House of Paine

to see the tilt is not enough

HERR PRESCO WITZ IS A THRICE BUGGERED 
TRADE  POLICY TART 

BUT HEAR HIM OUT 



=================================


" For most of the last 50 years,
 globalization has been a win-win proposition,
 making America richer while lifting hundreds of millions
 in the developing world out of poverty and despair"

.


 "Recently, however, it has begun to operate differently, undermining U.S. welfare 
while creating imbalances 
likely to end in a global economic crisis"





"In this new mode, globalization is tilting the world
 like a giant sliding board game 
on which the "flattening" of old barriers
 is accelerating the transfer of the supply side
 of the U.S. economy to the rest of the world
 especially Asia"
 

"Take Boeing as an example. Long America's leading exporter, it symbolizes the kind of high-tech leadership on which the future of the U.S. economy is widely said to depend. After

losing market share to the European Airbus in recent years, Boeing responded by developing the new 787 Dreamliner, which is gathering record orders. Yet these sales may not add a lot to the U.S. economy because much of the work—including production of the critical carbon-fiber wings that Boeing always insisted would be kept at home—will be done in Japan"


----------------- JAPAN ????? -------------


Even more telling is the example of the semiconductor king, Intel. When economists and political leaders say American industry should concentrate on producing very-high-technology products where it has a clear comparative advantage, Intel's chips are what they have in mind. Yet company executives recently told a presidential advisory panel that under present circumstances they must consider building more of their new factories abroad.


" Over the next 10 years
 they explained, the cost 
of running a semiconductor factory
 in the United States could be
 $1 billion more than that
 of running it abroad "

---- WHERE ???--------------

"That there is something odd here
 is not yet widely acknowledged.

" Indeed, most business, academic,
 media and political leaders continue to insist
 that globalization is proceeding smoothly,
 making the world rich, more democratic
 and more peaceful"


" President Bill Clinton called globalization 
America's strategy, 
and President George W. Bush describes the American economy 
as the "envy of the world.""

" Nor is this view entirely unjustified.
 U.S. GDP and productivity growth 
are the highest in the developed economies,
 while inflation, unemployment and interest rates 
are among the lowest"


"Nevertheless, a closer look reveals a dark side"

". The U.S. trade deficit 
is now more than $800 billion, 
or 7 percent of GDP,
and grows inexorably 
as Americans continue to consume
 more than they produce"


". The trade imbalance is
 of unprecedented size and breadth.
 Economists typically expect 
the United States to import commodities
 and cheap manufactured goods 
while exporting high-tech products, 
sophisticated services and agricultural goods,
 for which its land and climate are well suited."

" In reality, the U.S. high-tech trade surplus
 of $30 billion in 1998 has collapsed to a deficit
 of about $40 billion."

" Agricultural trade is now also in deficit
 for the first time in memory,"

" the modest surplus in services 
       is declining as global deployment 
of the high-speed Internet has made it possible
 for services to move offshore
as easily as manufacturing."

" In short, U.S. exports are declining versus imports
 across the board,
 while its growth depends on foreign lenders
 (primarily in Japan and China)
 to finance the excess consumption"

"Two factors explain these unexpected trends"


" The first has been at work for a long time.
 It is the gradual construction of the global economy
 in an asymmetrical form."


" For the United States, globali-zation 
has meant building its economy 
into a giant consumption machine"

" Easy consumer credit, 
home-equity loans 
with tax-deductible interest payments,
 markets largely open to imports,
 policies that emphasize growth 
through demand management
and accommodative monetary policy,
 and myriad other incentives have led Americans 
to save nothing while both households
 and government borrow at record rates.
 This is often justly criticized as excessive.
 But it is important to understand 
that American buying drives
 most of the world's growth 
because the United States is virtually
 the only net consuming country in the world"

.

"Globalization for most others has meant
 export-led growth"

" Particularly in Asia, 
"catch-up" development policies 
have focused on creating production 
and export machines"

". There are many flavors,
 but most Asian economies
 are characterized by relatively low consumption,
 savings rates of 30 to 50 percent of GDP,
 government intervention in markets,
 managed exchange rates, 
promotion of investment 
in "strategic" industries, 
incentives for exports 
and accumulation of chronic trade surpluses
 along with large reserves of dollars"

"Indeed, the dollar is the key to this whole lopsided global structure"

" The dollar, of course,
 is not only America's money,
 but also the world's primary reserve currency.
 As long as others will accept it in payment, 
America can buy and borrow 
without concern for saving, 
investment or production." 

