By Jacob M. Schlesinger 

To understand the current state of globalization, consider what's happening at three of the primary institutions designed to promote it:

-- The World Trade Organization is growing increasingly paralyzed by divisions undermining its ability to police international commercial disputes.

-- The United Nations' attempt to set global migration guidelines has provoked a backlash from more than a dozen nations arguing it threatens their sovereignty.

-- And the leading model of cross-border economic harmonization, the European Union, is slated to lose one of its biggest members, the U.K., in March. For the 27 countries remaining, polls forecast a united front of Euroskeptics winning enough seats in May parliamentary elections to "turn back the clock on European integration," according to a recent Der Spiegel analysis.

Clearly, globalization -- the smooth flow of goods, labor and capital across borders -- faces intensifying headwinds in 2019. The challenges, both political and commercial, are mounting, and growing messier, while advocates find responses increasingly difficult to craft.

Slowing ahead

Those challenges are reflected in the data. The WTO recently lowered its outlook for world trade growth in 2019 to 3.7%, down from a recent peak of 4.7% in 2017, due in part to "heightened tension...between major trading partners." The U.N. warns of a "troubling global investment picture," marked by a 23% drop in foreign direct investment in 2017, followed by another 41% decline in the first half of 2018. The organization also estimates the annual growth rate of international migrants fell to 2% for 2015-17 from 2.9% annually for 2005-10.

The news isn't all bleak for globalism. For one thing, international economic integration shows no signs of collapsing, as it did during phases of outright deglobalization. From 1914 to 1945 -- a period marked by two world wars and the Great Depression -- trade plunged from 38% of global economic activity to 7%.

What's more, the global trading system has shown some surprising resilience. The U.S. and Mexico -- each led by market-skeptical nationalist-populists -- last year defied expectations by salvaging the North American Free Trade Agreement with modest tweaks, rather than blowing it up. The day after signing that pact, President Trump reached a truce with his Chinese counterpart, Xi Jinping, in their monthslong market-rattling trade confrontation, at least until March 1.

The globalist-bashing American leader now vows that his long-term goal is expanding, not constricting, international trade -- albeit rejiggered along lines he considers more favorable to the U.S.

Yet "the quality of globalization is getting worse," says Adam Posen, president of the Peterson Institute for International Economics. "It doesn't mean it's going away," he says. But the benefits -- the efficiencies and income gains -- "are eroding."

Even the staunchest advocates of globalization acknowledge that those benefits from a tighter world economy haven't been shared equally, while the process of creating them has amplified income inequality and disrupted many long-successful industrial communities in advanced economies. They urge that the system be fixed. In an October primer on "sustaining globalization," the Peterson Institute recommended improving education and making it more inclusive, giving "all displaced workers sufficient financial and administrative support," addressing income inequality, and shoring up the health-care system.

But there's growing difficulty in pursuing such policies, the result of a kind of political Catch-22. Intensifying polarization is consuming democracies around the world, in part due to the backlash against globalization. The resulting paralysis in turn makes it harder for leaders to enact the policies that could moderate opposition.

Italy's left-right ruling coalition took office last year vowing to do more to take care of globalization's losers, crafting an ambitious budget offering a universal basic income for the unemployed, while lowering the age when retirees could receive pensions. But Rome was forced to scale back the plan in December, bowing to bond traders driving up Italian interest rates on fears of runaway debt, and to EU leaders declaring the plan violated the union's limits on deficit spending.

In Washington, an ideological divide between Democrats and Republicans over how best to ensure health coverage has led to the erosion of existing government programs without any bolstering of private-sector alternatives. Both parties talk about doing more to help hard-hit workers and communities with more training and infrastructure, but have done little to provide funds.

"We've been operating for a long time in a situation where positive action by the federal government is limited," says Edward Alden, a trade expert at the Council on Foreign Relations whose 2016 book "Failure to Adjust" chronicled the links between the anti-globalization backlash and the lack of worker support programs.

Rules fights

Beyond the internal divisions within major economies, the gap is also widening between them over how to define the rules of globalization -- another force constraining the advance of world economic integration. American authority to impose its vision of markets has eroded, while China is gaining increasing clout to shape the world economy with its contrasting strategy of state-driven commerce.

That's a big change from the early 1990s heyday of multilateralism, when 120 trade ministers gathered in Marrakesh, Morocco, to finalize the agreement creating the WTO. The Cold War had just ended, and the international economy seemed to be coalescing around U.S.-style capitalism, steered by the U.S. as sole superpower. The new body was both rooted in that end-of-history assumption of convergence, and designed to enforce it.

But the subsequent emergence of China as the world's leading trader has tested that mid-1990s framework, exposing hard-to-reconcile contradictions over the definition of "fair" trade. Those long-simmering disparities erupted into open conflict in 2018, with Washington and Beijing imposing steep tariffs on more than half of all goods exchanged between them -- essentially espousing a new era of dis-integration between the world's two largest economies, unless such fundamental conceptual disagreements are bridged.

