The Politics of Globalization

Over the past three decades, trade with low-wage countries - in firstplace China - has grown dramatically. Economic theory has longrecognized that trade liberalization, though enlarging the overalleconomic pie, also produces strong redistributive effects: while itincreases aggregate productivity and benefits consumers through lowerprices and a wider range of available goods, at the same time it is alsoassociated with substantial adjustment costs in the labour market. As thegains are diffuse but the costs concentrated, the lack of appropriatecompensatory mechanisms is likely to drive a backlash against theongoing economic transformations.The present dissertation aims at providing further understanding on theconsequences of trade globalization for developed countries.Specifically, our focus is on the political dimension of the phenomenon.Indeed, ballot boxes represent a litmus test of economic changes withprofound social effects and policymakers are called upon to offeradequate responses to the citizens’ requests.In chapter 2, we study empirically the role of low-wage importcompetition from China in shaping electoral outcomes in Italy over theperiod from 1992 to 2013. Given the unequal growth of Chinese exportsacross sectors, we compare the voting pattern at the nationalparliamentary elections in about 8,000 municipalities differentlyexposed to the trade shock according to their ex-ante industryspecialization. The model is estimated in first differences and Italianimports from China are instrumented by Chinese exports to other highincome countries.We find that China’s trade liberalization has favoured the spread ofpopulism in Italy. This result is robust to a large number of sensitivitychecks as well as to concurrent shocks that may have contributed to spura populist reaction in the Italian electorate - immigration, theintroduction of the Euro and fiscal austerity. Moreover, we show thatimport competition from China has triggered also other forms of protestvote, namely invalid ballot papers and abstentionism. In line with the predictions of economic theory, the channels at work turn out to belabour market adjustments.If trade globalization is a key determinant behind the recent wave ofprotest vote across the Western World, how can policymakers meet thechallenges associated with it? This dissertation assesses the desirabilityof three distinct economic policies, one intervening directly on the labourmarket and the other two acting, respectively, at the trade and fiscallevel.In chapter 3, we present a novel approach to analyse the employmentgrowth effects of the introduction of a national minimum wage (€8.50per hour of work) in Germany on January 1st 2015. Thanks to our accessto household survey data and proprietary firm-level data, we comparefirms in heavily affected sectors to similar firms in de facto unaffectedsectors. Industry vulnerability is determined according to the share ofeligible workers with pre-treatment hourly wage below €8.50 -computed separately for East and West Germany. Treated units arelinked to control units matching on past employment and forwardlooking credit ratings.We detect only very small negative employment effects in East Germany(0.05 percent of overall employment, 22000 jobs lost), mainlyconcentrated among small firms. The lack of a significant occupationalimpact still holds when we use different thresholds for treatmentassignment or alternative minimum wage bite measures. To explain ourfinding, we provide evidence that, in West Germany, the minimumwage introduction has also induced positive effects on turnover and adeterioration of credit ratings, while, among treated firms in EastGermany, turnover remains stable and credit ratings actually improve.Thus, ex-ante fears for dramatic job losses seem not justified andminimum wage policy may actually help to mitigate inequality in majorindustrial economies.In chapter 4, we develop a simple theoretical framework that allows usto investigate the macroeconomic consequences of sector-specific tariffson imported intermediates in the presence of input-output linkagesamong industries. Our model features a large open economy with multiple perfectly competitive sectors and exogenous market power.Each industry specializes in the production of a distinct good accordingto a nested Cobb-Douglas-CES technology; its output sales (net ofnational imports of the same good) meet final demand by arepresentative household with Cobb-Douglas preferences andintermediate input demand by other sectors. Under wastefulgovernment spending, we establish that a positive sectoral input tariffshock entails a loss in aggregate value added, by lowering output notonly of the protected industry’s immediate customers but also of itscustomers’ customers and so on.Assuming next that a given share of each industry’s total output is soldon foreign markets, our model can also be used to evaluate themacroeconomic implications of the introduction of border-adjustmentsinto sector-homogeneous corporate profit taxation. We show that a shiftto a destination-based regime induces a change in aggregate value addedthat results from the net effect of border-adjustments’ two keycomponents, the impossibility to deduct the costs of imported inputsfrom the corporate income tax base but the ability to exclude export salesfrom it. For low sectoral export shares, the network propagationtriggered by the implicit import tax is more powerful than that triggeredby the implicit export subsidy, leading to a contraction of overalleconomic activity.Thus, in today’s highly vertically integrated advanced economies, theunilateral adoption of both import tariffs on intermediates and borderadjusted corporate taxes may turn out to be counterproductive for theimposing country even before retaliation is considered.