Two years ago, in an article in the January/February issue of Foreign Affairs, we argued that the process of worldwide economic integration was likely to continue but that political support for globalization was rapidly weakening. Without political and institutional underpinnings, we feared, the single global economic space could disintegrate, just as it had during the 1930s. Politicians and mass publics in the United States, Europe, and Asia were not only skeptical that the benefits of globalization outweighed the costs, they also seemed intent on raising new barriers to the movement of people, capital, goods, and services across borders. The future looked muddled, driven by strong technological forces pushing global commercial and financial integration forward and equally potent political forces pushing in the opposite direction.

At the time, many people considered us overly pessimistic. Now it looks like we might have been too sanguine. The IMF predicts that global economic activity will expand by only 0.5 percent in 2009 -- down from 3.4 percent in 2008 and 5.2 percent in 2007. Global trade is expected to fall by more than 2.1 percent this year, and no major exporting country has escaped: China exported nearly 18 percent less in January 2008 than it did just one year earlier; for Korea, the drop was 33 percent; for Taiwan, 42 percent; and for Japan, 46 percent. According to the Institute of International Finance, private investment in developing economies has collapsed, falling more than 80 percent from its 2007 level. Whereas the worry two years ago was about the renaissance of state capitalism in energy and finance, it now appears that the banking sector in the United States, and almost every other major developed economy, will end up wholly or partially owned by the state.

Our description of the future as "muddled" turns out to have been an understatement. Today many are pessimistic about the future of the international system for the same reasons we were two years ago. In January, the World Trade Organization hopefully reported that most states were resisting the lure of protectionism. Although many were offering subsidies to their banks and auto manufacturers, it noted, "to date, most WTO Members appear to have successfully kept domestic protectionist pressures under control." A month later, the organization was no longer so certain, and optimism about the future was more difficult to locate. In the last several months, Brazil has raised tariffs on manufactured goods, the European Union has barred Chinese bolts and resumed subsidies on dairy products, and India has considered tariffs on steel imports.

The uproar among U.S. trade partners over the "buy American" principle initially embedded in the stimulus package -- companies would have been required to use U.S. steel and other goods in projects -- is a clear reflection of the concern that the economic crisis might kill globalization in its current form. Speaking out against the "buy America" provisions, President Barack Obama warned that the United States could not afford to send a protectionist message or "trigger a trade war." While this particular Smoot-Hawley-like bullet was ultimately dodged, protectionist temptations will not disappear and the political struggle for openness is likely to become ever more contentious.

The current crisis has caused the destruction of value, the contraction of capital, a decline in consumption, and an increase in unemployment. But its ultimate impact may be even more pervasive, because the crisis has further undermined the political legitimacy of the free movement of capital, goods, and services.

The legitimacy problem existed beforehand, of course, but the current downturn is making it much, much worse. When we wrote our article in 2007, for example, the U.S. public was wondering about how much globalization benefited them and whether some Americans -- say, bankers and CEOs of large corporations -- had benefited too much. Try asking the question now. The Chinese, meanwhile, were already working hard to keep all their plates spinning, ensuring continued rapid growth while addressing rising inequality and social protests. Soon the floor might be full of broken crockery.

As one of the most prolific exporters and important investors in U.S. dollar-denominated assets, China must play an important role in saving the global economy from which it has benefited so much. Beijing gamely talks about the need to "rebalance," shifting to a more domestic demand-driven model of growth, but has found it hard to abandon incentives for even more exports. Premier Wen Jiabao told the Financial Times, "Running our own affairs well is our biggest contribution to mankind." Perhaps. But the world will also need reassurances that Beijing's appetite for Treasury securities will outlast a crisis that, in the medium term, will threaten the value of the U.S. dollar.

Our message two years ago was that policy leaders needed to manage expectations at home as they worked together internationally. In particular, we argued that the United States needed to reinforce the global institutions that supported international trade while getting its own domestic house in order. Following through on these prescriptions is now even more necessary. In order to avoid disaster, all of the major economic players are going to have to resist pressure to protect home markets through subsidies or tariffs. Individual governments need to tackle the downturn through macroeconomic and financial policies; unemployment and worker retraining should be addressed through expanding and strengthening the social safety net. The United States in particular needs to absorb one of the most important lessons of European social democracy -- that a generous, well-designed welfare state is not the antithesis of capitalist globalization but rather its savior.

Amid all this gloom and doom, however, there is also a glimmer of optimism. Over the past 15 years, American capitalism lost its way, abetted by a world much too ready to lend it vast amounts of capital. The U.S. economy -- its households and companies -- essentially squandered those borrowed funds, saving and investing less, building and consuming more. The debate about the sustainability of those global imbalances has lost any charm it might once have had. Now, some $11 trillion of losses later, the answer is clear. And if the crisis proves to be a catharsis that persuades the United States to change its profligate ways, the legitimacy and promise of globalization may eventually be restored.

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  • RAWI ABDELAL is the Joseph C. Wilson Professor of Business Administration at Harvard Business School. ADAM SEGAL is Maurice R. Greenberg Senior Fellow for China Studies at the Council on Foreign Relations.
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