It’s Time for a Reset

In statistical terms, 2016 was a year of continuity for the world economy, as performance was quite similar to that of recent years. The big changes were political, as a widespread anti-globalization movement signaled a breakdown in a consensus among most political leaders that had held since the end of the World War II. It used to be generally accepted that reducing trade barriers increases prosperity and promotes peace, benefiting investing and recipient countries and promoting international cooperation in solving problems around the world. Almost all of this was called into question in 2016.

Both major party presidential candidates in the United States professed to be staunchly opposed to the Trans-Pacific Partnership trade agreement, and Donald J. Trump called for ripping up existing trade treaties like Nafta. Across the Atlantic, British voters opted to leave the European Union, while the ruling Conservative Party challenged the rights of foreign workers and the head of the Labour Party embraced socialism and expressed skepticism of Britain’s NATO membership. A trade deal between the European Union and hardly threatening Canada was almost scuppered by a recalcitrant Belgian province concerned about the effects of globalization on local workers. Movements hostile to the longstanding vision of an ever more united Europe gained strength in every major country.

Resistance to globalization was not confined to the West, nor to the industrialized world. Leaders including Recep Tayyip Erdogan in Turkey, Vladimir Putin in Russia, Xi Jinping in China and Narendra Modi in India all appealed to national pride, core values and strength, each placing uncomfortable emphasis on some variant of ethnic purity. In all four cases, any interest in universal values of openness or human rights is very much secondary to the reassertion of national strength.

This renaissance of nationalism and resistance to globalization appears to be universal, and not the exclusive preserve of either the left or right. It seems to stem from a profound sense on the part of many groups that their lives are buffeted by forces beyond their control. As people’s distance increases in a geographic sense, in a cultural sense, and in the sense of a lack of shared identity, they lose confidence in their leaders’ abilities to protect them. Insecurity is begetting atavism.

These trends pose dangers. For all the problems and challenges, the past 70 years have been a period of unprecedented progress in increasing human emancipation, prosperity, life expectancy and in reducing violence. All of this would be at risk.

We need to redirect the global economic dialogue to the promotion of “responsible nationalism” rather than on international integration for its own sake. A classic example of a misguided initiative is the effort to promote a bilateral investment treaty between the United States and China. Even in the unlikely event that such a treaty could be negotiated, its effect would be to trade a reduction in America’s ability to control the behavior of Chinese companies in the United States for increased security for American global companies when they locate production facilities or otherwise invest in China. From the point of view of a typical middle-class American voter, the deal is lose-lose.

To enable the international community to engage in this dialogue, global cooperation is key, with the focus of economic diplomacy on measures that increase the range of policies that governments can pursue to support middle-class workers domestically.

When the Allied nations met in 1944 at Bretton Woods to negotiate the rules and procedures of a new international monetary system, the economist John Maynard Keynes recognized that a global economy will have a systematic bias toward contraction if countries that have borrowed heavily are forced to cut back spending while no pressure is applied to countries that are running large surpluses.

While economic growth continued in 2016 for the United States, the European Union and Japan, it did so at rates that would have seemed unacceptably low a decade ago. In these three economies, inflation remained below the 2 percent target that central banks aim for, and market indicators suggest that it might well remain so for the next decade. And most interest rates continued their downward trend, reflecting the diminished inflation expectations and a high level of saving relative to investment.

These and other statistics indicate that the United States and Europe are just one recessionary shock away from being caught in a deflationary trap. Japan has been stuck in one for more than a decade, with expectations of decreasing prices prompting consumers to delay spending and save money. Assuring adequate pressure for stimulus needs to become a priority for the Group of 20, to precaution against deflation.

Given figures on the hundreds of billions of dollars lost annually because of tax sheltering, the gains from a global effort to prevent capital income from escaping taxation are at least comparable to those from highly controversial trade agreements. And such measures would make possible more support for the middle class.

In recent years we have also commenced a race to the bottom in areas like labor standards, environmental protections and capital requirements for banks. Businesses evade stiffer rules by moving elsewhere, hindering national aspirations to improve in these areas. The remedy is international dialogue directed at establishing global minimum standards, harmonizing approaches.

Finally, fences, walls and barriers are not an effective approach to resisting undesired flows of people. The only enduring solution to the unprecedented flood of refugees will come from creating conditions that enable people to do what they most prefer — stay at home. The global gain from supporting source countries is much greater than the gain to any one nation from limiting support solely to the refugees within its borders.

The events of 2016 will be remembered either as a point at which we began to turn away from globalization or the one at which the strategies of globalization began to be reoriented away from elite and toward mass interests. As we make our choices over the next few years, the stakes are very high.

This is an article from Turning Points, a magazine that explores what critical moments from this year might mean for the year ahead.