President Donald Trump, who was irritated by the US$500 billion annual US trade deficits with China, has slammed imports from China with huge tariffs increases, inviting retaliation from China to impose tariffs on imports from the US. Trump’s action was the latest example of the growing backlash against globalization. Discontent against globalization has been brewing for some time and has triggered protests — sometimes with violence — in many countries. And it has become one of the reasons for the rise of nationalist-populist movements all over the world.

It was an irony, since globalization — which is understood as free movement of goods, services, capital, people and ideas across borders — was a reason behind the boom of the world economy since the 1970s, where world economic growth and prosperity has reached an unprecedented level and hundreds of millions of people have been alleviated from poverty.

Between 1970 and 2008, the world output of goods and services quadrupled while the number of people living in extreme poverty dropped from 42 percent of the population in 1993 to 17 percent in 2011. The percentage of children dying before their fifth birthday declined from 22 percent in 1960 to less than 5 percent by 2016.

As trade barriers fell everywhere, and more and more countries opened to investment, trade and investment bloomed across many countries. The process was accelerated by the advent of information technology (IT) that has brought down the cost of production and transportation, and by China’s economic transformation into a market economy and it joining the World Trade Organization (WTO) in 2001.

The process has enabled companies to gain more efficiency in the production process with the emergence of a global supply chain, where different stages of production are located in different countries determined by their contribution to cost efficiencies. Trade in intermediates, parts and components expands across national boundaries. Through this process, emerging economies have been able to participate in the production of increasingly sophisticated products and increase their economic well-being.

These promising prospects of economic growth naturally should continue, but the reverse is true. Confidence in globalization started faltering, as more and more countries are now turning away from open and free trading systems to restrictive trading. According to the World Bank, since the global financial crisis in 2009, some 6,600 trade barriers — tariff and nontariff — have been erected by G20 countries. Cross-border financial flows have dropped from 23 percent of world gross national product in 2008 to 6 percent now.

What was the cause of this turn of sentiment against globalization?

It appeared that globalization did not benefit everyone and has created winners and losers. In some developed countries, inequality increased dramatically. The benefit of growth is enjoyed by a small number of elites who had skill and high education. The proportion of national output going to the top 1 percent went up from 9 percent of gross domestic product (GDP) in 1974 to 24 percent in 2008.

Millions of workers were displaced as factories were relocated to other countries, especially to Asia. The situation was exacerbated by automation, smart machines and robots that started to replace workers.

This shift coincided with two financial crises, one from the US subprime mortgage crisis that led to recession in 2008 and two from European debt crises triggered by Greece’s insolvency. Policy responses to this crisis were largely based on austere fiscal policies that ultimately produced recessions, high levels of unemployment and falling incomes for millions of ordinary workers around the world.

These adverse outcomes should not be inevitable, wrote Joseph Stiglitz in Globalization and its Discontents. They are the result of policies — globalization has been mismanaged. Globalization, if well managed could have benefitted all and didn’t have to result in people being worse off.

If globalization and trade weakened, it would be hard to expect the global economy to recover its former rate of growth. And with globalization shrinking and global trade growth slowing, it would be hard for Indonesia to pursue growth through trade.

What the government could do is seek domestically driven growth by deploying appropriate monetary and fiscal policies. There is currently some space for both monetary and fiscal stimulus.

The US Federal Reserve is no longer thinking about raising interest rates this year. Instead, recent remarks by its chairman Jerome Powell could be interpreted as opening the door to the Fed lowering interest rates. This is positive for Indonesia’s external risk. Several central banks in the world have cut their interest rate. Under these circumstances, it is only a matter of time before Bank Indonesia cuts its benchmark rate to support further economic growth.

In addition, government budget deficits are still low, providing fiscal space for the government to allow slightly higher deficits to bolster further growth. Loosening monetary policy and allowing higher fiscal deficits indeed pose some risk because it could trigger a negative response from the market.

But the Fed’s current stance on the interest rate was greeted with a stock rally on world markets last week. This indicates that the market would not be hostile to a looser monetary policy.

Under these circumstances the Indonesian government has reason not to worry over the market’s reaction, as long as macroeconomic stimulus is executed in a prudent and measured manner.

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The writer is an economist.

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