CHAMPAIGN, Ill. – The United States has led the way for decades in promoting free trade and globalization, but contrary to common wisdom, it’s now among the most vulnerable to a growing backlash against it, says University of Illinois professor Jude Hays.
The belief, especially among economists, has been that certain Western European countries supporting generous social insurance and welfare programs would experience the most pressure from globalization, and therefore the most popular opposition to it, said Hays, a professor of political science and a research fellow in the U. of I. Cline Center for Democracy.
Instead, it’s the U.S. and other Anglo-American democracies – including Australia, Canada, Great Britain and New Zealand – that are feeling the political heat, he said.
It’s one reason the U.S. has played a diminishing role in promoting free trade, something unlikely to change at World Trade Organization talks coming at the end of this month in Geneva, Hays said. And it may not change without a new arrangement between the U.S. government and its citizens, one that better protects those threatened by globalization.
He makes his case in a new book, “Globalization, Domestic Institutions, and the New Politics of Embedded Liberalism,” published by Oxford University Press.
For those who believe in the overall benefit of free trade, growing worldwide opposition to it is serious cause for concern, Hays said. Protectionism carries risks not only for the international economy but also for peace and stability, he said. “Relations between countries tend to go a lot better when there’s a liberal, open, international economy.”
Hays doesn’t envision a return to the kind of protectionism that produced the Smoot-Hawley Tariff Act of 1930 in the U.S., which many blame for deepening the Great Depression. “But I think the risks are greater today than at any other time since the end of World War II. I think there’s the potential for some reversals. I think there’s the potential that the WTO is going to become sort of marginalized in the governance of the international economy.”
As for why the Anglo-American democracies have trended toward greater opposition to free trade, Hays points to an interplay between their political systems, where the majority rules, and their labor markets, which are open and decentralized.
The openness of the labor markets makes those markets more flexible, but also leaves workers who feel threatened by free trade more vulnerable and insecure, Hays said. At the same time, the average voter in these countries has more power to reject taxes that might provide a stronger safety net or retraining for free trade’s losers, or might redistribute the overall gains from trade, he said.
“The idea is basically that the average Joe has a lot more political influence in majoritarian democracies … and the average Joe doesn’t want to pay high income taxes on wages and salary, and also doesn’t want to pay typically a lot of taxes on consumption either.”
In a globalized system, however, this leaves the U.S. and similar countries boxed in on sources of revenue, Hays said. With political restraints on wage and consumption taxes, the U.S., despite its business-friendly reputation, actually taxes capital and investment income at a higher rate relative to labor income than most countries in Western Europe, he said. It’s restrained from taxing capital even more, however, because capital is free to move to wherever conditions are the most favorable, and so countries that tax it too highly are at a disadvantage.
By contrast, many Western European countries – Austria and Sweden being among the best examples – have political systems that require governing through coalitions, and “corporatist” institutions that centralize wage bargaining across sectors of the economy, Hays said.
The average voter has less power to tip the overall balance of power and therefore less power to oppose income and consumption taxes. He or she also feels more confident of the safety net provided by government programs and other institutions, and therefore less threatened by globalization, he said.
The burden of funding generous welfare programs and social insurance was supposed to be a weakness for these countries in the face of pressures resulting from globalization, Hays said. Instead, it may be the lack of such programs, combined with other factors, that most influences anti-globalization sentiment, he said.
“It’s precisely those countries with the institutions that we thought might be most under pressure as the result of globalization that are able to maintain political support for openness, precisely because they have those institutions,” Hays said. “And because the U.K. and the U.S. and some of the other Anglo-American democracies don’t have them, they’re the most vulnerable to a backlash.”
Even if it benefits the larger economy, free trade produces clear winners and losers, Hays said, and political economists have argued that support for it rests on an implicit bargain between governments and their citizens. That bargain, which one scholar has labeled “embedded liberalism,” says that for governments to get support for free trade they must protect their citizens from the “vagaries of the global economy,” Hays said.
“It’s all about figuring out how you compensate the losers, and what sorts of programs you can put in place to build support for free trade among groups or populations that otherwise are going to be extremely skeptical of it,” he said.
To regain that support, and reverse the trend toward protectionism and against free trade, the U.S. and similar countries will have to forge a new bargain of embedded liberalism, Hays said, even if limited resources require “extreme creativity” in the design of policies and programs.
