My best shot at – Globalization

Whether or not the globalization is good for someone is difficult to say. But it is quite easy to tell if it is bad for someone. And the first thing that those who are wronged by globalization will tell you is: globalization took their jobs. One could argue that the jobs simply moved elsewhere and those who have them now needed those jobs even more. But globalization does not need to be a zero sum game. True progress brings benefits to all or at least close to it.

Let’s take a simplified look at how it works now.

• First a developed and rich country signs a free trade agreement with a populous developing country.
• Next thing that happens is that the highly subsidized agriculture from a developed country floods the developing country market with their products, driving local farmers out of business. This does not create many new jobs in the exporting country because the agriculture in developed countries is highly automated.  However, in developing countries the farming is less automated so the job loss is hugely disproportional.
• Now when the poor country is full of desperate people looking for any kind of job to sustain their families, the rich corporations start opening factories (often by moving them from the developed countries). The wages are low, the risks of injuries and death at work are high as the labour laws are weak or nonexistent, and there is little to no regard for the environment.
• The developed country is soon flooded with cheap imported goods, and the process of moving manufacturing continues, leaving more and more workers in the developed country without jobs. They are now desperate and forced to work for lower wages just to sustain their families.  The rich corporations suddenly have dual benefit from cheap labour both at home and abroad. It boosts their profits and even more - executive bonuses.
• The situation is getting even worse by burning an awful lot of fossil fuels to move agriculture products and manufactured goods back and forth over long distances instead of making them locally. Is the global pollution exacerbated by unbridled globalization?

Two centuries of struggle for fair labour laws, working conditions and pay, are being undone as the jobs are moving to countries with worker’s rights similar to those in Britain in 1800’s and  the US in 1870’s. It is de facto a global repeal in the making. On paper, the laws will stand and even improve, only there will be no decent jobs, just minimal wage jobs for families to live on. 

Is it all bad about globalization and free trade?

Of course not. There are many benefits to human kind in connected world. They teach that in macroeconomic courses. So instead of reaching for protectionism and isolationism, let’s see how to make globalization better.

Globalization 2.0

Let’s assume that these four countries sign a free trade agreement: UK, Canada, Australia and New Zeeland. That would be easy. Those countries have the same head of state, similar labour laws, social safety net, similar wages and environmental policies. They have strong democratic institutions and are connected on security issues, defense and have strong cultural ties. If for example these countries had free movement of goods, services, capital and workforce, they would all benefit similarly from unhindered trade alleviating the gluts and shortages, without jeopardizing domestic jobs creation. In this idealistic example we see that the free trade between “similar” countries brings benefits, with little drawback.  While these four are the unique example that cannot be replicated, let’s explore the possibilities to extend this idea more broadly.

The tier based trade

The concept is simple. Define the set or rules to qualify countries into tiers. These would be the qualifying criteria:

•         Wages in terms of real purchasing power. The idea is that similar work should pay for similar quality of living.
•          Labour laws. The employees should have similar working conditions and safety, working hours, and  benefits.
•          Economic freedom.
•          The rule of law. Laws are meaningless if they are not enforced equally to everybody.
•          Protection of property and investment.
•           Protection of environment.
•           Protection of intellectual property.

 It is important to refrain from including issues like human rights and similar politicaly/ideologicaly sensitive topics. However, the rule of law and economic freedom implicitly encompass those topics. I believe that the criteria balance the employee rights and environment with investors’ interest.

This is how it would work: 

Countries from the same tier trade without tariffs and the labour force is moving freely among them. The higher tier countries charge tariffs for importing goods from lower tier countries and vice versa. The higher the difference, the higher the tariffs.  

The goal is to make investments similarly profitable in most of the countries. The lower the wages in one country for example, the higher the tariffs.

What are the benefits? 

The governments in developing countries would be motivated to provide better labour laws, improve the standard of living and go through other reforms in order to qualify for the higher tier and thus be more attractive to the investors. As of now it is quite the opposite. Suppressing employees rights, keeping wages low and environmental regulations loose  attract foreign investment as long as there is at least basic infrastructure in place.

As it would  in the end improve life in developing countries it would in the same time protect  manufacturing jobs in developed countries. Furthermore, more production would be for the local or nearby markets. It is good for the environment because transportation over long distances creates more pollution.

This model is more sustainable than the current one, creates less social frictions, and as the pressure on the workforce eases, it is less likely to have social unrest and/or populist governments that will advocate protectionism and isolationism.

Who would implement it?

Ideally it would be done in WTO. In reality it is more likely that some smaller group of countries implement it and then others join freely. One group of countries could cluster around the US, another inside EU.  Even existing trade agreements can be updated using this model or something similar.

There would be one notable exception to this model: agriculture. Every country has its own agriculture fetish, whether it be milk and dairy in Canada, corn in the US or pretty much everything in France. It doesn’t matter. In Globalization 2.0 agriculture should be exempt from free trade, because it is too political. Otherwise it will be dead in the water from day one.

This is my best shot. Thank you for reading.