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Stephen Olson at Chinese Development Institute Conference


 Clyde Prestowitz giving presentation to CDI...


Steve Olson teaching trade negotiations at the Mekong Institute...


Stephen Olson to speak at upcoming workshop organized by the International Institute for Trade and Development on 

"Economics of GMS Agricultural trade in goods and services towards the world market"

Chiangmai, Thailand Sep 8-12.

Watch Clyde Prestowitz on PBS' Foreign Exchange with Fareed Zakaria

Foreign Exchange is a weekly, half-hour international affairs series, hosted by noted author, journalist and international commentator, Fareed Zakaria. The series probes the global questions of the moment from a profound, new perspective. Zakaria holds conversations with international newsmakers, politicians, diplomats, and journalists, as he examines America's role in an increasingly complex and interdependent world.

Clyde Prestowitz joined Zakaria in Show# 231, which aired on August 4, 2006. The episode questioned whether the US continue to command the attention of world markets when the dollar is dropping and free trade is flourishing? Zakaria interviewed two experts, with different takes on the issue: Clyde Prestowitz, Founder and President of the Economic Strategy Institute, and Martin Baily, Senior Fellow at the Institute for International Economics.

Image Click Here to Download Watch Streaming Video of Clyde Prestowitz on PBS' Foreign Exchange with Fareed Zakaria

Transcript follows:

In Depth: American Competitiveness

Fareed Zakaria: The rapid growth of markets in China, India, and elsewhere may wet the appetite of global investors in corporations but it brings home a reality to American workers. We're not alone anymore; can Uncle Sam continue to command the attention of world markets while competition is flourishing all around? With us to discuss the issue are two experts--Clyde Prestowitz is the Founder and President of the Economic Strategy Institute; he previously served as Counselor to the Secretary of Commerce in the Reagan Administration. Martin Bailey is a Senior Fellow at the Institute for International Economics, a Senior Advisor to the McKinsey Global Institute, and was Chairman of the Council of Economic Advisors during the Clinton Administration. Thank you both for joining us.

Now Clyde you have been worried about this growing competition for a while. You put it in your book this way--you said there are 3-billion new capitalists that have entered the global economy. Historically though when you have had the introduction of new capitalists, the pie has grown; so what's the problem? If you have 3-billion more capitalists won't--won't that happen; won't there be more people to buy, sell, exchange and you have a massive expansion of global commerce?

Clyde Prestowitz: It could be; it depends on--on how things are done but our experience in--in the past when Japan came into the global economy in the '60s and '70s and the Asian Tigers in the '70s and '80s, our experience has been that their economies grew on an export led kind of strategy so they sold more and--and our trade deficits tended to rise. And we found that we had disruption and kind of market distortions the number of industry; so I think it depends on how you do it. And one particular aspect of this new wave of--of the 3-billion new capitalists is that we tend to think of developing countries as being countries with a lot of unskilled inexpensive labor who will focus on labor intensive production. But among those 3-billion a small percentage of a big number is a big number and 10-percent of 3-billion is as large as the population of the United States. These people are very skilled; so our--

Fareed Zakaria: So they--so they have unskilled labor but they also have skilled labor?

Clyde Prestowitz: Very highly skilled labor and we have the notion I think in the--in the West that as these countries move into manufacturing of toys and shoes and so forth that we'll move to higher ground and do the high-tech and the Silicon Valley stuff. But what we're finding is that more and more of the Silicon Valley stuff is in fact moving there. So it very much depends on our own policies in terms of supporting education, in terms of saving investment, in terms of supporting innovation--as to whether we take advantage of the potential opportunities these 3-billion offers?

Fareed Zakaria: When you look at this world though what is the scariest part of this--of this new world? Is it the--the competition from that 300-million pool of skilled labor?

Clyde Prestowitz: I don't think it's--that's not--to me that's not the scariest part. I have two--two kind of scare scenarios; one scare scenario is that right now the structure of the global economy is incredibly imbalanced. There is one net consumer, the United States; we are consuming more--far more than we produce and everybody else in the world is--is a net seller. This is not sustainable and I--I fear a financial crisis, a global recession or even depression that could be tremendously destabilizing not only economically but politically. That's one scenario. The second scenario is that the growth of China and India provides potentially great opportunities but--but it also means that issues like global warming, pollution, water and resource scarcity are exacerbated tremendously so the model of economic development that we're all following--developed countries and developing countries--is again not sustainable.

