The U.S. and Canada were built on, and will continue to be dependent on, trade and immigration.Lindsay Dedario/Reuters
Claude Lavoie is a contributing columnist for The Globe and Mail. He was director-general of economic studies and policy analysis at the Department of Finance from 2008 to 2023.
U.S. tariffs, manufacturing subsidies, and anti-immigration and isolationist policies reflect a population discontent with trade and globalization that has been growing since the financial crisis of 2008. While the U.S. government may be the loudest voice against globalization, similar nationalistic policies can be seen in many other countries, including Canada, where measures to favour domestic industries and limit immigration are increasingly popular.
The critical force behind the rise of this sentiment is the failure to recognize and address the negatives of globalization. Just attempting to return to the previous status quo by returning tariffs to zero, redirecting trade toward friendlier foes, or reducing immigration will not eliminate this sentiment.
In previous decades, globalization was seen as the path to prosperity and peace. Free movement of goods, people and ideas, amplified by new communication technologies, were expected to bring significant opportunities and those pushing back were labelled as marginal and reactionary. Now, the previous consensus supporting international trade, migration and free markets seems to have been replaced by a “new economic nationalism.”
Were those earlier beliefs wrong? Most studies suggest trade and global integration have raised incomes and cut poverty and income gaps between countries. This is not surprising as trade has historically been associated with wealth. Globalization has not stopped America from being great. As a matter of fact, U.S. companies are global leaders, and the U.S. economy was booming before the current administration tried to make it great again.
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But globalization is resented by many because its drawbacks were not properly addressed. Like technology, be it nuclear power, the internet or AI, widespread adoption of any social innovation comes with negatives that need to be mitigated.
Such mitigation should be simple. Trade creates more winners than losers and the overall gains should be used to compensate losers to avoid escalating resentment. The problem is that many communities negatively affected by globalization, such as blue-collar workers, were not provided with adequate support because of faulty beliefs on the part of governments and winners’ greed.
Labour standards could have been strengthened or social supports increased to help these communities, but these require raising taxes, and governments were convinced doing this would hurt our international competitiveness. Studies have shown that taxes and standards are not necessarily detrimental to competitiveness. There are many wealthy open-trading economies with high tax burdens, high labour standards and generous social safety nets.
We were also convinced that labour reallocation and upskilling would occur organically, ensuring trade gains would trickle down. But people cannot easily relocate their family or transition from a low-skill to a high-skill job. Many people did not pursue high-skill careers because of a lack of confidence or ability. Financial, time and emotional costs are often barriers too high for most, and these costs needed to be managed through significant hands-on support from many stakeholders.
To be sure, trade and globalization create interdependencies which make us more vulnerable to things like cyberattacks and disruptions in supply chains. Bans on vaccines and mask exports during COVID and the dependence of the U.S. military on Chinese-made components illustrate this issue well.
But putting up protectionist barriers and isolationist policies is not a solution; it will only result in losing the benefits of trade and global interconnectedness. The U.S. and Canada were built on, and will continue to be dependent on, trade and immigration. Most of the issues like AI or climate change are global in nature.
Globalization is not dead, though it has slowed. And while finding new trading partners and standing our ground with the U.S. is a good thing, Canada cannot escape its geography and cultural links with our southern neighbour. What we have needed and still need is a mitigation strategy to make globalization fairer and more inclusive, and make interdependence feel safe.
This means an adequate and efficient safety net, stronger labour bargaining power, and adequate resources for immigrant integration and youth at risk. It means having the necessary infrastructure to pivot across different suppliers and buyers depending on geopolitical vagaries. It means undertaking adequate systemic risk analysis to identify the large undiversifiable economic risks and the actions necessary to mitigate them.
The digital tax is an example of a strategy to make globalization more inclusive, and its abandonment is not really a good thing.
This crisis moment provides an opportunity to address the drawbacks of globalization and any future structural change with complementary policies and recognize that we focused too much on efficiency gains and not enough on security, cultural and inequality considerations.