"Thus, deficits—whether trade or budgetary—
really don't matter
 and America can get away with fiscal irresponsibility"


" Oddly, 
the rest of the world can be 
just as irresponsible.
 By "managing exchange rates 
to keep the dollar overvalued 
and their export prices low,
other countries can oversave
and overinvest because 
the excess production can be exported 
to the U.S. market"

"This structure has grown for so long
 because it has great benefits
 for both sides. 
America gets to live above its means,
 as cheap imports and foreign capital 
keep inflation and interest rates down 
and home values rising. 
he rest of the world, especially Asia,
 gets to climb the ladder of technology faster than it would otherwise. 
By accumulating dollars,
 Asia also gains strategic leverage 
over the lone superpower—
which, by outsourcing management of the dollar,
 has ceded a degree of control over
 its own long-term interest rates"

"There is a downside, however.
 By keeping the dollar chronically overvalued
 and providing investment subsidies 
to attract strategic industries
 out of the United States, 
the Asian export-led-growth approach
 has long tended to shrink U.S. productive capacity"


" For some time, this was true mostly 
of commodity manufacturing,
 and the significance of the trend
 was discounted with the rationale
that the U.S. economy was moving 
to the "higher ground"
 of high-tech and sophisticated services"

"This argument was never entirely satisfactory
 because of the exchange-rate management
 and the investment subsidies
 used by export-led-growth countries 
to attract high-tech production
 to their shores."


" For instance, Boeing is outsourcing
 much of the 787's construction to Japan 
in part because an overly strong dollar
 reduces yen-based costs,
 and in part because the Japanese government
 will provide production subsidies 
unavailable in the United States "

"while "encouraging" Japanese airlines
 to buy the planes if the work is done 
in Japanese factories.
 For Boeing, this is all of critical importance
 as a way to offset 
the launch subsidies provided 
by the EU to archrival Airbus"

"But if it was always flawed, 
the argument is now in tatters 
in the face of the second aforementioned factor:
 the entrance into the global economy
 of China and India"


". Not only do they offer low costs,
 which the strong dollar further reduces,
 but—contrary to common assumptions
 about developing countries—
significant portions of their populations
 are highly skilled"

" They can thus be competitive
 across the entire range
 of manufactured goods and services.
 The negation of time and distance
 by the Internet and air-express services
 makes this all the more true"

"Further, the potential size of these markets 
attracts investment in anticipation of growth,
 even if the initial production cost
 is not fully competitive"

" This is particularly true of China,
 where national pride and an authoritarian government 
willing to offer large investment incentives 
create an environment 
in which foreign companies 
are encouraged to engender "trust"
 by transferring factories and technology to China, 
regardless of the fact 
that the comparative cost advantage lies elsewhere"


"This, combined with the asymmetric global economic structure,
 is why the U.S. trade balance is collapsing 
even in advanced-technology products 
and serv-ices."

" The growing trade imbalance, in turn,
 makes the current mode of globalization unsustainable
. To finance the deficit,
 the United States is already absorbing
 about 80 percent of available world savings. 
The value of U.S. imports
 is now more than double that of exports.
 To merely stabilize the deficit
 at its current rate would require 
that exports grow more 
than twice as fast as imports"

"But this cannot happen 
if the supply side continues to move offshore.
 If it doesn't happen
 and the deficit keeps growing,
 world savings will eventually be insufficient
 and a financial crash will be inevitable"

" Of course, U.S. consumption and imports could be cut
 but if that were to occur without a commensurate increase
 in consumption elsewhere, 
the whole world economy would suffer recession,
 if not depression".

"Some economists speak bravely of a "soft landing." "

"In this scenario, 
the United States reduces its budget deficit 
and excess consumption,
 while a gradually falling dollar
 results in rising exports
 to foreign markets where governments 
are stimulating consumption."

" While desirable, this will not occur automatically.
 Interest groups in all the key nations 
will defend the status quo".

