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Dorn: In the last decade, there has been a change of heart that made people much more critical of global trade. The Corona pandemic and the Ukraine war have further driven this development.
Dorn: Economic assessments have changed. We realized that global trade can lead to economic distortions, especially in the labor market. Even more important is the awareness that international links and dependencies create political risks.
Walter: The focus is on the question of interdependencies. In recent years, people have become aware that this can also be risky and problematic. But we also see more criticism of globalization because many countries that had long played a minor role in the world are now claiming a bigger piece of the pie for themselves and want to have a say, for example, in negotiating international rules. That is no longer so easy.
Dorn: The pandemic and the Ukraine war made the public, politicians and, of course, companies aware of what happens when supply chains are suddenly severed due to political intervention. For example, when ports in China are closed due to government restrictions related to Covid and certain goods can no longer reach us. Or when countries in Europe can suddenly no longer base their energy supply on Russian gas. This leads to a reassessment of political risks. Moreover, there has also been increased speculation about the possibility of a military conflict between China and Taiwan since the war in Ukraine. It is becoming a possible scenario that important suppliers may no longer function reliably.
The Corona pandemic and the Ukraine war have shown that security cannot be taken for granted. Such risks must now be given greater consideration.
Dorn: It remains to be seen to what extent such risk avoidance strategies will be implemented. Currently, we do not yet see a clear de-globalization. Such a de-globalization would be associated with high costs. As soon as we realize what it would cost to produce certain goods in our country again instead of in China or Taiwan, the enthusiasm for greater self-sufficiency will decline.
Walter: In recent decades, we have been fortunate to live in a relatively peaceful era in which security has not been a major concern, which has meant that companies have focused on maximizing profits and efficiency, allowing consumers to benefit from lower prices. However, we now realize that security can no longer be taken for granted as a result of both the pandemic and the Ukraine war, but also in general due to the growing tensions between China and the United States and China and Taiwan; we must now consider these risks more carefully. This is likely to change global trade.
Walter: Attempts will be made to diversify the supply chains and to produce certain things at home again. Incentives are already being created, for example, to produce semiconductors in the USA again. However, this will make many products more expensive. There is a reason why people talk about the peace dividend.
Dorn: The attitude of economists has long been that trade increases prosperity. It has been argued that with clever redistribution, profits can be used to benefit the whole population. However, the will for redistribution is not strong enough, or it is difficult to implement in practice. In any case, globalization has had a negative impact on many jobs in the manufacturing sector, especially because of competition from China.
Dorn: Around one-third of all jobs in the manufacturing sector were lost in countries such as the USA and the UK in the 2000s. Globalization played a major role in this. As a consequence, there are disruptions in cities that were heavily dependent on certain industries and are suddenly struggling with growing poverty, crime, and drug problems. Politically, the result is that protest parties are more likely to be elected in such areas, specifically to address these concerns about economic decline.
Walter: Criticism of globalization has been around for a very long time. What is new is that the politicization of globalization has increased massively. For a long time, the focus of criticism in Europe was on migration, while trade was much less politicized than in the USA, for example. This is due to the fact that Europe is made up of many small, open economies that are more dependent on trade than the USA, which is a large, relatively closed economy. In Switzerland, too, we are constantly asking ourselves how much the country should open up, how much it should cooperate. In recent years, the political debate has heated up. Right-wing populist parties and other voices critical of globalization have also become stronger because the party systems have changed more strongly from the classic left-right scheme to a two-dimensional system where, in addition to left-right in economic and distribution issues, there is a second axis that could be described as liberal-authoritarian or open-closed. In this new, two-dimensional party space, there is much more room for parties to position themselves and address a specific constituency, giving them a strong incentive to politicize issues such as Europe, international cooperation, or globalization.
Walter: It is difficult for the major parties to find a position on these issues because their voters have very different opinions. These so-called challenger parties like to exploit this by taking a clear position on these issues and tapping into the electorate. They appeal to people who have always been critical of globalization but have no political voice. This is changing politics and the political debate.
Walter: Right-wing populist parties are gaining strength, especially in regions that have been badly affected by globalization and technological change. However, the globalization losers do not automatically vote right-wing populist. People who have lost their jobs often no longer vote at all, or they tend to turn to left-wing parties again. Right-wing populists are often those who are afraid of losing something and those who fear or have suffered a loss of status, such as having a lower level of education than their parents or a lower income. There have always been losers and winners, but now the losers and those who fear loss have simply gained a much stronger voice.
