Zurich-based Professor David Dorn researches the downsides of globalization – making him one of the most respected Swiss economists. In an interview with NZZ am Sonntag he talks about globalization and immigration to Switzerland.

This interview by Albert Steck was originally published in German in NZZ Magazin on 18.11.2023. Translated and edited for layout purposes by the UBS Center.

Your research on globalization has attracted worldwide attention – no other Swiss economist is quoted as frequently in academia as you. In your work, you focus on the downsides of globalization. Which are they?

For a long time, the principle of economics was that the entire population benefits from international trade. Consumers enjoy cheaper products, while any loss in wages can be compensated. But China’s rapid rise to become the world’s largest exporter has now led to a reassessment.

Why? The fact that we can buy more cheaply has proven to be true.

That is true. Moreover, this consumer advantage is evenly distributed across society, in contrast to the disadvantages in the labor market. The surge in Chinese exports has been so huge that entire industries in the developed world have perished. In many countries, the losers – the people who have been laid off – are concentrated in individual regions that have lost overall prosperity as the result of globalization.

Your research shows how these dislocations can destabilize a society.

In effect, the consequences go far beyond job losses and declining prosperity. Consider those cities in the US that have been hardest hit by the decline in industry, where rates of crime, drug deaths, or children growing up in poverty have risen above average. Even if job losses only affect a minority of people directly, many more people are affected when, say, rising crime or drug misery fuel public fear.

Are social polarization and the rise of Donald Trump also a consequence of globalization?

There is evidence that extremist parties, such as the right wing of the Republican Party in the US, are becoming more popular in the hard-hit regions. This leads to what is arguably the most important conclusion of our research: economies have major problems with rapid change. Admittedly, change is essential for progress. But if this process proceeds too quickly, there will be great human suffering, which in turn can lead to political extremism.

Have economists and politicians underestimated the impact and negative consequences of globalization?

In fact, the economy assumed that workers were flexible in responding to change. In reality, however, we see that people do not find it easy to find a foothold in another occupation or another region after a job loss. For example, our data showed that few people moved out of affected cities after factories closed in the US.

What recipes do you recommend for curbing the damage of globalization?

A well-developed social safety net is important and helps cushion the dramatic consequences of job losses. These measures were insufficient in the US: our analysis showed that for a $100 decline in working income, people affected by industrial decline received, on average, only $15 in government transfers. For low-income people, the loss of jobs poses a dramatic risk of poverty.

What is your assessment of globalization for Switzerland?

Switzerland’s position is exceptional: it has benefited twice as much from its trade with China. On the one hand, consumers benefit because they can buy cheap clothes, shoes, and electronics from China. On the other hand, we are fortunate that these goods have hardly been produced in our own country for years. Thus, unlike in the United States or the United Kingdom, China’s opening up has not led to an industrial demise. Moreover, while the United States exports only a few products to China, Switzerland is a major exporter of medicines, machinery, and luxury goods such as watches. As a result, many Swiss companies have been able to enter into new markets.

For Switzerland too, however, globalization has a downside: immigration has increased sharply. Rapid change could therefore also overwhelm our economy.

It is true that, unlike the United States, our country has not experienced a clear cut in its industry. However, I see a parallel in the fact that our authorities, too, have long underestimated the extent of the change: immigration through the free movement of persons has been much higher than forecast for years. As a result, infrastructure development has not kept pace with population growth. The consequences are housing shortages and transportation bottlenecks.

Is Switzerland with a populace of 10 million the necessary price we have to pay for our success as an exporting nation?

In relation to the EU, trade and migration are linked with bilateral agreements. This means that we give Swiss companies access to the European market by giving EU citizens the opportunity to work here. Should Switzerland now leave the EU’s internal market again? I am cautious about this: it would be absurd to massively weaken our own economy just to avoid a population of 10 million in Switzerland.

But there is growing skepticism among the population about growth. Some economists also believe that Switzerland can easily slow its growth rate.

Anyone who proclaims zero growth as a target acts as if they can simply freeze the current state of affairs. This idea is particularly appealing to people who are satisfied with their current economic situation. But there are many people who want or need higher incomes. Moreover, zero growth applies only on average: if one part of the population improves its economic position, zero growth results only when others fall behind. But few want to see a decline in prosperity.

Will we thus have to expect tougher distribution battles?

Yes. Take the AHV, the Swiss Social Security: In order to finance rising expenditure, the pension fund needs additional income, especially from a growing economy with rising wages. By contrast, an economic stagnation would exacerbate the financing problems.

Nevertheless, the proportion of people in favor of economic foreclosure is increasing in many countries.

Yes, Brexit is a case in point. Supporters argued that one could simply keep globalization’s upside while eliminating its downsides. Indeed, after leaving the EU, the UK economy will suffer more than supporters expected. Moreover, immigration has not declined. In particular, many industries simply lack the necessary staff.

This week, relations between the US and China began to thaw again, following a face-to-face exchange between Presidents Joe Biden and Xi Jinping. Was the scenario of world trade breaking up into separate blocs overblown?

An old saying is also true for globalization: those who are declared to be dead live longer. Despite political tensions, global trade in goods remains robust. This is not surprising: without global manufacturing specialization, prices would rise sharply and bottlenecks would arise. This shows that bringing back a lost industry is not so easy.

In your research, you have shown that the tariffs against China introduced under President Trump have not had the desired effect.

Indeed, they have led to little job creation in the US. Indeed, tariff barriers are no longer an easy way to revive an industry that is no longer competitive in the world market. Instead, tariffs have increased imports from other Asian countries. Moreover, the trade war raises prices. And in the end, China retaliated, causing US job losses once again.

In other words, instead of resisting globalization, should politics take care of the losers?

Decoupling trade is, in my view, not very promising. When improved or cheaper products come onto the market, consumers want to benefit from them. Policymakers will have more impact if they address the negative consequences of this change, for example, by providing better social protection for people who have lost their jobs in the United States. In Switzerland, the free movement of people leads to housing shortages. This is where policymakers should focus.