent a revised domestic political consensus for openness, the liberal international order remains in peril. The outlook for a renewed political coalition in support of commercial integration, whether in the realm of trade, investment, capital flows, immigration, and even the environment, seems bleak. While new forms of multilateralism offer hope (the answer may lie, for now, in limiting the scope of cooperation to narrow issue areas—the agreement on fisheries at the recent WTO Ministerial, for example), no real progress can be made without reducing the anxiety and labor market risk experienced by wide swaths of politically engaged people in much of the developed world.

Layna Mosley
Layna Mosley is a professor in the Department of Politics and the School of Public and International Affairs at Princeton University.
B. Peter Rosendorff
B. Peter Rosendorff is a professor in the Department of Politics at New York University.
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