At our launch event earlier this summer, an audience question was asked that led to great, almost philosophic, answers by economist Peter De Keyzer and academic Jonathan Holslag. It also became a discussion about the DNA of peoples and how it differentiates America and Europe.
The question started from the seemingly ever increasing consumption behavior in Europe and the mass production in developing countries through cheap labor and how that increased purchasing power for Europeans. This led to the question whether or not we are in a position to take drastic measures against the likes of China who have acted as ‘our cheap providers of consumption goods’ for decades?
Peter De Keyzer reacted that Europe was not likely to take drastic action, certainly not in the way the US (“tackling two feet forward”) decided to do that. He took a step back and put the issue amidst the move of jobs to lower wage countries after the fall of the Berlin Wall, spurring development and prosperity in these regions. In developed countries consequences were not always positive. Peter gave the anecdotic example of Joe Sixpack losing his job in the airco-factory that moved to China. Joe was able however to buy his products at Walmart at lower prices and sustain his standards of living that way. The companies who moved their factories to these lower income countries have profited substantially from a larger market.
This introduction brought Peter to the World Bank economist Branko Milanovic, who depicted these consequences in what he called the Elephant Graph. It shows how the global population, from rich to poor, were impacted by low inflation and mass outsourced production. The 20 to 50% poorest segment of the population have significantly benefitted since 1988 through a rise in income of approximately 70 to 80%. A large part of the Western middle class however is worse off. This is a big contributor to Brexit votes, to Trump’s success and other populist phenomena across the world. Finally, the trunk of the elephant: the top 1% have benefitted substantially from growing markets.
An answer however needs to be found for the middle class, that is for sure. Peter states that the European answer will have to be fundamentally different from the US protectionist measures sparking a trade war. Isn’t the EU the biggest free trade agreement in the history of the world? The idea that free trade can create benefits for all parties involved is quintessentially in our DNA. Peter believes that this trade crisis, these protectionist measures serve as a soul-searching for Europe in terms of the values we stand for: free trade and freedom of the individual. Our behavior in the globalizing economy needs to glue with these values as it can redefine European and international free trade policies in the 21st century.
Isn’t the EU the biggest free trade agreement in the history of the world?Peter De Keyzer
Jonathan Holslag was very intrigued by both the question and Peter’s answer and added two layers of nuance. Firstly, he counter-asked: can we continue to afford to import on credit like we do? Like in the US and the UK, many European countries are importing on credit. Inevitably extended periods of mass import goes hand in hand with a lack of focus and investments on one’s own productivity. This is a toxic imbalance and is often solved by a period of protectionism to adjust the balance. Did we see the Machiavelli in Jonathan Holslag here? Does the means of protectionism justify the goal of restoring important economic balances?
Jonathan second nuancing opinion was about Europe’s ambition for a 4th industrial revolution that will be green, sustainable and fair. He linked that with unfair competition by China (and some other countries) who do not shy away from support to big companies and creating a unleveled competitive playing fields. Examples he gave were artificially cheap capital, less scrutiny on sustainable development of the economy and even cheap labor at times. Luckily, this is one of the discussions currently held in the European commission. Our European trade policies will need to take this into account and implement supporting measures on the way to new developments. Critics will classify this as ‘green protectionism’, but as these measure are applicable to all parties, Europe has to have the courage to push this through: it is a necessary and fair measure to level the global playing field.
Concluding, at some point we need to rethink our blind consumerism with its negative impacts on our planet. We will design a new set of rules in which we have to include links to global trade.
Quite intriguing to see how this question sparked the interesting debate we had.