Fareed Zakaria: All right; so that's--that's a big full plate. Let's start with the issue of competitiveness as it were. Martin where do we find--where are we going to have competitive advantage? If Clyde is right that you have these countries that have mass numbers--masses of low skilled labor but then they have an inexhaustible pool of high-skilled labor, they have access to capital--again historically an unusual thing, so you have these poor countries that have cheap labor, cheap capital, skilled labor, cheap capital. They're going to make the toys, they're going to make the--the shoes but they're also going to make the software; what will we make?

Martin Baily: Well that's a debate that goes back a long way in fact to the days when the rise of the British Empire and other countries thought that they--they had to protect themselves against competition from the developing industrial sector in Britain and they said we can't produce anything. And I think we--we learned at that time that trade can benefit everyone; we can find a niche; we have a lot of niches already--a lot of areas. We export a tremendous amount so I'm--I'm not really worried about the US being competitive. I think the evidence is that we have a number of areas where we're competitive--not just high-tech but companies in earth-moving equipment, in industrial products--a lot of areas where we are very competitive. One of the problems we've had though--

Fareed Zakaria: But why are we competitive though? Spell that out for me because let's say you have some guy in--in New--in New York or Chicago or Phoenix who makes 80 or 90 or 100,000-dollars a year doing one of these things; can't these--can't these jobs--can't somebody in Bangalore or--or Shanghai do roughly the same thing at 10,000-dollars and won't that mean eventually the job will move to Shanghai?

Martin Baily: No, because the--all those people that are joining the market are also creating demand for product so it--as India and China develop they'll create demand for their own products, and so as Clyde said, the--the pie is growing. We still have many areas where we have the knowledge, we have the skills, we have the patents, we have the technology, and we can produce those things. And if we have a well-functioning global capital market in which our exchange rate adjusts that will be the balancing item. We will pay higher wages but they will be based upon the higher productivity and the kind of technology we have in the--in the US. Now obviously we want to keep that going and I agree with Clyde; we want to improve our educational system, we want to continue to invest in technology; but as long as we continue to do that and also as long as we get some adjustment of our exchange rate with other countries, particularly with China then I think we will be able to be competitive. I've done some work looking at what has driven our trade deficit and it's--it's--we have had trade balance. We had trade balance roughly in 1980 and--

Fareed Zakaria: And--and the trade deficit is--explain what it is and why it worries you.

Martin Baily: Well the trade deficit is the--the--because we're importing more than we're exporting and we're borrowing the difference from overseas, so we're accumulating foreign debts in order to consume more than we are producing and that is a concern because we're running up debts. We're becoming more indebted to the rest of the world. But that hasn't always been the case; we've had it quite a bit. That's something that's been a bit of a chronic problem but there are times in the past where we've been able to roughly balance our trade and if you compare where we are now to where we were then the problem is the US dollar is too high; it's got to come down. Relatively little of our exchange--of our trade deficit is because we've somehow lost competitiveness. Actually we lost competitiveness more in the '50s and '60s when the European economies and Japan were growing than we're losing competitiveness now.

Fareed Zakaria: So you think we're not really losing competitiveness--in a way it's implicit in your argument, the idea that look if you're going to lose competitiveness you're going to lose competitiveness to other advanced industrial nations and right now there's no evidence of that. You can't really lose that much competitiveness to a country like India that's at 600-dollars per capita GDP.

Martin Baily: Well we certainly can lose some jobs to India; there's no question that anytime that you open yourself up to foreign trade you're going to change the structure of employment in your domestic economy. There will be people who will lose jobs and that's pretty costly to the US economy. I don't want to minimize the costs that are involved for Americans who lose their jobs in this--in this process. But it doesn't mean that we lose all jobs; it means that we have to find different jobs and do different things and that I think is where the US is actually very good. We have a relatively flexible educational system, a relatively flexible labor market that can adapt to changes in the world demand for goods.

Fareed Zakaria: But--but let me ask you about this--this issue of the currency, because a number of very serious economists like Martin say look; the fundamental problem here is just that we have an over-priced currency--that if the currency fell American exports become more competitive, our--our indebtedness to the world declines--that you know what seems these vast structural problems with a couple of fixes, most importantly the decline of the dollar would--would just--you'd notice that they would mostly miraculously disappear.

