Politics / The rise of populism and its implications on trade and global governance — Part II

Whether right wing or left wing, populist movements all share a same claim: that the benefits of globalization and trade have not been fairly split, resulting in increased tariffs, trade wars, and even Donald Trump threatening to leave the World Trade Organization. However, these unilateral decisions have led to fear from investors as a the possibility of an economic recession in 2020 due to trade wars increases.

Throughout this decade, it seems that populist politics have exploded. For instance, an index created by the Bridgewater hedge fund indicates that the number of people in industrialized countries voting for anti-establishment candidates has risen by 28% from 2010 to 2017, and it is most probable that this number has kept on increasing since the survey was made. Therefore, we will look at the economic, social, and political impact that populism has had during recent years on trade and global governance.

Trade and the tension between populism, globalization, and economic prosperity

In The Macroeconomics of Populism, the economists Rudiger Dornbusch and Sebastian Edwards explain that the economic policies undertaken by populist governments are, in most cases, “quintessentially irresponsible”. According to their beliefs, populist leaders, in attempting to address social injustice, dramatically increase spendings and taxes for top-earners. By not taking into account budget constraints, governments thus end up in debts which, in turn, usually results in a combination of inflation, capital flight, recession and default. Examples of this include Salvador Allende’s Chile in the 1970s and Alan García’s Peru in the 1980s. The reasons for such political behaviour supposedly comes from the majoritarian aspect of populism, meaning that when the populist government is elected it needs to act fast to satisfy the demands of the people. As results must seen immediately, actions with a visible short-term impact are employed while their long-term effect is most probably infertile, if not damaging, for the economy. More on this will be discussed when addressing the impact of populism on politics, decision-making, and global governance.

However, what Rudiger Dornbusch and Sebastian Edward depicts seems less applicable to some current populist leaders, thus suggesting that their model may be slightly challenged. For instance, Mexico’s president, Andrés Manuel López Obrador, has offered what many believe to be a revolutionary macroeconomic plan which has allowed a surplus before interest payments of 1 percent of GDP in 2019 and of 1.3 percent in 2020. In addition, the prime minister of Hungary, Viktor Orban, has managed to reduce the stock of public debt down by 6% since his election. In Poland, under Jaroslaw Kaczynski, the debt/GDP ratio was pushed under 50 per cent last year, something that had not been seen since 2009.

One can thus ask themselves what has changed since the publishment of Rudiger Dornbusch and Sebastian Edwards’ Macroeconomics of Populism. Mainly, it is possible to notice a significant change in the policies employed by populist leaders since the 70s and 80s. Indeed, while populism is normally to be seperated from nationalism, it appears that the distinction between these two concepts is becoming blurrier. Therefore, this allows populist governments to strive for autocracy (national self-reliance) and avoids relying on foreign capital. A reason for this shift may be that the perceived enemy of populism, the “them”, has become an external entity rather than an internal one. Indeed, the end of the 20th century has intensified globalization, and in particular the international market integration of developed countries has led to greater division of labour. In turn, this has led to companies relocating for cheaper labour and raw material. While this decrease in cost might have decreased prices for consumers, it has also raised unemployment, thus explaining the surge for nationalist policies. In turn, an increasing number of countries have decided to resort to tariffs, sometimes resulting in retaliation. For instance, the United States has entered a trade war with China after imposing

So far, the US has imposed tariffs on more than $360bn (£296bn) of Chinese goods, and China has retaliated with tariffs on more than $110bn of US products.

Even if there might have been a short term gain in employment for the United States, the long term effect can have a significant negative impact for American businesses. Indeed, while we previously assumed that local producers always gain from tariffs on foreign goods, as they eliminate foreign competition, foreign intermediary goods necessary for local producers are also affected by the tariff expenses for these producers and their price will thus increase as well. Indeed, this concept was developed by economists Clarence Barber and Max Corden. Thus, the increase in tariffs on aluminum and steel in the United States has raised the prices of these inputs for American producers who now have to either buy foreign intermediary goods at a higher price or buy from local suppliers who also have higher prices. In turn, American producers may have to raise prices for the goods they sell. This can lead to a decrease in consumers’ disposable income on the long-term. Indeed, as consumers have to pay more for certain goods, they can spend less on others. In turn, this can increase the demand for cheaper public services, thus creating a strain on the government’s budget. Lastly, most economists agree that the last time high tariffs were imposed, during the great depression, might have worsen the crisis.