The U.S.-China trade spat is also undermining the authority of the organization tasked with resolving such disputes. A core purpose of the WTO is to reduce the odds of commerce-hampering trade wars -- where countries choose on their own to punish and retaliate against trading partners -- by creating a trusted, neutral arbiter to determine whether global rules have been broken.

For a quarter-century, it generally succeeded. But the Trump administration argues the WTO isn't equipped to police flagrant fouls, especially by China, and has taken matters into its own hands, often slapping on trade sanctions without awaiting Geneva's imprimatur. That has triggered a self-reinforcing spiral of extralegal trade disputes, with Beijing and other nations retaliating outside WTO channels.

New ground for U.S.

That highlights another big shift casting a cloud over the future of globalization: For the first time in decades, the U.S. isn't committed to advancing the cause. American officials say they will work with like-minded nations to try to reform the global system, but no longer offer open-ended support for it.

"We have to be very careful about recognizing multilateralism for multilateralism's sake," Clete Willems, the White House aide overseeing international economic policy, told a December conference of Washington trade lawyers and lobbyists.

Even as the U.S. has flipped from its longstanding role as globalization champion to challenger, other countries have tried to fill the void, continuing to advance the cause of trade liberalization. But they are doing so in ways that fragment, rather than solidify, the global economy, by creating bilateral and regional free-trade zones.

Eleven nations in Asia and the Americas on Dec. 30 started their own bloc of tariff rates and trade rules dubbed the Comprehensive and Progressive Agreement for Trans-Pacific Partnership. On Feb. 1, Japan and the EU will create yet another commercial zone, with a separate manual governing business between their economies. The result is an increasingly complex patchwork quilt of sometimes-overlapping, sometimes-conflicting regulations, making it harder for multinationals to do business across regions.

The rapidly evolving nature of trade itself has become a challenge to the ideal of a cohesive global economy.

Technology is, of course, accelerating globalization in many ways, by cutting costs, facilitating communication and allowing even tiny firms to transmit products and services instantly via the cloud to consumers all over the world. The McKinsey Global Institute estimates that, since 2015, the global value of international data flows has exceeded the value of global merchandise trade.

But the impact of digitization is complicated, and can at times simultaneously tighten and weaken economic ties across borders, as it allows companies to do more business outside their home country with a much smaller footprint in foreign markets. A U.N. investment report noted that, for many multinationals, "by creating new ways to access markets the digital economy can make a physical presence less fundamental or even obsolete, which could result in a retreat of international production."

And digital free trade can be more difficult to police than conventional goods trade. Over the steady postwar march toward globalization, trade liberalization focused on tracking and cutting tariffs and quotas on machines, crops and other concrete goods. The battles over those policies have at times been fierce, but the battle lines were fairly clear over how to define and detect protectionism.

"Digital protectionism is hard to define and perhaps even harder to contest," writes Susan Ariel Aaronson, a professor of international affairs at George Washington University.

Attempts to do so foment testy cross-border squabbles over policies that many governments say are legitimately designed to guard privacy, cybersecurity or law enforcement -- even if they also happen to raise production costs, hamper data flows, and force companies to turn over to foreign governments source codes and other valuable intellectual property.

Many U.S. companies have complained about the commerce-restricting impact of new European privacy rules that took effect last year, prompting some to leave the bloc and cut off Continental customers. The response from European lawmakers in a widely cited open letter: "Data protection should not be subject to trade negotiations. It is a fundamental right, not a trade barrier."

In a 2017 survey of 400 chief information and technology officers, the consultant Accenture found that three-quarters "expect to exit a geographic market, delay their market-entry plans or abandon market-entry plans in the next three years" due to new digital trade barriers.

It doesn't help that the WTO can't offer clear guidance on what is or isn't allowed, since its rules haven't had a major update since 1995 -- long before world trade was revolutionized by Amazon.com Inc., Google, cloud computing, mobile phones and apps. In 2013, two dozen members launched talks to try to hash out consensus guidelines for digital trade, but that effort was put on hold after three years of fruitless discussions, and remain stalled.

Despite all the problems, Alan Wolff, a veteran American trade lawyer and now deputy director general of the WTO, says he is "very optimistic, " because, he says, "open borders and rules-based trade...are better for national economies...and efficiency is a gravitational force."

The motto of the city of Geneva is "post tenebras lux," which translates to "after darkness, light," Mr. Wolff told a December audience at the Peterson Institute. But he was careful to avoid forecasting just when the latest fights would pass and a new dawn of globalization would emerge. "Do we go over a cliff first?" he asked. "Perhaps."

Mr. Schlesinger is a Wall Street Journal senior correspondent in Washington. He can be reached at jacob.schlesinger@wsj.com.

(END) Dow Jones Newswires

January 21, 2019 19:34 ET (00:34 GMT)

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