[IP] Clyde Prestowitz: Globalization game
Begin forwarded message:
From: "John F. McMullen" <observer@xxxxxxxxxxx>
Date: June 5, 2005 4:58:15 AM EDT
To: johnmac's living room <johnmacsgroup@xxxxxxxxxxxxxxx>
Cc: Dave Farber <farber@xxxxxxxxxxxxx>
Subject: Clyde Prestowitz: Globalization game
From the Boston Globe -- http://www.boston.com/news/globe/
editorial_opinion/oped/articles/2005/05/31/globalization_game/
Globalization game
By Clyde Prestowitz
US PRESSURE on Beijing to revalue its yuan is now dominating the
news, but China is only following Japan as a manifestation of a much
bigger problem. Globalization is broken. As currently structured, it
is undermining US productive capability and becoming unsustainable.
Without fundamental change in the rules of globalization, any
conceivable yuan revaluation now won't have much impact on world
economic imbalances. Remember that economists said a 20-30 percent
revaluation of Japan's yen (then at 260 yen to the dollar) would
balance trade in the 1980s. But the yen has more than doubled since
then, and Japan still maintains a large trade surplus both globally
and with the United States, as do all of the world's major economies.
The real problem is that globalization is a different game for many
countries than it is for America. While China's peg of the yuan to
the dollar is now the focus of criticism, most Asian countries have
long managed their currencies to remain weak against the dollar in
order to stimulate their exports. Japan has spent over $300 billion
in currency intervention in recent years to keep the dollar up and
the yen and export prices down. In addition, many countries offer tax
holidays, financial incentives, and protected markets to attract new
facilities in ''strategic" industries that no one expects to move
just because currencies fluctuate.
These actions follow from policies specifically aimed at accumulating
large trade and dollar surpluses as a matter both of stimulating
growth from exports and of assuring national economic sovereignty by
avoiding dependence on foreign lenders.
While US state governors extend financial incentives to attract
investment, they have only peanuts to offer compared to foreign
countries, and, of course, do not control their own currencies. The
federal government has long shown no interest in attracting foreign
factories to or keeping US factories on its shores. Rather, America's
emphasis is entirely on consumption-led growth. Banks aggressively
offer credit cards to students with only part-time jobs. Home equity
loans with tax deductible interest payments are used to pay for
vacation trips. Not only does the White House call for tax cuts in
wartime, but tells consumers it's their patriotic duty to buy more.
Americans at all levels really do believe that debt and deficits
don't matter.
The confluence of America's consumerism with the strategic, export-
led growth policies of many other countries has produced a world with
one net consumer, the United States, which now consumes about $700
billion a year more than it produces. All other major economies are
net sellers, depending directly or indirectly on US-bound exports for
much or all of their growth. Because America consumes more than it
makes, it must borrow from abroad to finance its excess consumption.
In a kind of vendor finance program, a few foreign central banks
provide the financing by buying US Treasury bills and other US assets.
Thus, globalization has evolved into a kind of pyramid scheme. To
maintain global growth, the United States must consume and borrow
ever more while foreign banks buy ever more US Treasuries so their
producers can export ever more.
America has long been ambivalent about this situation. Consumers love
the low import prices, US CEOs love the foreign tax holidays, and the
US government loves the foreign lending that helps keep US interest
rates low. But the chronically overvalued dollar and the foreign
investment incentives also cause a steady transfer of production and
technology abroad while putting downward pressure on wages and
building large foreign claims on future US income. This results in
political pressures and US charges of unfairness against trading
partners with big surpluses. In the past, cosmetic ''fixes" like
''voluntary" export restraint agreements were used to relieve
pressure while the fundamental forces kept operating until the next
''fix."
Now the sustainability of the system has been put in question by the
entrance of 3 billion new players from China, India, and the former
Soviet bloc at a moment when the Internet and global air express have
negated time and distance along with the long standard economic
assumptions that labor, capital, and technology don't move between
countries.
These new players are unusual. While having the low wages of
developing countries, several hundred million of them have first
world skills. That they are effectively next door and also planning
to grow by exporting to US markets dramatically increases the
pressure on an already stressed system. Even for America there are
ultimate limits on consumption and borrowing. US borrowing already
absorbs 80 percent of the world's available savings. At 100 percent
the global economy will be in deep crisis.
The only way to avoid that is to insist that the globalization game
be played the same way by all its players. Sure, China needs to
revalue, but without other big changes, globalization as we know it
will be on life support.
Clyde Prestowitz is the author of the recently published ''Three
Billion New Capitalists: The Great Shift of Wealth and Power to the
East."
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