Sunday, July 10, 2005 (SF Chronicle)
GLOBALIZATION'S NEXT VICTIM: US/Production, wealth, power, services and technology are slip-sliding away to the East
President Bush says the U.S. economy is the envy of the world, and
Federal Reserve Chairman Alan Greenspan insists economic growth is
solid despite a bit of froth, but the truth is that the global economic
scene is now more troubled that at any time since the trade wars with
Japan 20 years ago.
The U.S. trade deficit was considered unsustainable at around $25
billion annually by the Reagan administration. It is now nearing $700
billion, an unprecedented 6 percent of our gross domestic product.
As a result, the U.S. economy is on life support. Our lifeline to
finance this deficit is huge infusions of foreign lending, much of it
from the central banks of China and Japan. Congress is calling for
China's scalp, and Treasury Secretary John Snow is demanding that
Beijing revalue its currency. The new U. S. Trade representative is
promising to get tough with China just as I and other U.S. trade
officials promised to do with Japan in the past.
Former Federal Reserve Chairman Paul Volcker is forecasting a 75
percent probability of a major international financial crisis within
How, if the United States is the envy of the world, can we be having all these problems? Easy.
Although the world, as characterized by columnist and author Tom
Friedman, is getting flatter as a result of removal of trade and other
barriers, it is also being tilted at an increasingly steep angle.
Think of it as a sliding board, very flat and smooth but inclined to
speed the move of production, services, technology, wealth and power
from West to East and often from open, democratic systems to more
opaque, authoritarian regimes.
In short, despite the miracles it has accomplished in the past and may
bring in the future, globalization is distorting the world economy in
ways that pose increasing risks to the United States and the rest of
the international community. This is an issue that didn't make it onto
the agenda of the world leaders at the G-8 meeting in Scotland last
week, but should make it onto future agendas.
Part of what's wrong is illustrated in recent statements by the chief
executive officers of Intel and IBM. In testimony to a presidential
advisory panel, Intel's Paul Otellini said his company might build some
future factories overseas. After selling his company's personal
computer division to China's Lenovo, IBM's Sam Palmisano told the New
York Times that he had gotten a blessing on the deal from China's top
leaders and added that "IBM wants to be part of China's strategy."
Remember now, we're talking about Intel and IBM, two of the three or
four top technology companies in the world, both based in the United
According to our elite economists, America's future lies with high tech
- - with companies like Intel and IBM. Yet here are two of U.S.
high-tech industry's top CEOs saying the future may lie abroad,
especially in China.
Add the fact that U.S. trade in high-tech products has swung from a
surplus to a deficit, and it is not at all clear that this country's
future will be in high tech.
At the heart of the problem is the false assumption that all the
countries in the globalization contest are playing the same game.
They're not: Some countries have strategies, but others don't have a
clue. The United States is in the latter category.
Otellini's concern is not U.S. labor or capital or other costs. In
fact, he emphasized that from an operating point of view, a U.S.
factory location would be advantageous, as the theories say it should
The difference is that countries like Israel, Malaysia, China and
Ireland are offering capital grants, tax holidays, free land and
infrastructure, as well as other financial incentives for companies to
build factories in their countries despite less attractive operating
Such strategically advanced countries also foster business
relationships. They initiate technology sharing arrangements and
establish technical standards that give a leg up to producers operating
within their borders.
This all creates a painful dilemma for U.S. executives like Intel's
Otellini. American companies may prefer to resist the pull of foreign
subsidies, but with fiduciary responsibility to maximize returns to
their shareholders, doing so may mean committing career suicide.
Or take IBM's Palmisano. Of course he wants to be part of China's
strategy. He'd be a fool not to. China is big and going to get a lot
bigger, and IBM needs to be part of its development. The missing link
for Palmisano is that he can't be part of an American strategy, too,
because the United States doesn't have one.
The United States, which might be said to have more or less invented
globalization, has been complacent about its leadership in world trade
while other countries have sought innumerable advantages. The United
States has also insisted on the validity of theoretical trade models
while other countries have been beating us in real-world deals.
