Could globalization crack up?

• Author: Smick, David M.
• Position: FROM THE FOUNDER

Here's a prediction: Barack Obama and the Democratic Party could, after four years, be out of power for a generation. The economic challenges are that daunting. The same would have been true had Mitt Romney won the U.S. presidential election.

I'm not talking just about the U.S. fiscal cliff or America's "budgetary crystal meth habit," as financier Bill Gross recently described Washington's inability to contain today's exploding debt. Nor am I merely referring to Japan's heart-stopping potential fiscal nightmare or the eurozone's losing struggle with austerity policies. Nor to the economic aftereffects of Hurricane Sandy, coming at the worst possible time for the United States.

The risk stems from something more fundamental: The globalization model of the past thirty years is at risk of cracking up. And there appears to be no new model to replace it.

Since April, an ugly economic world has turned uglier. The annual growth rate of total global exports has collapsed. Exports were a crucial engine in powering the U.S. economy out of the worst of the recession in the second half of 2009 and remain important for growth. Many of the world's important economic powers are highly export-dependent for GDP growth.

Lately, even China and India, which were thought able to decouple from the weakness of the industrialized world, have fallen victim to the seizing up of global trade. The World Trade Organization has slashed its estimates for trade growth. The UN Conference on Trade and Development reports that economic growth is weakening worldwide. The International Monetary Fund paints an ugly picture of the world economy.

Meanwhile, the Doha Trade Round is on life support. The world is at the edge of a currency war with more than a dozen countries beyond China manipulating their currencies against the dollar for trade advantage, according to the Peterson Institute for International Economics. China is experiencing trade deficits and has slapped tariffs on American-made automobiles in response to U.S. duties on Chinese tires. Leto Research analyst Criton Zoakos argues that rapid Chinese wage inflation and new software-based cost-cutting manufacturing technologies in the United States are setting the stage potentially to make the globalization model "obsolete."

Financial liberalization, including the free flow of capital, is also under worldwide pressure. Banks are rapidly becoming more nationalistic. This trend is heightened by regulatory barriers...