By Sam Volkers
Problems with free trade & globalization
Now that I have explained what economic nationalism and industrial policy are and we have looked at some successful historical examples of both ideas in practice, it is important to look at why both ideas are starting to gain ground again: the problems caused by free trade and globalization.
For most of history, the way countries have organized their economies has been influenced by their culture, history, geography, access to natural resources, and their political and economic realities. Countries with plenty access to seas and rivers were more likely to embrace trade than landlocked countries. This is why the Netherlands historically has been a trading nation, while Belarus for example is not.
Since the late 1970s — early 1980s, this historical continuity is being threatened by the “golden straightjacket of neoliberalism” — as political commentator Thomas Friedman calls it — with countries being forced to give up ever more economic and political sovereignty to international institutions and implement economic policies not suited to local factors.
Offshoring & (Offshore) Outsourcing
During the period between the collapse of the Soviet Union and the Great Recession, the idea that free trade and globalization are inherently good dominated economic and political thought. Critics of these ideas were painted as luddites, anarchists or archaic nationalists clinging on to their outdated beliefs of national sovereignty. This self-confident belief was severely damaged by the 2007–2009 Great Recession and the Eurocrisis that followed it. Suddenly the negative effects of reckless free trade policies and hyper-globalization were being exposed.
A lot of these issues had to do with offshoring, outsourcing and a combination of the two. Simply put, offshoring means that a company sets up a subsidiary company in another country that is tasked with carrying out a specific process for the mother company. Outsourcing is like offshoring, but not the same. Outsourcing means that a company hires another (smaller) third-party company to carry out a specific task for them, instead of doing it themselves. A company can outsource work to domestic third parties, but also to foreign ones. When the latter happens, we speak of “offshore outsourcing”. This is a process in which a company hires a foreign company to carry out specific tasks for them in that foreign country (Morrison 2017). This is often done with manufacturing processes and certain services, usually because the wages are lower. This way companies can make more profits and their products become cheaper to buy.
Although this sounds great it has big costs. Throughout the West, many people have lost their jobs due to offshoring and offshore outsourcing. The signing of NAFTA (1) caused more than 879.000 Americans to lose their jobs in the period between 1993 and 2002 (Scott 2003). In Mexico, it was estimated that around a million small farmers lost their jobs due to the trade deal, causing many of them to flee to the US (Vriesinga and Somers 2014). In the Netherlands, the negative effects of offshoring and (offshore) outsourcing have been less severe, but still present. Between the years 2009–2016, more than 48.000 jobs were sent overseas. Although most of these jobs were in the industrial sector, there were also a lot of services jobs that got outsourced, such as in IT (CBS 2018). For many of these workers who got displaced by offshoring and outsourcing, finding new work is difficult. Some do find a new job, but these are often lower paid and part-time service jobs. Many others do not find any new work at all and end up in despair, with some even giving up on the search to find work all together (Stiglitz 2014).
But it is not just jobs that are disappearing due to offshoring and outsourcing. Over the last few decades, entire industries have moved to lower-income countries, taking jobs, technology and knowledge with them. For example, in the two years between 2009–2011, 10% of companies in the Netherlands moved (part) of their operations to other countries (CBS 2018). In countries such as the United States these numbers are far higher. Although the IT sectors and services have also seen companies move jobs and operations overseas, the brunt of it has been manufacturing industries. And this has consequences not just for those working at the factories, but also the entire local economy around it.
The reason for this is that manufacturing serves as a “linkage industry”, which means that a lot of other businesses depend on it. A factory usually forms the heart of an area’s local economy, because it supports local businesses both directly (e.g. local suppliers of raw materials) and indirectly (it pays wages to its workers who then spend it in local stores). Studies have shown that one job in advanced industry supports roughly two other jobs in the local economy (Morrison 2018). This is why the re-location of manufacturing can do serious damage to local economies, because if a factory closes its suppliers will lose their main customer and its workers will be laid off, causing a drop in profits for local stores and other small-medium businesses, which can lead to even more businesses closing their doors. This will lead to economic decline for these areas and sometimes even outright poverty.
In the United States, entire towns in the Midwest have been decimated by poverty, unemployment and drug addiction after the closing and offshoring of local manufacturing plants. Recent studies have found that opioid deaths were 85% higher among people of the prime working age from areas where local car plants were closed, compared to those living in areas where they stayed open (Chokshi 2019). Luckily, the situation is not this desperate in the Netherlands, but here the towns that have seen their factories move overseas are also in a state of economic decline.
The supposed benefits of outsourcing/offshoring, cheaper consumer goods, are not shared equally. Workers who lose their jobs, as said before, will often not find a job that pays as well as their old one. Because of this — combined with the rising costs of living (e.g. housing and healthcare) — these workers will not be able to buy the cheaper imported consumer goods and thus will not profit from the new situation.
Some might argue that better welfare and retraining programs for workers can solve these problems. Although these ideas are good and needed, they are not sufficient, because the problem is not just about the human cost. Offshoring and (offshore) outsourcing also pose a serious risk to our economic development.
When an industry is moved to another country, the knowledge and technology that is related to it gets lost as well. This makes it much more difficult to resurrect these important industries, because the human capital and technology needed for it is just not available anymore (Morrison 2018). On top of this, moving production to a place where labour is cheaper and more abundant takes away the incentive to innovate and create more efficient production methods. In the past, companies that faced the challenge of a labour shortage would try to find new ways to produce in a more efficient way, leading to the invention of (new) technologies like the combustion engine. Today, this happens less, because it is easier for companies to move production abroad than to innovate, which in the long run will mean a loss of innovation and stagnating economic development.