The last time that the proportion of voters in industrialised countries choosing anti-establishment candidates was as high as it is now was during the 1930s, with the figure reaching 40 percent. Similarly to at that time, populism surged again after the 2008 financial crisis. The financial crisis persuaded the people that they were ruled by incompetent and self-serving elites. In particular, the fact that Wall Street and the City of London were bailed out while ordinary people lost their jobs, their houses and their sons and daughters on the battlefield in Iraq and Afghanistan, reinforced their feeling of being left out. Britain’s scandal over mps’ expenses and the shock regarding America’s lobbying which funnels corporate cash into politics are other examples of this. The anger spurred by populism regarding our current political system brings us to our second topic: the effect which populism holds on on trade, our democracies, and global governance.

Trade and the impact of populism on politics, decision-making, and global governance

A new Ipsos survey indicates that ⅔ of people interviewed believe that the current political system is not only broken but rigged for the rich. In addition, 64 percent of people around the world aged 16-74 currently feel a need for “a strong leader to take their country back from the rich and powerful”, while 49 per cent feel that “to fix the country we need a strong leader willing to break the rules” and some 62 per cent “feel that experts don’t understand the lives of people like them”. Another survey suggests that over half of voters from eight countries in Europe and North America told the Pew Research Centre that they were dissatisfied with how democracy is working.

This increased populism has been particularly damaging for trade, and the process will accelerate if countries continue to rebel against democracies. Paradoxically, democracies are not dying anymore because of coups and revolutions. Instead, it is now the people itself which are rising against democracies, while those were supposed to put them at the centre. However, a new survey from Echo, a London communications group, puts forward that populism is creating a new trend of political engagement within citizens around issues such as the environment. Apparently, “in the UK 53 per cent of adults polled, and 57 per cent of adults in the US, claim to have written to government or companies, signed petitions and taken part in marches or protests”, while “among 18- to 34-year-olds, the activism is higher still at 64 percent and 68 percent of those polled”. This is striking — and welcome, if you believe that people should take part in politics. In this case, the involvement of the people raises the issue regarding the environment, which is closely tied to international trade. Indeed, one of the main reasons the people are stepping up is to address environmental concern, indicating that it has significantly been damaged by globalization. Fast-fashion, for instance, is one of the main examples of this. Therefore, this could suggest that populism may allow to address issues that had not previously been raised.

In addition, as mentioned before, populism is majoritarian, meaning that the people’s desires must quickly be satisfied after having elected a new populist government. Thus, Mudde explains that it is frequent to see that populist dismiss populist leaders dismiss key democratic concepts such as “minority rights, rule of law and separation of powers”. Weiss writes that authoritarians see the world in terms of “emergency and exceptional situations”, thus anyone obstructing “the people” must be eliminated. In Hungary’s case, while its economy is increasingly prosperous it should be underlined that its ruling party has captured the judiciary and media and, according to Mudde, has built this century’s first “populist radical state”. Therefore, the prime minister, Viktor Orban, does not need to break the law to make decisions as he can get parliament to change it instead. The prime minister does not need secret police to take his enemies away, rather they can be eliminated without violence, by the press. Thus, “in form, Hungary is a thriving democracy; in spirit, it is a one-party state”.

However, this pattern is increasingly being seen in other states. Indeed, it seems to be happening not just in young democracies like Poland, in which the Law and Justice party has set out to mimic Fidesz, but even the longest-standing ones like Britain and the United States. Brexiters, for instance, seem to follow the same path: politicians are now threatening to ignore parliament’s ban on a no-deal Brexit, and most recently Johnson shutted down parliament.

Therefore, if populism has not peaked yet, a question can be raised: how do we bring the best out of it, are our democracies in danger, and can the recent issues raised by populism match the World Trade Organization's fundamental goal — international free trade ?

