"The fifth era of globalization has come to an end," says Douglas Irwin, John French Professor of Economics at Dartmouth College in the US and a leading expert on international trade. The huge growth in trade of recent decades has come to a halt, and although the future is still unclear, and to a large extent depends on what US President Donald Trump decides, talking to "Globes" Irwin warns that the eradication of world poverty is liable to stall, and trade wars could deteriorate into shooting wars.
Irwin worked in the past in the US Federal Reserve, and was a junior staff economist on the Council of Economic Advisers of President Ronald Reagan. He came to Israel to take part in a student seminar of the Friedberg Economics Institute, which promotes economic freedom in Israel and the Abraham Accords countries. As a prominent economic historian, it’s only natural that, to explain how significant was the period of globalization that has ended, he goes back in time to 1815, when Napoleon, who had led France to the conquest of most of Western and Central Europe, was finally stopped at the Battle of Waterloo.
"In the years following, there was a welter of important inventions, such as the steamship and the telegraph, together with extensive movement of workers and of capital," he relates. "During those years there was a slow but steady rise in trade, but it did not penetrate deeply, and it did not yet reach most of the world." Irwin thereby refers to what today is called the "Third World," countries with a low level of development, that entered into global trade late, with the economic effects of that still being felt.
From the fall of Communism to the subprime crisis
Irwin goes back to the first period of globalization, which ended with the outbreak of the First World War, after which global trade began to decline. "In the 1920s, there was reconstruction, but it was ended by the Great Depression that began in 1929. That was a severe blow to globalization, because a substantial part of the response to it, both in the US and in the rest of the world, was protection of industry and the construction of tariff walls."
Immediately after that came the Second World War, which again caused countries to become inward looking, and did not allow international trade on a large scale. "After that, global trade recovered dramatically, but it was mostly split between two blocks: liberal and communist. Third World countries were even more closed, out of a perception that global trade was exploitative – but that harmed their growth."
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The really big change came in 1989, when the communist block collapsed. "The Berlin Wall fell, Europe switched to a freer economic model, and even China became more capitalist. India started to develop, and it seemed as though international trade in the framework of the ‘Washington Consensus’ was uniting the world and connecting all ends of the earth. The period between 1990 and 2010 was the strongest ever period of globalization, by some way."
But starting from the global recession that began with the bursting of the subprime bubble in the US, the growth in international trade halted. As a proportion of global GDP, international trade today is similar to what it was in 2006. "And it’s getting worse," says Irwin. "In addition to Brexit, the UK’s secession from the European Union, China is turning inwards, and the US under Trump is doing so as well. It’s still not a substantial decline in international trade, but it’s certainly a halt to growth."
In a previous interview with "Globes," in 2020, Irwin already acknowledged that economists were discussing whether globalization had reached a peak. "There has been a huge expansion of trade in the past twenty or thirty years, driven in part by policy that encouraged trade, and that enabled the supply chain to develop," he said then, "But when you look at global trade as a proportion of global GDP, you can see that it has been in decline since 2011. That means that we may have reached an inflection point, that there’s a limit to how far the world’s economies can become integrated."
In that interview, which took place at the height of the Covid pandemic, Irwin already argued that Trump, who was in his first term as US president at the time, "is encouraging this development," although he hedged by adding that it had begun before him. "Even if there were no Trump, if the supply chains turned out to be vulnerable, trade would have declined in any case," he said.
On Trump’s move: "It doesn’t look good"
As in the Cold War period, the world is starting to split into two separate trading blocks, and, according to Irwin, the biggest and most important cause of that is the crisis in trade between the US and China.
In your interview with "Globes" in 2020, you warned that another term for Trump would be liable to lead to a real trade crisis. How do you see that today?
"It doesn’t look good. Not does it look as though there’s material change in China. To recreate the integration of world trade, we need one of two things: either a policy of economic liberalization and an orientation towards free trade, or a major technological innovation, such as the standard container that, at the time, gave a big push to international trade. Well, it does not look as though countries are moving in a liberal direction, and it also doesn’t look as though there’s a technological breakthrough of that kind."
Here’s a tough question: What is Trump trying to achieve?
"Trump has rather a lot of goals, and he also changes them frequently. He says that tariffs will bring money into the US, which will make it possible to cut taxes. He wants to bring industries and productive jobs, that in the past shifted to other countries, back to the US. He also wants to lower the trade deficit, because, as far as he is concerned, it means that other countries are taking advantage of the US."
The trade deficit is the gap between exports, that is, goods and services that a country sells, and imports, what it buys. "The significance of a trade gap, is drawing capital from the rest of the world. Trump doesn’t really see that," Irwin explains. "From his point of view, if a country doesn’t buy from the US, it’s exploiting it. He comes with the perspective of a businessman. No business can stay in existence if it buys more than it sells, and he sees the US as a business, but it doesn’t really work like that, because the difference is investment."
