Thijs Jochems: What is the real problem with globalisation?
This column was originally written in Dutch. This is an English translation.
Globalisation means that every country and every company specialises in what it does best. Combined with international free trade, this leads to an increase in total global production and prosperity. So why is there so much resistance to it?
By Thijs Jochems, Advisor and Private Investor
According to David Ricardo's theory of comparative advantage, the world should become more prosperous through greater specialisation. However, this requires that “production gains” can be passed on unhindered (without tariffs or administrative barriers such as those that exist within the EU) through global trade flows of products, services, technology and ideas. Why would countries even consider imposing tariffs? It only makes products more expensive for their citizens.
One negative consequence of globalisation is that local economic activities disappear as a result of globalisation. In the Netherlands, we have seen the disappearance of the textile industry, the production of TVs, etc. All these industries moved to “low-wage countries”. The impact on local communities was and remains significant. If the government fails to take adequate measures to combat the negative consequences, this will lead to considerable discontent at the local level. However, in the grand scheme of things, these are still “incidents” that affect relatively small groups within a society. So why is this discontent so widespread?
The ability to benefit from global differences in wages, taxes, subsidies, geographical advantages, economies of scale and the like is mainly reserved for large multinational companies. Tech companies in particular, which are usually platform companies by nature – Microsoft, Amazon, Facebook, etc. – and therefore have virtually no global competition, are realising large (excess) profits through globalisation. The rules of the WTO, the World Trade Organisation, also strongly favour large companies. In other words, although globalisation generates large excess profits, these are not distributed to “the world” but to a limited group of multinationals and their shareholders.
The skewed distribution of the additional revenues generated by globalisation – combined with the negative consequences for regions, SMEs, etc. – is leading to growing resistance to globalisation. An additional problem of globalisation is that we have experienced, for example during Covid, that global specialisation in supply chains has led to (excessive) dependence on other countries. A number of countries are using this position of dependence as a political weapon. This sometimes makes it necessary to limit globalisation for strategic reasons. Nevertheless, there is still enough “production” left for the world to benefit from comparative advantages. How should we organise globalisation in order to improve the unequal distribution of benefits and burdens?
The OECD has been trying for years – unsuccessfully – to introduce a global minimum tax rate for multinationals. “Broad-based taxation on imports” negates the benefits of globalisation. A better approach is specific taxes such as the Digital Services Tax. The EU is already working on this. In line with this, governments could skim off the excess profits generated by globalisation from multinationals and large tech companies such as Apple by levying specific taxes on certain products and services. These taxes would be paid by the companies in the country where the products and services are offered and purchased. If governments use the proceeds from these taxes to invest in hard-hit regions and professional groups, we will achieve a broader and therefore better distribution of the benefits of globalisation. By also exempting SMEs from these taxes on certain products and services, there will be a further redistribution of the windfall profits from globalisation.
