ISSUE 32: 2017

Insights

Making Globalization Work for Everyone

To check the popular revolt against trade and immigration, the benefits of globalization must be distributed more equitably.

Photograph by Andy Ryan

» Click here to access your account and more insights.

» Not a client yet? Click here to find an office or have us contact you.

Dissatisfaction with the status quo reached fever pitch in 2016, fueling populist movements that shocked the global political establishment and roiled the financial markets. Two issues at the heart of the populist surge appear to be illegal immigration in the U.S. and the flood of refugees from the Middle East into Europe. Stagnant incomes and rising income inequality traceable to the globalization of the labor force, also have fed the backlash.

Given the emotion around these issues, it should not be surprising that crude appeals to restrict trade and immigration have resonated with many voters. Unfortunately, those who have fostered globalization and greater immigration have responded mainly by pointing out the downside to closing borders and restricting trade. This does nothing to assuage the anxiety behind the increase in populism. As a result, voters in the United Kingdom shocked the world by voting for Brexit, and U.S. voters elected Donald Trump the 45th president of the United States in part because he empathized with Americans who believe their standard of living has been undermined by global trade agreements.

More complex than “either, or”

The issues of globalization and immigration have been cast as a binary choice between free trade and open borders or protectionism and strict limits on immigration. This overly simplistic framing of the debate ignores the fact that the issues raised by the populists are real and deserve to be addressed in a thoughtful way. 

As in the U.S., there are big differences of opinion in
the UK and Europe about the best means of protecting national borders.

Some countries have done exactly that. Canada, with its relatively open economy and large immigrant population, has not seen the kind of concerns about border control that U.S. voters have voiced. This is largely because it has a well-functioning immigration system that prevents large numbers of undocumented workers from entering the country. Many argue that what’s needed in the U.S. is a humane but effective immigration system. This has not been possible to achieve largely because of government gridlock. Republican control of the White House and of the Congress could break the stalemate. 

As in the U.S., there are big differences of opinion in the UK and Europe about the best means of protecting national borders. Ideally, Brexit negotiations between Europe and the UK will provide an opportunity to bridge the gulf between those who view immigration as a threat to their way of life and those who see opportunity and economic growth in the free flow of workers across the European Union. Certainly London has good reason to move forward on the immigration issue because sensible immigration reforms could mitigate the negative economic impact from Brexit.


Rethinking globalization can make its outcomes fairer for people around the world. (Photo: Ojo Images/Getty Images).
 

Japan provides another interesting counter example to the populist fervor in the U.S. and Europe. Immigration is not an issue for the Japanese because there is a consensus to preserve Japan’s cultural homogeneity. Even if it were to welcome more immigrants, however, Japan might not see the fear and resentment immigration has stoked in other developed economies because of the income gains enjoyed by Japanese workers. On balance, the per capita income of the average Japanese worker has improved in recent years, unlike that of workers in the U.S. and Europe, where economic gains have been concentrated among the elite beneficiaries of globalization.

All of this suggests that trade and immigration policies must be reformed to help those who have fallen behind since the 1970s. Generally speaking, globalization has been hardest on those without college degrees in the developed countries. Globalization of labor markets has put the less educated in wealthy countries in direct competition with the masses of workers in developing economies. In sharp contrast, college-educated workers in the developed world enjoy a comparative advantage in the global competition for jobs because they make up such a small portion of the global work force. This helps explain the widening of the wage gap between workers with college degrees and those without them.

Leveling the playing field

Former President Obama acknowledged the need to address the concerns of displaced American workers. His suggested remedies for income inequality and economic insecurity included early childhood education, continuous learning, job training, a basic social safety net, the expansion of the earned income tax credit and investments in infrastructure.

At the end of the day, constructively addressing
the issues driving the
new populism can help
sustain globalization.

