Brexit: The End of Globalization as We Know It?

Robert E. Scott

Robert E. Scott Economic Policy Institute

The British vote to leave the European Union is a watershed event—one that marks the end of an era of globalization driven by deregulation and the ceding of power over trade and regulation to international institutions like the EU and the World Trade Organization. While there were many contributing factors, the 52 percent vote in favor of Brexit no doubt in part reflects the fact that globalization has failed to deliver a growing standard of living to most working people over the past thirty years. Outsourcing and growing trade with low-wage countries—including recent additions to the EU such as Poland, Lithuania, and Croatia, as well as China, India and other countries with large low-wage labor forces—have put downward pressure on wages of the working class. As Matt O’Brien notes, the result has been that the “working classes of rich countries—like Brexit voters—have seen little income growth” over this period. The message that leaders in the United Kingdom, Europe, and indeed the United States should take away from Brexit is that the time has come to stop promoting austerity and business-as-usual trade deals like the Trans-Pacific Partnership (and the now dead Transatlantic Trade and Investment Partnership) and to instead get serious about rebuilding manufacturing and an economy that works for working people.

Conservative austerity policies in Britain over the past two decades, which have slashed government spending and limited government’s ability to deliver public services and support job creation, fueled the anger towards elites that encouraged Brexit. At the same time, the neoconservative, anti-regulatory views of public officials in Brussels—who are disdainful of government intervention in the economy and who consistently pushed for the “liberalization of labor markets” and other key elements of the neoconservative model—left Europe unprepared for the Great Recession. It’s no surprise, then, that there has been a revolt against the EU. When the financial crisis hit in 2008, EU authorities, especially banking officials in Germany and other wealthy countries that have a dominant influence over the European Central Bank, reacted by blaming public officials in Greece, Spain, Portugal and other countries hardest hit by the crisis. The budget cuts they demanded led to further contractions in spending and soaring unemployment which still persists in much of southern Europe, putting further downward pressure on employment in the UK and setting the stage for widespread populist revolts from the left and right that have gained traction across much of Europe.

The Brexit vote could also unleash a race for the exits that could tear apart the EU. Fanned by right-wing and populist parties, voters in Sweden, Denmark, Greece, the Netherlands, and even France could all demand independence from the EU. If Europe comes apart it would likely result in a deep recession and prolonged period of slow growth while the affected countries pick up the pieces and rebuild their economies. And it could take two years or more to work out the terms of the UK divorce from the EU, which will have a chilling effect on trade and investment in Britain and the EU. If there is a silver lining in this crisis it is that the EU could be forced to confront the flaws in its structure and develop the policies needed to create broadly shared prosperity, as explained by Jeff Faux.

Despite vast differences in the political structures of the United States, Great Britain, and the Euro area, each finds itself in a similar economic position. Trade and investment deals have been promoted by both Democratic and Republican presidents and by the leaders of both parties in the United States. The result has included rising trade deficits and the loss of more than 5 million manufacturing jobs over the past 20 years. Furthermore, the growth of trade with low-wage countries like China has reduced the wages of most working Americans—those without a college degrees—by $1,800 per year in 2011. This estimate includes not just manufacturing workers, but all those with similar skills, roughly 100 million workers or two-thirds of the labor force. Meanwhile, divided government has prevented the Obama administration from implementing effective fiscal policies since 2010. As a result, government spending in the wake of the recession has been weaker than in any recovery in the past 40 years.

In the United States, there is a growing recognition that—like the Brexit vote—the populist upsurge that allowed Donald Trump to win the Republican primaries and Bernie Sanders to seriously challenge Hillary Clinton is based, in part, on opposition to TPP and to the fallout from globalization for the broad working class. After initially supporting the TPP, Hillary Clinton finally came out against that agreement during her primary campaign. However, Clinton’s delegates on the Democratic Party platform committee last week voted down a proposal to keep the trade deal from coming up for a vote in Congress. If Clinton is perceived as remaining committed in principle (if not in the particulars) to trade deals like the TPP, she risks alienating working class voters in the election.

As former Treasury Secretary Larry Summers noted on Friday, “The political challenge in many countries going forward is to develop a “responsible nationalism…, for approaches to policy that privilege local interests and local people over more cosmopolitan concerns.” In the United States, such policies must begin with plans to rebuild manufacturing and create more good jobs for working people without a college degree. The key to rebuilding manufacturing is to rebalance global trade and eliminate U.S. trade deficits, which are the product of nearly two decades of currency manipulation and other unfair trade practices led by China and other Asian nations, as well as Germany, which has a huge trade surplus. We must realign the dollar to make U.S. exports more competitive, and re-invest in workforce training, manufacturing extension, and R&D to help rebuild the U.S. manufacturing economy. We also need to strengthen the economy through substantial and sustained investments in infrastructure and in clean energy developments, important parts of Hillary Clinton’s program but entirely absent from Trump’s. Finally, there are a number of supporting steps needed to raise wages, such as raising the minimum wage, rebuilding collective bargaining, and prioritizing very low rates of unemployment that will help close the wage gap between the haves and the have-nots that is fueling the backlash against globalization.

Brexit is a moment of crisis for the global economy, one which demands a fundamental re-examination of our core values. It is time to develop alternatives to the current model of globalization, which benefits only those who are most well-off in our society.

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Reposted from EPI.

Rob Scott joined the Economic Policy Institute in 1996. His areas of research include international economics, trade and manufacturing policies and their impacts on working people in the United States and other countries, the economic impacts of foreign investment, and the macroeconomic effects of trade and capital flows. He has published widely in academic journals and the popular press, including The Journal of Policy Analysis and Management, The International Review of Applied Economics, and The Stanford Law and Policy Review, as well as The Los Angeles Times, Newsday, USA Today, The Baltimore Sun, The Washington Times, and other newspapers. He has also provided economic commentary for a range of electronic media, including NPR, CNN, Bloomberg, and the BBC.

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