Expert Speak Raisina Debates
Published on Mar 28, 2018
The entire anti globalisation move is centred around protection of jobs.
Anti globalisation wave to affect all, including US and EU

The anti globalisation stance of the rich countries today is strange, and shortsighted. Globalisation had begun in the western world after the World War II with the establishment of the Bretton Woods institutions which championed economic liberalisation and free trade. The West, specially the US, benefited and Americans were able to enjoy a free flow of goods from all over the world which kept its inflation in check.

This was also the result of their own companies moving to China and other countries with cheap labour and setting up manufacturing bases there and exporting goods back home as well as to other countries.

As more big companies moved abroad, Americans started losing jobs, especially in labour intensive industries. This was also the case in Europe. As labour costs rose, production shifted offshore not only to take advantage of cheap labour in the manufacture of goods but also in services with IT companies outsourcing services from countries like India. India became the world’s ‘call centre’ and Indian techies went to US under H1B visas to work in American companies on temporary basis. Outsourcing boomed even after the global financial crisis and this process made countries like China and India more prosperous than before by reducing poverty. There was a rise of the middle class the world over.

The Chinese rich developed a voracious appetite for branded American and European goods. In India, the middle class with more disposable incomes started consuming new types of consumer goods and enjoying holidays abroad. A new way of life was being experienced by the middle class population in India and elsewhere.

Outsourcing boomed even after the global financial crisis and this process made countries like China and India more prosperous than before by reducing poverty.

The middle class, according to Homi Kharas of the Brookings Institution, “have a massive demand for all types of services, whether that is Hollywood movies or Bollywood movies or Hong Kong movies, or the ability to eat out in franchises like KFC or McDonald’s or using internet application or taking out insurance, they’re driving massive changes in the structure of the global economy that include consumer goods that the US is good at producing.”

According to Kharas, middle class includes people with income of at least $10 per person per day in 2005 dollars. Today 45 per cent of the world’s population fits that category.

Not just the rich in China and India, but the upper middle class love German cars, French perfumes, Swiss watches, Italian wines and French and American movies. The European Union (EU) knows very well what a big market it has in Asia. But the EU may become more protectionist than before, reacting to its fear of China and India in recent times.

Today, Trump is openly turning protectionist and imposing duties on items that would hurt China. He is also imposing stricter visa rules for IT guest workers from India under H1B visa. The US is no doubt entering a dangerous territory. This is going to hurt the US more in the long run because if India and China retaliate, the loss of a huge market will hurt its production and jobs even more.

Any retaliation will lower the demand for American goods causing more problems for Trump. China, for example, can stop importing $21 billion of agricultural commodities from the US, which will hurt American farmers. In any case, protectionism will not be able to bring back jobs to the US that are labour intensive and require hard intensive labour like garment manufacture. Such jobs have now permanently shifted abroad to developing countries.

Today, Trump is openly turning protectionist and imposing duties on items that would hurt China.

Out of the two giants, India and China, the EU is more worried about China, especially due to its huge increase in investments in Europe. China has bought some big companies, football leagues and industries in Italy.

Italy needs FDI badly since it was hit by the Eurozone crisis, when it ran a huge public debt. China came with big investments like the $7.7 billion buyout of 26 per cent stake in iconic Italian company Pirelli in 2016 by Chemchina. Europe accounts for roughly 60 per cent of the Chinese FDI, including mergers and acquisitions, compared to the 25 per cent in the US, 15 per cent in Asia, Africa and Latin America. But today not just Italy, but France and Germany too are worried about the strength and size of investments in the EU by China. Heads of states of Germany, France and Italy have requested the EU commission to give them authority to scrutinise and potentially block Chinese investments in sensitive sectors at the national level.

EU welcomes Indian investment but it has to lead to an increase in employment. The entire anti globalisation move is centred around protection of jobs. India too has started the ‘Make in India’ initiative in which FDI is encouraged with various incentives to start factories that would give employment to the youth. EU has for a long time tried to protect jobs in its services sector by not allowing Indian IT personnel to move freely within Europe. India has been insisting on it but so far with little success.

The anti globalisation movement has been spurred by the huge trade deficits that developed countries have with China and India. China has a huge trade deficit of $375 billion with the US, the EU and also India. (India is already taking action against the surge in Chinese imports). China itself has launched the Belt and Road Initiative (BRI) to reach out to European market in the face of threats to its investments. The ultimate aim is to have direct links with road and rail to Europe for facilitating trade and investment through BRI.

The anti globalisation backlash can impact on China’s plan to forge ahead with its BRI initiative. To make it work, 11 members of the EU from its central and eastern sub-region have been persuaded to sign up support for China’s 16+1 initiative for BRI. They all want Chinese investment while Western Europe is deeply suspicious of its rapid advances. More scrutiny of all investments from China and demand for reciprocity in market access in China are on the cards in the future.

Fortunately India and China have huge domestic markets and China has already diverted its attention from export-led growth to enhancement of domestic incomes. India is still in need of FDI and foreign exchange to build infrastructure and bring 250 million people out of poverty. India and China have options to export to 150 countries in the world where they can sell. However, for both, the US and the EU are the biggest markets but diversification of exports is important in the era of anti globalisation.

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David Rusnok

David Rusnok

David Rusnok Researcher Strengthening National Climate Policy Implementation (SNAPFI) project DIW Germany

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