In contrast to Mr. Obama’s prescriptions for addressing the fallout from globalization and immigration are the potential trade restrictions and border-control measures advocated by President Trump. The reality is that many of the pro-growth policies proposed by President Trump complement former President Obama’s focus on worker training by making the U.S. more attractive for business. 

For example, the U.S.’s high corporate tax rate, which President Trump wants to reduce, is a major reason American companies relocate; in many cases, it’s a bigger factor than differences in labor costs. As technology reduces the labor share of corporate expense, the tax rate differential becomes a more important factor in corporate site choice. A significant cut in the corporate tax rate should increase the number of firms that find the U.S. an attractive place to operate. This, in turn, should increase the demand for U.S. labor, potentially pushing up wages. Similarly, reducing the regulatory burden on business by streamlining compliance costs could help improve productivity and raise workers’ incomes.

At the end of the day, constructively addressing the issues driving the new populism can help sustain globalization by making its outcomes fairer for more people. This does not require high barriers to trade or closed borders, which ultimately would halt globalization. Globalization needs a reset. The populists are making it happen sooner rather than later, when the inequities could be much greater. 

IMPORTANT INFORMATION

Investing involves risk. There is always the potential of losing money when you invest in securities.

Projections made may not come to pass due to market conditions and fluctuations.

Past performance is no guarantee of future results. Asset allocation, diversification and rebalancing do not ensure a profit or protect against loss in declining markets.

Any information presented about tax considerations affecting client financial transactions or arrangements is not intended as tax advice and should not be relied upon for the purpose of avoiding any tax penalties. Neither U.S. Trust and its representatives nor its advisors provide tax, accounting or legal advice. Clients should review any planned financial transactions or arrangements that may have tax, accounting or legal implications with their personal professional advisors.

Always consult with your independent attorney, tax advisor, investment manager and insurance agent for final recommendations and before changing or implementing any financial, tax or estate planning strategy.

OTHER IMPORTANT INFORMATION

International Investing International investing involves special risks, including foreign taxation, currency risks, risks associated with possible differences in financial standards, and other risks associated with future political and economic developments.

Investing in emerging markets may involve greater risks than investing in more developed countries. In addition, concentration of investments in a single region may result in greater volatility.

Dissatisfaction with the status quo reached fever pitch in 2016, fueling populist movements that shocked the global political establishment and roiled the financial markets. Two issues at the heart of the populist surge appear to be illegal immigration in the U.S. and the flood of refugees from the Middle East into Europe. Stagnant incomes and rising income inequality traceable to the globalization of the labor force, also have fed the backlash.

Given the emotion around these issues, it should not be surprising that crude appeals to restrict trade and immigration have resonated with many voters. Unfortunately, those who have fostered globalization and greater immigration have responded mainly by pointing out the downside to closing borders and restricting trade. This does nothing to assuage the anxiety behind the increase in populism. As a result, voters in the United Kingdom shocked the world by voting for Brexit, and U.S. voters elected Donald Trump the 45th president of the United States in part because he empathized with Americans who believe their standard of living has been undermined by global trade agreements.

More complex than “either, or”

The issues of globalization and immigration have been cast as a binary choice between free trade and open borders or protectionism and strict limits on immigration. This overly simplistic framing of the debate ignores the fact that the issues raised by the populists are real and deserve to be addressed in a thoughtful way. 

As in the U.S., there are big differences of opinion in
the UK and Europe about the best means of protecting national borders.

Some countries have done exactly that. Canada, with its relatively open economy and large immigrant population, has not seen the kind of concerns about border control that U.S. voters have voiced. This is largely because it has a well-functioning immigration system that prevents large numbers of undocumented workers from entering the country. Many argue that what’s needed in the U.S. is a humane but effective immigration system. This has not been possible to achieve largely because of government gridlock. Republican control of the White House and of the Congress could break the stalemate. 