Fragile global supply-chains & Economic dependence
Another big shock to the conviction that free trade and globalization will triumph came in 2020, when the Covid-19 pandemic exposed how fragile our global supply-chains are, and how dependent we have become on other countries.
The pandemic made it very clear how dependent Western countries have become on countries like China and India for the production and supply of important goods, like medicine and medical equipment. In the Netherlands, this problem was exposed during the early days of the pandemic, when we were plagued by a shortage in facemasks and other medical equipment. The reason for this is that, instead of producing these things ourselves, we import them from India and China. Around 80% of our medicine and medical equipment is imported from India and China (Scheffer 2020). This has left our national security and the welfare of our people in the hands of a volatile global market. A recent example of the vulnerability of the global economy was when a tanker accidentally blocked off the Suez Canal, preventing around 10% of global trade — including a lot of oil and important goods from China — to pass through to Europe (NU 2021).
And it is not just for consumer goods and medical equipment that we are reliant on countries such as China, but also for goods vital to national security and our economic infrastructure, such as military equipment and possibly our 5G-infrastructure. A recent controversial example of this was the use of security equipment produced by the Chinese enterprise Nuctech — a company that has got close ties with the Chinese government — by the Netherlands and the EU for border protection and customs services (Berendsen 2020).
Although there might be an economic incentive for us to import these goods, it is politically dangerous. Being reliant on other countries to produce goods vital to national security and the well-being of our citizens gives them great leverage over us, which they can exploit for political and financial gain. Now if the countries producing these goods were allied countries or countries that do not pose a threat to our interests, this problem would not be that pressing (although still present), but China — with its concerning human rights record and expansionist tendencies — does pose a possible threat in this position. They can use this leverage to force us to keep quiet about their actions, something which we have already noticed with the world’s reserved response to China’s mistreatment of the Uyghurs.
Foreign ownership of strategic assets
This possible threat is made more serious by the fact that China has spared no expense and has been buying up large amounts of European companies and assets. Chinese state-owned enterprises (SOEs) have even been buying up important infrastructure, such as harbors or airfields. The Chinese SOE Cosco owns a 35% share in the Euromax Terminal in Rotterdam, and a majority stake in the terminals of Piraeus (51%), Valencia (51%) and Zeebrugge (100%) (Veldkamp 2018).
According to Rob de Wijk — a professor of international relations at the University of Leiden — China will invest billions into these ports to make them big, in an effort to reduce the importance of the port of Rotterdam. With this strategy of investments and loans, China tries to cause division within Europe. This will prevent Europe from coming together and forming a fist against Chinese influence in the region (Boswijk and Buijs 2021).
But it is not just investments and take-overs by foreign governments that pose a threat to our economic prospects and political sovereignty, the take-overs of local companies by multinationals do so too. These mergers are often driven by goals of short-term profits, and cannot be seen as investments beneficial to long-term growth. Research shows that between 65% and 85% end up failing, causing a lot of economic damage and destruction of capital (Hueck and Went 2017). These failures can end up costing a lot of people their jobs and usually these job losses are suffered in the country of the company that was bought-up and not in the country of the company that was doing the buying (Chang 2010: 93–94).
The effects of free trade & globalization on the environment
Another area on which unbridled free trade and globalization have had a negative impact is the environment. Besides the more obvious effects that free trade has on the environment — the transport of goods from one end of the world to the other produces a lot of emissions — there are also less obvious effects.
A lot of these effects are caused by free trade’s tendency to stimulate the offshoring of manufacturing from richer countries with strict environmental laws to poorer countries, where the laws are less strict. For example, a recent study concluded that (Zhou 2017):
“A significant number of U.S. firms reduce their pollution at home by offshoring production to poor and less regulated countries. The greening of U.S. manufacturing over the past several decades may be partially caused by a growing flow of “brown” imports from poor countries.”
In essence, these companies do not just outsource jobs, but also pollution. To prevent this, governments in rich countries try to incentivize the companies to stay and produce in a more environment-friendly way. Often this involves offering subsidies and other forms of investments to help pay for these changes in production processes.
This is however made difficult — and sometimes even prevented — by international trade organizations such as the WTO. The WTO is not a big fan of governments prioritizing local industry and giving subsidies to domestic businesses, and there is little exception when it comes to subsidies in the name of the environment.
Another reason for this lack of government intervention, is that most recent multilateral trade deals contain an Investor-State Dispute Settlement-clause (ISDS-clause). This ISDS-clause mandates the creation of an independent court system that allows multinationals to sue the national governments of sovereign states when these national governments restrict certain actions by these multinational companies in the interest of, for example, the protection of the environment (Baazil 2020).
Because of this clause, governments that take action against multinationals that cause a lot of environmental damage (e.g. by regulating them or banning the import of their products) can be sued by these multinationals in lawsuits that can end up costing countries millions — if not billions — of euros (Baazil 2020). In the current system, these trade deals and international organizations end up eroding the economic sovereignty and power of individual nation-states in favor of multinationals and international capital, at the expense of the environment.
1: NAFTA: The North American Free Trade Agreement (NAFTA) is a treaty between the United States, Canada, and Mexico, which agrees to remove trade barriers between them. Features of NAFTA include the elimination of tariffs on imports and exports between the three countries. NAFTA is an agreement designed to facilitate trade and ensure that North American producers receive preferences over goods not originating in the U.S., Canada or Mexico. Definition found on: https://www.sage.com/en-us/blog/glossary/what-is-nafta/.