Opinion Globalization Is Good for Europe

Europe is nervously watching the dramatic changes under way in the world economy. The suspicion is: If it is good for the Chinese, then it is bad for us. But protectionism is not the answer, argues the former EU Trade Commissioner.

By Peter Mandelson

Among the many abilities of the Indian Trade Minister Kamal Nath, one of the least appreciated is his ironic sense of humor. He has one particular quip that goes right to the heart of the contemporary politics of globalization. Whenever a European refers to India as an emerging economy, Nath shoots back that by this definition Europe must be a "submerging economy." Nath knows exactly what nerve he is touching. The idea that the so-called Old World (in what sense is Europe's civilization older than China's or India's?) is struggling to hold its own against the dynamic rise of the new is familiar enough. Even though this is not the case -- or need not be if we make the right public policy choices now -- it has not stopped many Europeans and Americans from fearing the emerging political and economic landscape of the 21st century. How Europeans respond to this picture will matter not just to Europe but to the rest of the global economy as well.

The European social model is not endangered by Chinese textiles.

The European social model is not endangered by Chinese textiles.

The raw and explosive growth of China and India in the last two decades is enough to make most other economies look pedestrian by comparison. But the reality in Europe remains anything but pedestrian. Seven of the world's ten most competitive economies are European. Europe continues to dominate export markets across the entire range of manufactured goods and services, especially for products with a high degree of creative or technological content. Europe still accounts for a share of global economic output that dwarfs China and India combined. These are not arguments for complacency in the face of economic competition but they are reasons for perspective.

Many Europeans intuitively believe that a world in which China and India achieve export superpower status must be a world in which Europe's own prosperity is proportionately reduced. While this might be the case for raw measures of relative power in the global economy, it does not hold for economic prosperity. Despite China and India's steady growth in productivity and mechanization and the resulting increased trade competition, the European economy has followed the growth boom in the emerging economies over the last decade with a net job creation of 18 million. Globalization turns out to be a striking example of the "lump of labor" fallacy -- the mistaken notion that there are only a fixed number of jobs to go around in the global economy. A hundred million new jobs in the developing world have not cost Europe a single job on aggregate. Instead, Asian competition has been good for Europe. European companies have responded to the new competitive pressure by looking for new areas of specialization, both in manufacturing and especially in the services sector. Purely in terms of our aggregate prosperity, preserving globalization makes economic sense.

Globalization is, however, about to enter a new political phase. The economic effects of globalization have been felt for decades in Europe through increased pressure on businesses, decline in local manufacturing, and a steady downward pressure on import prices. This process has nevertheless been one that has been broadly conducted on European (and American) terms. It has been driven by Western investment and capital, and structured to supply Western demand. We are seeing the first signs of how that will change.

Company acquisitions and inward investment from the emerging world are beginning to bring home to Europeans precisely what globalization means in terms of the growing economic weight of Russia, China, and India. You might call this "the Tata effect" -- after the Indian car manufacturer that produced the world's cheapest automobile in 2008, the same year that it took ownership of the prestigious British car manufacturer, Jaguar. These are the surface signs of a fundamental change. The global economic architecture is being fundamentally restructured. Economic power has been dispersed globally away from its concentration in the Atlantic world. While nothing in this process is inevitable, it is safe to say that political power is now following a similar shift.

This will likely provoke considerable anxiety in Europe, as well as in the United States, not least because it will compound political anxiety about the effects of rapid economic change. The aggregate benefits of economic globalization for Europe do not conceal the technological changes and the competitive pressure applied to labor-intensive manufacturing that have forced painful adjustments on many in Europe. We are now competing harder for both our domestic and export markets. Old economic certainties have been eroded and as individuals we live in a much less predictable economic system.

This general anxiety is reinforced by the perceived failure of financial markets to manage risk responsibly, together with spiraling and speculative food and energy prices. It is also deepened by the fact that some of the largest of these new players in the global economy are state capitalists on the Russian and Chinese model. Although there is little reason to believe that these models are sustainable beyond the earliest phases of export-led growth (they are in fact obstacles to the development of sound capital markets and diversified economies), many in Europe nevertheless argue that Europe's liberal, rules-based, hands-off approach is naïve. The political pressure is likely to grow to contain the rise of these states or to shelter the European economy from them. Either course would mean putting Europe's current economic internationalism into reverse.

Does Economic Internationalism Matter?

European -- and American -- attempts to counter or contain this shift would not only be an unconscionable suppression of the development of half of the world's population, they would even be against a pragmatic reading of European interests. Europe's economic prosperity is rooted deeply in global economic demand and trade with a growing global market. Suppressing the growth of that demand would be counterproductive -- not just for us, but also for those further down the development ladder who can benefit from exporting to these growing markets in much the same way that the current emerging economies have done by exporting to ours. The European economic interest, in other words, is not simply the sum of what happens within our borders. We are a supply chain economy, and policies that try and shut Europe off from imports or from competitive pressure will raise our costs and therefore damage the very European economic interests they intend to serve.


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