Think of the world as divided into two groups: the strategic traders
such as Japan and China, and the free traders who maximize consumption
and have no real strategy for keeping or attracting new companies.
Joining the United States in this latter group are countries like
Canada, the United Kingdom and Chile. They're not totally pure, but
they usually play by free trade rules. In principle, they believe in
markets, operate under a rule of law, are reasonably transparent and
have rising consumer welfare as their primary economic objective.
The other group, the strategic traders, especially many nations in
Asia, are characterized by unusually high savings rates, relatively low
consumption, lack of transparency, absence of or gaps in the rule of
law, extensive formal and informal government intervention in markets,
managed exchange rates, programs to promote strategic industries, and
explicit policies aimed at accumulating trade surpluses and large
dollar reserves in order to gain financial sovereignty and a degree of
In this mix, the United States is unique as the printer of the dollar,
the world's primary reserve currency. Because most international goods
are priced in dollars, the United States is able to buy simply by
printing its own money. All other countries must first produce and sell
something in order to earn the dollars necessary to buy abroad.
As long as others will accept dollars in payment and reinvest them in
U.S. assets, America is relieved of any need to be fiscally responsible
by balancing its budget and trade deficits.
Perversely, the rest of the world also finds fiscal responsibility
unnecessary. The Americans can buy and borrow without concern for
saving, investment and production.
Perversely, the rest of the world also finds it unnecessary to be
fiscally responsible. By managing exchange rates to keep the dollar
strong and their export prices low, the rest can over-save and
over-invest because excess production can be exported to the U.S.
market. Combined with financial incentives, these policies facilitate a
steady move of production, technology, and know-how to the countries
that have a trading strategy.
The combination of these various globalization games has tilted the Earth and created today's hugely unbalanced global economy.
The United States is the only net consumer. Global growth depends on a
steady increase in its already unprecedented trade deficit, which in
turn depends on a steady rise in foreign lending, particularly from
China and Japan.
Already the United States is absorbing 80 percent of available world
savings. The system is unsustainable. This lending can obviously not go
beyond the totality of savings. But even if it were sustainable for a
long time, the accumulation of debt would be a threat to future U.S.
and world growth.
The notion that floating exchange rates will somehow smoothly adjust
Earth's tilt is equally flawed. When Federal Reserve Chairman Alan
Greenspan speaks soothingly of a soft landing in which revaluation of
China's yuan leads to a surge of U.S. exports to rebalance the trade
deficit with no slowing of U. S. growth, he ignores the fact that the
United States no longer has export production capacity sufficient even
to cut the trade deficit in half.
In the real world, plants can't be built instantaneously, and
production doesn't expand overnight. And even if floating rates worked
in principle, they won't as long as most Asian countries, not just
China, are actively managing their exchange rates through so-called
dirty floats. It may be that these countries are hurting themselves,
but they also hurt their trading partners.
Finally, there is the view that we shouldn't worry too much about how
other countries grow because their growth will inevitably result in
their buying more from us, increasing our growth as well. But we have
now had 50 years of globalization during which a number of countries
such as Japan and South Korea have experienced the miracle of going
from poor to rich. If the theory were correct, they should have become
big buyers by now. But they have not. The United States remains the
consumer of last resort.
The fact is that the strategic trading system becomes hard-wired, and
these countries do not easily or suddenly shift to consumption from
saving, producing and exporting. Nor does the United States show any
capability for going in the opposite direction from its role as the
world's No. 1 consumer.
Until we all accept economic reality and start to change it, the world
economy will continue to head full steam for Niagara Falls. We
desperately need to reinvent globalization. For starters, Washington
might become as interested in keeping Intel and IBM building factories
at home as Beijing is eager to lay down the red carpet for them.
Clyde Prestowitz is the author of "Three Billion New Capitalists: The
Great Shift of Wealth and Power to the East" and president of the
Economic Strategy Institute, a nonprofit, nonpartisan Washington
research organization focused on globalization and competitiveness. He
Copyright 2005 SF Chronicle