Dorn: Nobel laureate Paul Krugman stated that he and other leading economists were wrong in their prediction that the sharp increase in international trade would have little negative impact on the labor market. They relied on economic analyses from the 1990s and 2000s that found little impact of globalization on wages. It was only later that it became clear that growing import competition in some sectors and regions had not led to a fall in wages, but to a considerable loss of jobs. We now know that the NAFTA free trade agreement between the USA, Mexico, and Canada in the 1990s had already led to considerable problems in the USA, because many jobs were outsourced to Mexico.
Walter: Globalization has strong distributional effects, creating losers and winners and reinforcing inequality. The gap between those who benefit from it and those who face economic difficulties as a result is therefore widening. At the same time, we must not forget that globalization has also contributed to a massive reduction in poverty in the world in recent decades. The poorest people are often much better off today than they were 30 years ago. But the winners have benefited even more. Politically, this inequality is a very big problem. As David Dorn's studies show, these gains and losses are often concentrated locally. Moreover, many jobs have become obsolete not because of globalization but because of technological change. On the other hand, new jobs are being created, such as those of social media managers.
Inequality has grown to a degree that was not expected. This is the core of the globalization crisis.
Dorn: We have long known that trade produces winners and losers. However, the impact on inequality is much greater than originally thought. In the case of significant imports of goods from China, the benefits in terms of lower consumer prices are relatively evenly distributed across the population, while the disadvantages in terms of loss of manufacturing jobs are highly concentrated in individual population groups and geographic regions. Therefore, one could say that inequality has increased to an extent that was not expected. This is the core of the globalization crisis, which ultimately leads to political conflicts between winners and losers.
Walter: We don't know yet, but it has become much more likely than we could have imagined a few years ago. The supply chain problems already described, growing security concerns, and the success of politicians who are increasingly taking an isolationist line, as well as a growing self-confidence in the Global South, could relatively quickly develop a more difficult dynamic. One example is semiconductors, where attempts are currently being made to slow down China. However, this could lead to China pushing ahead with both developments on its own and developing its own standards, so that Chinese products would no longer be compatible with Western products in the medium term. Companies then have to choose whether they want to specialize in Western products or Chinese products. This can lead to the formation of a block. At the moment, however, it is still difficult to foresee which direction the market will take in the long term.
Walter: Decoupling the global economy along political fault lines would entail major efficiency losses and costs. And there are major global problems, such as climate change, that can only be solved globally.
Dorn: I don't think we are on the way to a new Cold War. After all, the bloc formation during the Cold War was based on clear differences of economic ideologies, on the opposition between capitalism and communism. The current fault lines run partly between democratic and authoritarian countries. But there is no clear division into two blocs of countries, but rather a structure of overlapping alliances in overlapping conflicts. The United States and China, for example, which are now engaged in a conflict over semiconductors, may still be willing to cooperate somewhat constructively in other areas. Because if we cooperate less, we will be poorer.
Dorn: According to surveys, most people continue to believe that international trade is good for their country overall. Our perspective in Europe is strongly influenced by the fact that our economic growth has been relatively low for several decades. When average incomes rise only slightly, there is a larger proportion of people whose incomes actually stagnate or even decline. This also happens within families. As Thomas Kurer of the University Research Priority Program "Equality of Opportunity" has shown, this loss of wealth within families contributes strongly to dissatisfaction. In Switzerland, economic growth is often viewed critically. But higher economic growth allows more people to be satisfied with the development of their personal economic situation. And there are fewer distributional conflicts if the cake grows steadily.
Walter: I don't see an end to globalization for now. I rather think that globalization is changing, that the flow of goods is changing, that our behavior is changing, and that everything is becoming more expensive. However, a look at the past also shows that even a very strongly networked world can collapse, even if we can hardly imagine it today. The world economy was already highly globalized at the end of the 19th and beginning of the 20th centuries. It took until the 1980s for the level of globalization to return to what it was before the First World War.
Walter: Political developments are often difficult to predict, as the war in Ukraine has once again just shown. But it would certainly take a very big shock, like the First World War, to fundamentally call globalization into question. However, it has also recently become clear that it is possible to restrict economic exchange and that we have a lot to lose as a result. Brexit is a good example of this. It shows that our prosperity cannot be taken for granted.
Walter: There are many reasons why we should cooperate. And there are also many areas where this still works incredibly well. The pandemic was a huge shock, but we returned to normal life and normal economic life relatively quickly, which shows that the system is quite resilient. My hope is that the willingness to make certain compromises and bear certain costs in order to make international cooperation possible will be greater again when it becomes clearer what is actually at stake.
Dorn: There is a tendency, particularly in the area of populist politics, to promise voters a great deal and then later fail to deliver. As in the case of Brexit, for example, where the United Kingdom's go-alone approach by no means led to the hoped-for economic boom. These experiences remind us that international cooperation brings advantages that are worth preserving.