Bloc Positions

Anti-International Trade Countries

As has been mentioned, the rise of populism in some countries has brought about suspicion and an overall decrease in international trade. Places as diverse as Italy, Brazil, Hungary and Sweden have been displaying increasingly populist tendencies recently. So too has Britain, judging by the battle over Brexit. Countries like these have threatened to use, or have already implemented protectionist measures. After Bolsonaro’s election, for instance, Brazil rushed to protect and support domestic industries in certain economic sectors (the so-called strategic development plans) through import barriers and generous public support—at the expense of international competition. India, on the other hand, is justifying its agricultural subsidies by claiming that their poorest citizens can't afford food, but they're maintaining massive tariff walls that effectively prevent the imports that could bring prices down. In some cases, like in the United States, leaders have even expressed their desire to leave international institutions and agreements that favour international trade, as is the WTO. Delegates in such a position will favour a resolution that weakens the role of international institutions and that supports self sufficiency. Alternatively, delegates in such a position could opt not to write a resolution and instead seek to weaken resolutions that aim to strengthen the powers of institutions or favour multilateralism at the expense of national economies.

Pro-Globalization Developed Democracies

In stark contrast with the bloc above, the democratization of some countries throughout their history has manifested a stark interest in open markets and international competition. Some nations, in fact, take part in so much international trade that the combined value of all of their imports and exports exceeds their entire gross domestic product, or GDP. Such is the case with Belgium, Luxembourg, Singapore, Ireland, Canada, and some countries in the G7. which have economies that are heavily involved in the international trade world. In some cases, some democratic, open market countries are heavily dependent on other economies (i.e Canada and the United States), implying that their national economies would suffer deeply if their trade partner implemented protectionist measures. In fact, only a few open economies with little exposure to the tariff-imposing country may gain as a result of increased competitiveness in third markets. The NAFTA agreement, for instance, which has been a massive relief to Canadian industries since its implementation, has been put into question numerous times by US President Donald Trump. If the US were to abandon the deal, the Canadian timber industry, for example, would experience tremendous repercussions. But the effects could also be material for those economies that, despite having a less direct exposure, are particularly integrated into global value chains. For example, one estimate puts the share of global value chain-related trade at more than half of exports from many South-East Asian economies. The erection of trade barriers, then, threatens this integration, with potentially serious negative consequences for those countries. Delegates on this bloc will thus favour a resolution that aims to protect the role of multilateral institutions, and that aims to limit the abilities of populist leaders to impact the flow of international trade. A problem that such delegates might experience is that of enforcement and ratification. It is important to consider that the WTO does not have enforcement powers, and that it cannot call upon the Security Council to take action. Under such circumstances, then, delegates from this bloc will face a great diplomatic challenge; how to ensure that those countries threatening the flow of international trade are constrained? They might want to consider to counter the calls made by populist leaders and exercise leadership to wrap-up the Doha Round, fight unemployment with macroeconomic policies and strengthen safety nets to minimize calls for protection.

Developing Economies

Developing economies suffer the most from protectionist agendas and the anti-globalization movement, for it affects the use and redistribution of resources, and limits foreign investment. This is because the income of developing nations is closely tied to the strength of larger economies. According to the OECD, restrictiveness can take the form of “new rules or more rigorous enforcement of existing ones; greater conditionality attached to regulatory approval mechanisms; or a more expansive notion of strategic industries, the national interest and national security”. It is also important to note that multilateral trade agreements and the rules implemented by the WTO also help protect developing countries. These agreements limit the ability of powerful countries to dictate terms of trade that benefit them at the expense of the poorer country, so if the anti-multilateralism movement continues, it is expected that larger economies will overtly take advantage of smaller, developing ones. Delegates on this bloc will thus seek to negotiate with large economies, and join in a common resolution that ensures the implementation of existing international agreements that protect them. It is important that delegates on this bloc consider their economic interest and join, or draft a resolution that has their best interest in mind, with the least amount of conditionalities possible.

In this context, the role, goal, and rights of the World Trade Organization are being put in question. Can our economies, and democracies, survive in a globalized world ?