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A tough year for free trade

Rolf Wenkel nz
December 27, 2016

Donald Trump in the US and rising populist parties in Europe - 2016 wasn't a good year for advocates of free trade. Recent studies have identified some key aspects of globalization that nativists fear most.

Coastguard rescuers

Each year for the past 11 years, the World Economic Forum has asked 750 of the people in its network of experts to give their prognoses and identify global economic risks for the coming year. There's never been a wider spectrum of risks than this year. That's the message of WEF's Global Risk Report 2016. Political instability is the highest it's been since the end of the Cold War.

In fact, since the survey of experts was completed, the picture has darkened further. Britain's electorate narrowly voted to abandon the European Union, and the US electorate in key 'swing states' voted for Donald Trump, handing the controversial real estate tycoon the presidency despite having lost the popular vote by nearly three million ballots. Matteo Renzi lost his referendum on a new constitution in Italy, and resigned. Populists in Italy, France and the Netherlands are making headway. In Germany, 'concerned citizens' with similar nativist leanings are gathering into the populist, xenophobic 'Alternative für Deutschland' party (AfD, Alternative for Germany).

It's not only in Germany and Europe that optimistic faith in progress seems to be in retreat. Around the world, 2016 saw setbacks for international deals meant to harmonize rules on cross-border trade and investment. Open markets and globalization are being blamed for all manner of ills; protectionism and nationalism are spreading like grass-fires in the dry season.

'Buy locally' is bad economics

"We economists have perhaps not made it clear enough that open markets, on a net basis, bring more advantages than they produce losers," Jürgen Matthes, head of the International Economics and Economic Outlook research unit at the Cologne Institute for Economic Research, told DW.

Ten years ago it was common knowledge that open markets and a free trade are the necessary preconditions for jobs and prosperity - now this is supposedly no longer true?

"It's still true," Rolf Langhammer reassured DW. Langhammer is the former vice president of the Kiel Institute for the World Economy. "But in the US, a very mercantilistic viewpoint has gained currency, which claims that imports are a burden because they cost domestic jobs."

In the short run, so-called import substitution strategies can achieve successes, Langhammer said, but in the long run, American industry would be harmed by the destruction of cross-border supply chains. "We can only hope that Trump has smart advisors who will be able to dissuade him from such a strategy."

At the moment, however, business news outlets in Germany are dominated by headlines like "Decline in World Trade is a Warning Shot." Germany's national public radio service, Deutschlandfunk, has asked "Has Globalization Reached its Limits?," and the weekly news magazine "Focus" has a title proclaiming "Economists Prophecy the End of Globalization." The influential Bertelsmann Foundation recently published a study which daily newspapers summed up with the headline: "Fear of globalization strengthens right-wing populists."

Global trade is still growing, but ever more slowly

Economic data for the current year are in fact not particularly encouraging, especially for a major trading nation like Germany. The World Trade Organization, WTO, recently adjusted its projection for year-on-year global trade volume growth downward from 2.8 to 1.7 percent. Similarly, overall global output growth (GDP growth) is on a weakening trend. DZ Bank has estimated 2016 GDP at 2.7 percent larger than that of 2015, the lowest growth rate since the 2008 global financial crisis.

TTIP Protest Augsburg
Thousands of Germans gathered in Augsburg in mid-2016 to protest against the proposed EU-US TTIP agreementImage: picture-alliance/dpa/Stefan Puchner

Some economists are now prophesying and end to the era of globalization. They say a new protectionism is in evidence, with states adopting measures intended to privilege domestic industries - such as open and hidden subsidies, export duties, and rules to keep highly qualified foreign personnel out of domestic labor markets. Since the global financial crisis, hardly a day has passed since some country somewhere in the world hasn't implemented one or another measure to protect its domestic enterprises, and to make things more difficult for foreign businesses.

The WTO tracks such measures assiduously. In the years since 2008, WTO member nations have implemented nearly 3,000 distinct trade-restrictive measures, and retracted only 750 such measures. At present, there are 2,238 trade barriers of various kinds in force amongst WTO member countries.

"The WTO updates these numbers every six months," Matthes told DW. "Shortly after the crisis, one could perhaps have been somewhat understanding about the introduction of one or another trade barrier. What worries us, however, is that the number of such barriers hasn't been shrinking since then."

Trade mitigates against conflicts

On the occasion of the signing of CETA, the EU-Canada free-trade agreement, EU Council President Donald Tusk said, "Post-factual reality and post-truth politics are a major challenge on both sides of the Atlantic. Free trade and globalization have saved hundreds of millions of people from poverty and hunger. But only a minority believes that. Free trade and globalization protect people from conflict. Only relatively few people understand that. The alternative to free trade is isolation, protectionism, national egoism, and following on from that, the danger of violent conflicts."

According to a study entitled "Globalization anxiety or value conflicts?" published by the Bertelsmann Foundation, fear of globalization has played a decisive role in the recent success of right-wing populist parties in Europe. The great majority of people with sympathies for the right-wing and populist parties feel threatened by internationalization, according to the results of a Europe-wide survey. In a European comparison, it is above all the supporters of Germany's AfD (78 percent), France's Front National (76), and the FPÖ in Austria (69) that perceive globalization as a danger.

Fear as a driver

The question of whether voters are liberal, conservative, or authoritarian in their values plays only a secondary role in the attractiveness of Europe's populist parties, according to the Bertelsmann study. Isabell Hoffmann, one of its two authors, even sees a positive side to the fears: "This is a glimmer of hope for politics, because fears can be dissolved more easily than firmly cemented values."

"Globalization has changed," says Rolf Langhammer from the Kiel Institute for the World Economy. "Away from goods trading, toward trade in services; away from trade, toward financial capital movements. And in addition to capital movements, a trend towards migration, that is, the migration of labor. The trade in services and the migration of people - these are the neuralgic points on which many citizens say: 'No, we don't want that.'"

The Bertelsmann study tried to find out exactly what it is about globalization that people fear. Issues such as war, the environment, poverty, economic crises or terrorism were about equally important to nearly all the respondents. Only in the area of migration did the assessments differ markedly: People who fear globalization were much more concerned about migration.

Fifty-four percent of those who perceived globalization as a threat felt very alienated in their own country. At the same time, the majority (55 per cent) of this group had no contact with foreigners. Among respondents who regarded globalization as an opportunity, the fear of migrants and sense of alienation was markedly lower.