"Thus, for the sake not only of the United States 
but of all nations with a stake in globalization
 it is imperative that political leaders 
change its current mode. 
The game cannot continue 
with one participant playing consumer
 while nearly all the others play producer.
 For the long-term success of all,
 everyone must agree to play 
the same globalization game"



Prestowitz:
 " president of the Economic Strategy Institute "


After 500 years in the dustbin of history, the Flat Earth Society has been coming back recently with the argument that as a result of the Internet and Global Supply Chain Management the world really is flat. While it’s true that these technologies have largely eliminated the age old time and distance barriers to international trade, no one should confuse instant communication or fast delivery with a level economic playing field. The truth is that the world economy is being tilted in a way that is undermining America’s long term growth prospects and that is increasingly unsustainable.


The usual discussion of globalization assumes it means the same thing to all the participating countries. In fact, the major economies take two quite different approaches to globalization. On the one hand are the United States, the European Union, Canada, Mexico, Australia and a few others who might be called “dirty free traders.” With their agricultural subsidies, emergency steel tariffs, and “voluntary” export restraint deals, they are far from pure free marketers. Nevertheless, they believe in market principles and free trade, maintain generally open markets and effective competition policies, float their currencies, and make maximizing consumer welfare the main objective of trade policy. On the other hand are many countries, particularly in Asia, that pursue strategic trade and export led growth. Their focus is on production and exports rather than consumption. They create strong incentives for saving (even compelling it in some cases), direct investment toward “strategic” industries, suppress domestic consumption, and manage exchange rates to keep their currencies cheap versus the dollar in order to promote the exports that are the key drivers of domestic growth. Because they see trade and international capital flows as intimately linked to geo-political considerations, they explicitly aim to accumulate trade surpluses and large reserves of dollars. 

The combination of these two approaches to globalization has produced an international economic structure that resembles a kind of giant Ponzi scheme. Although a few European and other smaller economies run small trade deficits, for all practical purposes, the United States is the only net consumer. Indeed, it consumes far more than it produces, thereby running trade deficits now approaching $700 billion or 6 percent of GDP annually that are the main engine of global growth. But like any household that spends more than it earns, the United States can only maintain this level of consumption by borrowing money from the rest of the world. Moreover, to sustain global growth, it must consume and borrow ever increasing amounts. 

The rest of the world, and especially strategic trading Asia, saves, invests, produces, and sells to the United States, accumulating large trade surpluses in the process. It also provides a kind of vendor financing to American consumers through purchases of Treasury bonds and other U.S. assets. And just as America must consume ever more to maintain global growth rates, so the Asian and other exporters must lend ever more.

This unbalanced mode of globalization has perpetuated itself for a long time because it has apparent advantages for all the key players. For the Americans it’s a big party. They get to live far above their means. Prices and inflation are kept low along with interest rates, the stock bubble or housing bubble or whatever the current bubble is makes people feel rich as they take out home equity loans to buy fancy vacations and cars, unemployment is low, and growth is strong. The only possible problem could be increasing domestic and international debt, but as long as the rest of the world provides financing, Vice President Cheney is correct when he says deficits don’t matter. For Asia and the rest of the world, there is steady growth, a continuous influx of production and technology from abroad and especially from America, and growing geo-political power as its large dollar holdings give it leverage over important U.S. interests. 

The only problem is that there are serious long range difficulties. Perhaps the most serious is the fact that the Asian management of dollar exchange rates keeps the dollar chronically overvalued. While this keeps U.S. import prices low and is attractive to consumers, it makes the United States a high cost location for suppliers of goods and services and leads to their steady exodus to offshore locations. Eventually the R&D, design, and engineering move abroad as well. This was true even before the Internet and Global Supply Chain Management leveled the time and distance barriers. Now it is even more true. Indeed, if anything, the so called flattening of the world has only exacerbated its policy induced tilt. In the past, time and distance made offshoring of many services, R&D, and key aspects of high tech manufacturing difficult to contemplate. Now, anything can be moved if the financial incentives and exchange rates are set favorably. As a result there has been an acceleration of the flow of skills and technology from the United States to Asia. Over time this is likely to increase the trade deficit and require even greater borrowing as America’s productive capacities erode.

This leads to the second serious difficulty which is that the United States is already soaking up about three fourths of the world’s excess savings. For growth to continue that rate must rise, but it obviously cannot go beyond 100 percent. At that point the whole structure is likely to collapse in a global recession or depression. The fact that most populations will age rapidly and even shrink over the next decade and that more of the available savings will be necessary to cover soaring pension and health care costs suggests that current structures and flows are not sustainable in the long term regardless of how ubiquitous and instantaneous the Internet becomes and how smoothly global supply chains can be managed. 

This entry was posted on Wednesday, September 21st, 2005