In what? In preparation for future exports, and also in US government debt, which is sold all around the world. In fact, reducing the debt will also reduce the trade deficit.
"Another matter that Trump is promoting in his trade policy is a reduction in other countries’ tariffs on the US, and he’s using counter-tariffs to push for that. On the other hand, he’s also not happy with the trade agreement with Mexico and Canada that he himself signed, and which is a free trade agreement in every respect. He’s also threatening annexations and border changes, but it’s not clear whether that’s serious or just excuses as part of a trade war."
The poor will pay far more than the rich
Trump’s supporters refer us to the nineteenth century, to a time when the US federal government’s revenues came mainly from customs duties. Why did that change? And is it relevant to a service-based digital economy such as we have today?
"Indeed, customs duties were 90% of the federal government’s revenues until the Civil War, and 50% until the First World War. The main reason for that situation is that the US economy was agrarian, but as the US economy developed, diversified, and underwent industrialization and urbanization, it became easier to collect internal rather than external consumption taxes. Is that relevant today? Simply, no."
Why?
"The general rule for obtaining high government revenues is to collect low taxes from a wide base. When a tariff is imposed on a specific import, the importation of that product will simply become smaller. Trade is very sensitive to this. By contrast, taxation of income and consumption creates less of this sort of effect, because people will still want to work and to buy things. So a tax system based on tariffs is not a good basis for a modern economy."
The choice of products on which to impose tariffs is also not obvious. "Trump chooses to impose tariffs on automobiles, for example, because that’s an iconic US industry. Nevertheless, Americans buy foreign vehicles a lot more than foreigners buy American vehicles. Trump sees that as unfair," Irwin says.
Who supports these aims?
"In industry, it’s hard to find support for the tariffs policy. It’s true that the steel industry supports it, although they’ve always been protected. The automobile industry unions also support it, but honestly, there isn’t mass support from below for these plans. There are of course many people who support Trump in the context of the MAGA (make America great again) movement and the culture war in the US between conservatives and progressives. But there’s no broad movement from below that supports going in the direction of shutting off trade. That’s Trump, and he’s moving the people around him in that direction."
Will the decline in international trade make the world poorer? Who will mainly suffer?
"You have to remember that tariffs are very regressive. Poor people will therefore pay much more than rich people. Every country involved in trade will be affected, and we will all be poorer as a result. The fourth period of globalization, from 1990 to 2010, was characterized by a dramatic decline in world poverty. Today, we can already see a slowdown in the rate of decline of extreme poverty around the world. It’s hard to predict which countries will be particularly affected."
Another expected effect that Irwin mentions is that tariffs will lead to higher prices. "It isn’t inflation, which a continuous rise in prices over time, but rather a one-time jump. Still, real income will certainly fall. As far as growth is concerned, the US is a very large economy in which trade plays a relatively small part. The impact on growth will be smaller, and the US can afford a trade war more than other countries."
How should Israel behave in a more protectionist world? Is there any way we can gain from it?
"Israel has free trade agreements with the US and with the EU, and that’s a very good basis, but it’s not enough. You need to sign as many trade agreements as possible, in order to diversify, particularly with East and South Asian countries, and Latin America. And if there are possibilities for signing peace agreements, that will open many more doors."
Israel signed free trade agreements with Vietnam and with South Korea several years ago, and Minister of the Economy Nir Barkat is working on a similar agreement with India, although that is not yet on the horizon. "The more such agreements that Israel signs, the more it can reduce risks, and even boost trade. If some of the countries turn inwards, connections with as many markets as possible are insurance against that."
As for the possibility of gains, Irwin says that Israel can deepen its hold on industries with global demand for which supply will be harder to obtain. "Israel as a technology center, both in production and services, can create large advantages. In the chip industry too, Israel has manufacturing capabilities and experienced workers. The US is very concerned about Taiwan and South Korea, which are threatened by China and by North Korea respectively, which is liable to make them less reliable. In this respect, Israel could stand out favourably as a source."
Could a trade war turn into a shooting war?
"That’s a difficult question, because the historical evidence is mixed. In many ways, geopolitics affects trade wars, not the other way around. Trade wars are the symptom, and not the cause. But they are certainly liable to bring war closer, because they reduce mutual dependence, which reduces the costs of war, because the economies are in any case disengaged. One of the arguments in favour of trade with China is that it will make it harder for them to invade Taiwan. But if China is isolated, it will be easier for it, politically and economically, to go to war. It can be seen how much Russia is suffering from sanctions, ad similar actions could be a lever on China. But of course, it’s important to remember that even that doesn’t lead to immunity from wars.
"One of the reasons that democratic countries tend not to go to war is that they are committed to their citizens and their economic position," Irwin adds. With that, he also refers to allies of the US that are among the chief casualties of the trade wars. "Alliances are relationships, and relationships are a long-term business. If Trump exploits these relationships for short-term gain, he puts the US into a position with fewer advantages in the future."
Published by Globes, Israel business news – en.globes.co.il – on March 16, 2025.
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