Who wins, who loses from Globalisation?

President-elect Trump has said it’s gone too far. Many of those who voted for Brexit think it damaged British industry; those who voted Remain claim if it’s not there it could damage both the manufacturing and the financial sector. There is a sense that Globalisation has brought too many problems for advanced industrial nations and that ‘American jobs need to be brought home’, as Donald Trump has stated on many a platform.

The growth of international trade and relatively free flow of goods and raw materials around the world has increased dramatically over the last three decades. Facilitated by developments in freight transport (large container vessels and port handling facilities), the internationalisation of major companies to operate multi-location branch plants in multiple countries, and the entry of Russia and China into the international market-place after decades of communist suspicion of dealings with the capitalist ‘West’ – have all contributed to an enlargement of the scale at which businesses operate into a truly integrated global arena.

The re-location of basic manufacturing plants to low-cost locations in south-east Asia and, more recently, eastern Europe was always a double-edged sword. Cheaper cars, clothes and electronic goods manufactured in low-wage countries such as Thailand, South Korea, Slovakia and China has meant a celebration of profits for company shareholders and consumers enjoying declining prices for highly-desirable goods. It has also meant rising living standards in countries newly industrialising. But the downside includes the closure of similar factories in high-wage countries and the prospect of de-industrialisation and rising joblessness amongst skilled and semi-skilled employees. The transfer of James Dyson’s manufacturing plants from Southampton to Malaysia in 2002 was heavily criticised by many in the UK at the time. But, as Dyson explained, the option was either a slow terminal decline of the entire company in the face of cheaper competition, or a move of the manufacturing part of the company (with the loss of 800 UK jobs) to a part of the world where profits could be maintained and a long-term chance to beat the competition would secure the future of the entire company. The Dyson research and development (R&D) establishment is still located in Wiltshire and has had multi-million-pound investment to upgrade facilities - and raises the question: would it still be there if the company had bent to the pressure in 2002 and not relocated half way round the globe?

President-elect Trump has ridden a wave of popularity by stating he will bring jobs back to the USA that have moved to low-cost countries, particularly China, from the relocation of branch plants of American companies. He will do this by raising tariffs (import taxes), making imported goods more expensive and stimulating the sale of US-made goods that will then be cheaper. The danger, as this article in the Observer (Guardian group) argues, that China (and other countries) are likely to retaliate in kind and put similar tariffs on goods imported from the USA. American maize, soybean and chicken products could suffer, along with the job prospects of those involved in them. Another response could be Chinese state airlines cancelling orders for Boeing aircraft (based in Seattle) and making a choice for European-built Airbus aircraft.

Donald Trump's other stated aim to reverse a major impact of globalisation is to massively reduce federal business tax, which currently sits at 35% of a US firm's profits. Many companies relocate abroad not just for cheaper labour, but for lower taxes. Ireland has become the favoured European base for many well-known US companies such as Google, Amazon and Facebook where the tax rate is the lowest in the EU at 12.5% (UK: 20%). With transfer pricing between cross-border elements of the same multinational, profits can be maximised in whichever country has the lowest tax rate - meaning governments of all other countries receive less in tax revenue. Donald Trump has stated he will reduce the US business tax to 15% to attract business profits back to the US. But a massive fall of 20% in federal tax revenue will mean the US government has far less to spend on key investments for the social good.

While the signs of declining industry are all-too-visible in derelict steel factories and ship-building premises in what has become known as the ‘rust-belt’ around the Great Lakes of the USA, what is less visible are the jobs that will be lost if trade agreements are torn up and globalisation is put into reverse. While there look to be superficial easy answers, to ‘bringing jobs home’ – the reality is that consumers will be paying higher prices, exporting businesses may find sales drop through the floor, unemployment rises in industries that were assumed to be profitable and the US government has much less finance to provide the basic services the country is used to.

In the UK, the vote to leave the EU has already caused concern in factories that export the majority of their products to European countries. If Britain leaves the ‘single market’ (the zone in which goods can be transferred across international borders without any tariffs), it is likely that a tax will be slapped on them as they pass the UK border and cross into the EU. That will make them more expensive, and sales are likely to fall. Not good for anyone’s employment prospect. This is why a recent announcement by Japanese car-giant, Nissan, to put significant investment into upgrading production lines to produce two new cars at its Sunderland plant was received with such relief. (See this BBC article). Nissan could have decided to move production onto the continent to remain in the ‘EU27’ after Brexit to ensure low, tariff-free prices continue. The fact that it has committed to a long-term future at its plant in the UK suggests it sees the arguments for continuing ‘globalisation’ – at least amongst 28 European countries, as continuing awhile yet. As this article in the Economist argues, rejecting Globalisation can hurt most the people who are in greatest need.

(Thanks to Stephen Schwab for Nissan article links)