Clyde Prestowitz: Yeah; I--I pretty much agree with that but I think the dollar is over-valued for a reason. That's why I say how you do this is very important. The dollar is being managed; effectively the United States has outsourced management of the value of the dollar to the Asian Central Banks, particularly the Central Banks of Japan and China.

Fareed Zakaria: Now explain what that--you mean by that is that these--these Central Banks take their surpluses and buy dollars--buy Treasury Bills?

Clyde Prestowitz: They intervene in the foreign exchange markets either to--they either peg their currency to the dollar at a desired rate at--at the rate they want or they intervene in the market in what's known as a dirty float. So their currency like the Japanese yen is supposed to be floating freely responding to supply and demand in the market but every once in a while the government will jump in and buy dollars or sell dollars in order to keep the dollar at a strong level that will facilitate Japanese exports.

Fareed Zakaria: Now why do they want it as a strong--?

Clyde Prestowitz: Because it facilitates their export; strong dollar means the Japanese--the price of Japanese products in the US market is less expensive.

Fareed Zakaria: Right; strong dollar means weak yen, which means--

Clyde Prestowitz: Exactly.

Fareed Zakaria: --but why are the Chinese doing it since--?

Clyde Prestowitz: Similar thing--all these countries--this is a key point; all of these countries are characterized by high--very high savings rates, 30, 40, 50-percent savings right--very high investment. Fifty-percent of Chinese GDP is investments, so 50-percent of every dollar spent in China is a new factory and management of the currency because they're pursuing export led growth strategies. Now to the extent that their management of the dollar and the extent that their--their very high savings rates distort markets, this can be very deleterious to the US in terms of job creation and particularly in terms of the kind of jobs that are created.

Fareed Zakaria: So how--so how do you fix this? I mean they're going to do--they're going to do what they're going to do.

Clyde Prestowitz: Well they can only get away with managing the dollar because we acquiesced it. This is not something that they control just entirely themselves; we have something to say about this. We have pretty much acquiesced in their management of the dollar to be over-valued. There's a second important factor; Martin says that we're competitive in a number of areas and we are. Let's take something like high-tech, semi-conductors; the US is generally considered to have an advantage in the semi-conductor industry. Yet recently several major US semi-conductor companies have announced new factories in places like Singapore, Israel, China and so forth--not because the cost of labor is less in the semi-conductor industry in these countries, not because product quality is better or technology is better but because these governments are offering tax holidays; they're offering capital grants, free land, so these are bribes essentially and these are market distortions.

Fareed Zakaria: Okay; so let's just take that. So what would you--what should we do about that reality that for some of the--for many countries create favorable--many countries create favorable circumstances which allow plants to move abroad, tax holidays as he said--. Now my understanding of a pure free market economist is that he would say fantastic; let them subsidize American companies going in--you know in other words this is great for us because we're getting free subsidies from foreign governments.

Martin Baily: Well this is a little ironic that Clyde is from the Reagan Administration and you're describing me as the free market economist. I think those tax holidays are a bad idea; we do them as well. I mean auto companies--Korea is investing in the US--

Clyde Prestowitz: Let me just interrupt a minute; we do them at the State level but we--

Martin Baily: But we--let me finish.

Clyde Prestowitz: Our government doesn't do this.

Martin Baily: We do them at the State level but we put out a lot of money. New York State put out something like 300-million dollars to build a chip factory in New York State. It's a little crazy actually because there are very few people that work in a chip factory so why you would want to subsidize that I--it is--is beyond me. But the other point that I wanted to make about what--what Clyde said is we do sort of acquiesce in the management of our currency by other countries, but we're also complicit because we are a very low saving economy. We're running a big budget deficit and Americans don't save much, so that's a big reason why we're spending more than we produce and the difference comes out as the--as the trade deficit. So even if China or Japan were to change their ways, unless we were to change our own policies we'd end up with a trade deficit with someone else. So it's really--a lot of it's made here in the United States.