As in the U.S., there are big differences of opinion in the UK and Europe about the best means of protecting national borders. Ideally, Brexit negotiations between Europe and the UK will provide an opportunity to bridge the gulf between those who view immigration as a threat to their way of life and those who see opportunity and economic growth in the free flow of workers across the European Union. Certainly London has good reason to move forward on the immigration issue because sensible immigration reforms could mitigate the negative economic impact from Brexit.


Rethinking globalization can make its outcomes fairer for people around the world. (Photo: Ojo Images/Getty Images).
 

Japan provides another interesting counter example to the populist fervor in the U.S. and Europe. Immigration is not an issue for the Japanese because there is a consensus to preserve Japan’s cultural homogeneity. Even if it were to welcome more immigrants, however, Japan might not see the fear and resentment immigration has stoked in other developed economies because of the income gains enjoyed by Japanese workers. On balance, the per capita income of the average Japanese worker has improved in recent years, unlike that of workers in the U.S. and Europe, where economic gains have been concentrated among the elite beneficiaries of globalization.

All of this suggests that trade and immigration policies must be reformed to help those who have fallen behind since the 1970s. Generally speaking, globalization has been hardest on those without college degrees in the developed countries. Globalization of labor markets has put the less educated in wealthy countries in direct competition with the masses of workers in developing economies. In sharp contrast, college-educated workers in the developed world enjoy a comparative advantage in the global competition for jobs because they make up such a small portion of the global work force. This helps explain the widening of the wage gap between workers with college degrees and those without them.

Leveling the playing field

Former President Obama acknowledged the need to address the concerns of displaced American workers. His suggested remedies for income inequality and economic insecurity included early childhood education, continuous learning, job training, a basic social safety net, the expansion of the earned income tax credit and investments in infrastructure.

At the end of the day, constructively addressing
the issues driving the
new populism can help
sustain globalization.

In contrast to Mr. Obama’s prescriptions for addressing the fallout from globalization and immigration are the potential trade restrictions and border-control measures advocated by President Trump. The reality is that many of the pro-growth policies proposed by President Trump complement former President Obama’s focus on worker training by making the U.S. more attractive for business. 

For example, the U.S.’s high corporate tax rate, which President Trump wants to reduce, is a major reason American companies relocate; in many cases, it’s a bigger factor than differences in labor costs. As technology reduces the labor share of corporate expense, the tax rate differential becomes a more important factor in corporate site choice. A significant cut in the corporate tax rate should increase the number of firms that find the U.S. an attractive place to operate. This, in turn, should increase the demand for U.S. labor, potentially pushing up wages. Similarly, reducing the regulatory burden on business by streamlining compliance costs could help improve productivity and raise workers’ incomes.

At the end of the day, constructively addressing the issues driving the new populism can help sustain globalization by making its outcomes fairer for more people. This does not require high barriers to trade or closed borders, which ultimately would halt globalization. Globalization needs a reset. The populists are making it happen sooner rather than later, when the inequities could be much greater. 

IMPORTANT INFORMATION

Investing involves risk. There is always the potential of losing money when you invest in securities.

Projections made may not come to pass due to market conditions and fluctuations.

Past performance is no guarantee of future results. Asset allocation, diversification and rebalancing do not ensure a profit or protect against loss in declining markets.

Any information presented about tax considerations affecting client financial transactions or arrangements is not intended as tax advice and should not be relied upon for the purpose of avoiding any tax penalties. Neither U.S. Trust and its representatives nor its advisors provide tax, accounting or legal advice. Clients should review any planned financial transactions or arrangements that may have tax, accounting or legal implications with their personal professional advisors.

Always consult with your independent attorney, tax advisor, investment manager and insurance agent for final recommendations and before changing or implementing any financial, tax or estate planning strategy.

OTHER IMPORTANT INFORMATION

International Investing International investing involves special risks, including foreign taxation, currency risks, risks associated with possible differences in financial standards, and other risks associated with future political and economic developments.

Investing in emerging markets may involve greater risks than investing in more developed countries. In addition, concentration of investments in a single region may result in greater volatility.