After decades of ever deeper integration, market-based globalization has entered a serious crisis. Trade integration has come to a halt and global trade growth has slowed down. Transnationalism is experiencing a profound crisis of credibility, which is most visible in the large number of people who see themselves as losers of a process over which they seem to have no control. Their votes have occasionally given rise to populist leaders who are now questioning the rules of globalization. These growing trade tensions have impacted export-dependent Germany more than most other countries. As a result of trade conflicts and the uncertainty surrounding Brexit, Germany’s industry entered into a recession in 2018.
The first signs of this crisis of globalization emerged in the aftermath of the Global Financial Crisis in 2008 when a major reversal of capital flows brought the world’s entire financial system to the brink of collapse. Since then global trade has been growing at a lower rate than before the crisis. As a group of researchers around German economist Moritz Schularick, one of this Forum New Economy’s academic partners, has demonstrated (Funke et al, 2016), financial crises also tend to be followed by a rise of right-wing parties and populists, as has been the case with Brexit and the election of Donald Trump in recent times.
The first major political clash occurred on June 23, 2016, when the citizens of the United Kingdom, by a slim majority, voted to leave the European Union. This came as a shock to the European project, which for decades had been hailed as a success story of integration. At the same time, protests all but halted the Canada-EU Comprehensive Economic and Trade Agreement (CETA) and inhibited the ratification of the Transatlantic Trade and Investment Partnership (TTIP) with the United States. On November 8, Donald Trump was elected to the White House.
All this might appear as a turning point in the wave of post-World War II globalization. Ever since the Bretton Woods conference in 1944 and the signing of the General Agreement on Tariffs and Trade (GATT) in 1947, the United States had championed free trade and promoted trade liberalization around the world. This turning point has also interrupted a period of accelerated globalization that had transpired since the early 1980s.
In 2018 the US imposed import tariffs on solar panels, aluminum, steel, and washing machines from most countries including its closest allies. In addition, the Trump administration has embarked on a large-scale trade war against China. Some commentators have referred to the current crisis as a crisis of hegemony, reminiscent of the world economic crisis of the 1930s when the US failed to assume leadership by stabilizing the global economy (Kindleberger, 1986; Tooze, 2015; Tooze, 2018).
Fears have been mounting that the world might be disintegrating as it did in the 1930s when protectionism caused the volume of world trade to collapse by 30% (Stephen, 2019; Adam, 2019). The escalating trade tensions have particularly dampened the outlook for the global economy. In the eyes of the International Monetary Fund (2018) the “intensification of trade tensions, and the associated rise in policy uncertainty, could (…) disrupt global supply chains, […] lowering global productivity and [harming] low-income households disproportionately.” Germany, with its export-dependence is particularly vulnerable to this trend towards deglobalization as its industry has been declining more rapidly than in other countries.
This crisis is even more dangerous because to a great degree it originates from the negative side-effects of the market-driven globalization that has prevailed for some decades. Empirical studies have pointed to a strong link between the flipside of globalization and a subsequent rise in populist forces, which claims to “no longer surrender […] its people to the false song of globalism” (New York Times, 2016). In a famous study, the MIT economist David Autor and his colleagues argued that Chinese competition and the deindustrialization of the Manufacturing Belt helped Donald Trump win the 2016 presidential election (Autor et al, 2016).
This link seems to hold even for a country like Germany, which is supposed to be among the world’s major profiteers of globalization with its huge export surplus. According to a representative Forsa poll for the Forum New Economy in October 2019, only a slim majority of Germans state that globalization has brought about more advantages than disadvantages for them. Another sign of a deep crisis of confidence is that less than 30 percent express the wish that the process of economic and financial globalization should be intensified further.
Recent research by a team of economists around Robert Gold from the Kiel Institute for the World Economy has demonstrated that economic distress in regions that have been particularly vulnerable to import-competition has increased the support for nativist and extremist politicians (Dippel et al., 2019). Complementary results have been obtained by Düsseldorf-based economist Jens Südekum, another of Forum New Economy’s partners. According to this work there is evidence that exposure to import competition from China and Eastern Europe has led to severe labour-market distress in the affected regions (Dauthet al, 2014). Combined with the findings by DIW economists around Marcel Fratzscher, who showed that distressed regions voted more often for the populist right-wing party AFD, this suggests a structural link between globalization and populism even in Germany (Franz et al., 2019).
As Robert Gold and his colleague Thiemo Fetzer have depicted in a new paper commissioned by Forum New Economy, this diagnosis generally also holds for other European countries.