Denying The Downside Of Globalization Won't Stop Populism

11/10/2016 12:01 PM AEDT | Updated 11/10/2016 12:00 PM AEDT

The rise of anti-globalization sentiment, including in Australia, poses a big challenge to mainstream politicians who've been trumpeting the virtues of free trade for decades.

Treasurer Scott Morrison recently started pushing back, delivering a staunch defense of globalization to an audience in Sydney. Like other world leaders responding to the wave of populism, Mr. Morrison doubled down with strong claims about the universal, lasting benefits of free trade. Australians may be anxious about their economic future, he conceded. But don't blame globalization.

Globalization "increases our living standards and always has," Mr. Morrison bluntly proclaimed. Free trade, immigration and inward foreign investment are "the very sources of ... prosperity." Resisting globalization, he suggested, is like thinking "we can pull the doona over our head and insulate ourselves."

Denying any potential downside to globalization, and deriding critics as hiding from reality, will not defuse the wave of anger that put four One Nation senators into Parliament. Contrary to Mr. Morrison's claims, there is ample evidence that Australia's trade performance has deteriorated badly in recent years, despite –- or perhaps because of -– the acceleration of free trade.

Globalization, as currently practiced, is imposing real, lasting damage in many parts of Australia, and producing a fertile political environment for nationalism and xenophobia. The political and policy responses to that danger must go beyond denial.

Mr. Morrison stressed the effectiveness of his government's trade agenda, especially what he called new "export trade deals" with China, Korea, and Japan. (This curious terminology deliberately neglects that free trade agreements are also intended to facilitate imports!) "The results are there to see," he said.

Or are they? As a share of GDP, Australia's exports have declined significantly since the turn of the century, even as government inked several free trade pacts. Services exports also contracted relative to GDP. And ironically, Australia did worse with its free trade partners, than with the world as a whole.

For example, we now have one year of experience under free trade with Japan and Korea. Perversely, Australian exports to both countries declined in the first year: by 9 percent for Korea, and 16 percent to Japan. Yet Australia's imports from Japan and Korea surged by 14 percent and 24 percent, respectively.

Therefore, Australia enjoyed more exports, and a better trade balance, without free trade than with it. In the first months of free trade with China, Australia's exports are also declining. Similarly, under Australia's trade pacts with the U.S., Thailand, Singapore and Chile, imports grew much faster than exports -- and in some cases exports didn't grow at all.

There's little reason to believe that new deals being pursued by Canberra (with India, Indonesia and the Trans Pacific Partnership) would have any better results.

The cumulation of many bilateral trade deficits is an overall global payments imbalance that is driving Australia deeply into international debt. Australia's current account deficit reached $77.5 billion last year: the biggest ever (in nominal terms). Relative to GDP, that's the second-largest of any OECD country -- behind only the U.K. (another hotbed of populism). It's even worse than precarious emerging economies (like Brazil, South Africa or Turkey).

Mr. Morrison actually celebrated this large international deficit last week, suggesting it allows Australia to invest more and grow faster. But he has it perfectly backwards. Business investment is contracting rapidly in Australia, not growing. And with Australia buying so much more from the rest of the world than it sells, we end up with less production, fewer jobs and less income. The gap can be offset with growing international debt, but only for a while.

This miserable trade performance is clearly contributing to Australia's weak labour market: declining total hours of employment, disappearing full-time jobs and unprecedented wage stagnation. So disaffected Australians aren't making it up when they conclude their prospects have diminished, and no amount of boosterism can change that reality.

Moreover, they have sound reasons to blame globalization as one important factor (certainly not the only one) for their predicament.

If Mr. Morrison and other free-traders want to truly counter the divisive and dangerous ideas of nationalism and xenophobia, they should start by acknowledging that globalization does indeed have a downside, not just an upside. Then they must move to implement policies -– like balanced trade, job creation, stronger income security, and better vocational education -- to assist those Australians who have been harmed by it.

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