The end of globalization? US protectionism points to a shift.
| Madrid
When President Joe Biden slapped a 100% tariff on Chinese electric vehicle imports last month, it was clearly a protectionist move. But does it mean that globalization – the free trade force that has made the modern world – is in retreat?
There is certainly a shift in the developed world toward what is known as “industrial policy.” That’s an umbrella term for policies that deliberately favor certain sectors of the economy, for example using subsidies and trade protections.
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A story focused onDeveloped countries are increasingly adopting protectionist policies to give themselves an economic advantage over competitors. Does that sound globalization’s death knell?
Once, the goal was to boost growth. Now, it is more a matter of encouraging the green economy and of securing supply chains, making them less dependent on distant, and sometimes unreliable, trade partners.
From the U.S. Inflation Reduction Act to Europe’s Green Deal, Beijing’s “Made in China 2025” drive and Canberra’s vision of a “Future Made in Australia,” politicians are working to safeguard their own economies in the face of global instability and pressures at home.
“The tone of the conversation has shifted radically,” says Fredrik Erixon, a director of the European Centre for International Political Economy in Brussels. But “globalization today works in different ways,” he adds. “There are protectionist trends. But they’re not really going to take away the oomph from globalization.”
When President Joe Biden slapped a 100% tariff on certain Chinese imports last month, he triggered a new wave of international speculation. Is globalization – the force that has made the modern world, a trend as reviled by some as it is revered by others – in retreat?
Trade as a share of global economic output has shrunk. And “industrial policy,” meant to promote certain domestic industries at the expense of global competitors, is on the rise, especially in wealthy countries. For nearly a decade now, people have been talking about “slowbalization,” as globalization appears to be slowing down.
But that trend may point less to deglobalization, and more to an economic recalibration favoring domestic resilience, prompted largely by supply chain vulnerabilities exposed by the pandemic and the war in Ukraine. Policymakers are worrying more, too, about climate change and social inequality.
Why We Wrote This
A story focused onDeveloped countries are increasingly adopting protectionist policies to give themselves an economic advantage over competitors. Does that sound globalization’s death knell?
“Fragmentation is a major danger to the health of the global economy,” says Kevin Gallagher, director of the Global Development Policy Center at Boston University. But “there is now a consensus that the ‘hyperglobalization,’ whereby free and unregulated markets were the norm, was detrimental to the cause of building low-carbon, socially equal, and resilient economies.”
What is “industrial policy,” and does it run counter to globalization?
“Industrial policy” is an umbrella term for policies that aim to develop certain sectors of the economy so as to meet government goals. That can be done in many ways, for example using subsidies, tax benefits, and trade protections.
Most major economies, including the U.S. and Germany in the 19th century, and Japan and China in the 20th century, matured with the help of industrial policy.
In the 1980s, as globalization began to take off, many governments came to see industrial policy as an obstacle to free trade and free markets, and they took a hands-off, laissez-faire tack.
In recent years, the pendulum has swung back.
“Now in the United States, both major parties are protection parties, they just sing slightly different melodies,” says Gary C. Hufbauer, senior fellow at the Peterson Institute for International Economics in Washington. “That has an effect around the world.”
Why are rich countries adopting more industrial policies now?
In the past, industrial policy focused on traditional manufacturing and boosting economic growth. Today, it has more to do with encouraging green manufacturing, securing supply chains, and staying technologically competitive – not least in defense and national security-related industries.
Border closures during the pandemic forced policymakers to reassess their dependence on fragile international supply chains, especially for semiconductors, electric batteries, and critical minerals. Europe sought independence from Russian energy supplies when Moscow invaded Ukraine. Meanwhile, governments are pushing to be at the forefront of the technological revolution, ensuring good domestic jobs at the same time.
Mr. Biden’s latest tariffs are an illustration of what economists have called a “great reallocation” of trade away from China, as the U.S. seeks to decouple its economy from China while building up its own green manufacturing sector.
The investments needed for the green transition are “rife with market failures,” says Adam Hersh, senior economist at the Economic Policy Institute in Washington. “So if we want to see that change, then we have to have some kind of public intervention.”
From the Inflation Reduction Act and the CHIPS Act in the U.S. to Europe’s Green Deal, Beijing’s “Made in China” drive, and Canberra’s vision of a “Future Made in Australia,” politicians are working to safeguard their own economies in the face of global instability and pressures at home.
“The tone of the conversation has shifted radically,” says Fredrik Erixon, a director of the European Centre for International Political Economy in Brussels. “There’s a premium on every type of policy proposal you can brand as being part of economic sovereignty [and] reducing dependencies.”
Who wins and who loses when countries protect certain industries?
In wealthy countries, the “winners” are the favored industries, concentrated now in the low-carbon and high-tech sectors, and their workers. The “losers” are consumers and firms paying higher prices for goods produced locally, but more expensively.
In the case of electric vehicles, the BYD Seagull costs $10,000 in China. Consumers in the U.S. can expect to pay three times that for an EV. (President Biden’s policies offer a tax credit of up to $7,500 to anyone who buys an American-made EV.)
In the absence of negotiated global agreements, developing countries lose, too. Industrial policy is expensive, and poorer countries “don’t have the financial firepower to match … the West,” says Professor Gallagher, making it harder for them to become producers of the technologies that will power the future economy.
Is this the end of globalization?
In short, no. Globalization may be taking a new shape as governments reshuffle their domestic priorities, but the world is still becoming more interconnected, not less.
“Globalization today works in different ways,” says Mr. Erixon. “It’s a lot more concentrated on services, on digital connectivity, on technology ideas and applications that are flowing across borders, and on human capital.”
Still, economic fragmentation is cause for some concern. Tariffs may be low by historical standards. But trade restrictions increased by 500% worldwide between 2015 and 2023.
If that trend continues, the costs to the global economy could reach $7 trillion over time, or about 7% of world GDP, according to one estimate by International Monetary Fund staff last year.
So far, though, the impact of a shift toward industrial policy is relatively minor. The heaviest adopters, excluding China, spend an estimated 0.3% to 0.7% of gross domestic product on the initiatives.
“There are protectionist trends,” adds Mr. Erixon. “But they’re not really going to take away the oomph from globalization.”