Fareed Zakaria: But--but what would you do about the fact--I mean there's--there's a cultural aspect to this as--as well isn't there--that people argue that look; we're working less hard than we used to. We're saving less; our personal savings rate is close to zero. Are these things going to change--we consume too much, we--we--we get ourselves into debt. Everyone is buying credit; they're using credit cards--is this--is this--first of all--

Martin Baily: It will have to change; no, it will have to change.

Fareed Zakaria: --are these--are these really all bad signs?

Martin Baily: Well we get some advantage from the high living standards we get by all the consumption that we make but I think over the long-run it's--it's got to change especially as you know the baby-boomers are getting older and they realize that they don't have enough to--to live on. So one of the reasons we have such a high--low savings rate is that we had such a huge accumulation of wealth in houses and I think that run is sort of ending. So as we stop accumulating wealth in--in our houses, we may actually start saving more. So I think there's some hope you'll get at least a turnaround in private saving. The other thing we could do is--certainly we could do more to balance our own Federal budget deficit; that would make quite a big--big difference in increasing our saving rate.

Fareed Zakaria: You know Clyde when--when people hear these kinds of discussions you will appreciate this particularly--people say didn't we hear this all about Japan and--and frankly people say it about--about you. Look, he was a scare monger about Japan; he thought Japan was going to take over the world and it turned out they ran into a brick wall. We were much more competitive; we were able to be more flexible. Isn't it likely that when you look at these scare scenarios and it will turn out that we will be more resilient and--and flexible after all?

Clyde Prestowitz: Well there's--there's something to that argument but I--my argument would be that Japan was kind of the prelude and now we're in the main game because what the--the competition with Japan highlighted was some weaknesses in the US system--low savings, problems in education, difficulties in manufacturing systems and so forth; we addressed some of those. We adopted Japanese just in time delivery; we improved quality in the US; the US Federal Government jumped into--to support R&D and some key areas, and so we addressed some of those. But what we're seeing now is kind of a repeat of the same scenario--again low US savings, again lagging US investment, lagging US even commitment to our--to research and development--the numbers are much bigger. In the '80s with Japan we were a net creditor country. We're now the world's biggest net debtor. At the peak of the trade deficit in the '80s it was three and a half percent of GDP; it's now seven percent heading for eight. So our position now is much weaker; the numbers are much bigger and in the case of Japan we were dealing with a country that was essentially a client state. We're now dealing with countries that are fully independent actors and are going to be much less acquiescent in our kind of the--.

Fareed Zakaria: Does--Martin when--when people talk about how we should respond to this, everyone says look; the--the challenge of competition has been good for us. It has forced our industries to be more flexible; we've moved up the value chain. And then they say well what you have to do with American workers is invest in education and re-training. But I mean we've been doing that for 20 years and is it really that easy to re-train people at 45--50 with these--these people who will be laid off from auto jobs? What will they do; how do you re-train somebody to get into a 21st Century industry?

Martin Baily: I think that's the biggest challenge and having been fairly upbeat about the effects of globalization and trade let me now say that I think we do have a dark side of it here in the United States. Average workers in the United States are not doing very well; real wages are weak and there are a lot of people who feel very insecure. And I think that too is a product of the--the situation we've created here; if you lose your job you lose healthcare, you may not have a pension, there isn't a lot of support in terms of getting re-training--those things are fairly half-hearted, so we don’t have a system, even though it's very flexible--we don't have a system that gives to workers the chance to move to a different place and to get another decent job. And there I think we maybe could learn some lessons from Europe. Generally speaking I think Europe has much too rigid a labor market but some of the countries--Denmark is an example--where they have this flex security system where that if you get laid off they do have lay-offs; they do have a pretty flexible labor market, but you get income support, you get re-training support, you get a continuation of healthcare and things like that; I'm--I'm not sure we could take over that system here in the United States but I think we could look at what they do and take some lessons and say what can we do given that we're going to live in a global economy, given that we're doing well in that global economy how can we make sure everyone benefits--not just the rich or not just American companies?

Fareed Zakaria: What is the one or two things you would do to fix things domestically so that we can thrive in this competition?

Clyde Prestowitz: I think the two--I think the two really critical things are the value of the dollar and the US savings rate. And what I would like to see us do is to actually make a move so that the dollar is reduced as the world's currency; I'd like to see oil priced in something other than dollars. This would force fiscal discipline on the United States--force us to bring our budget deficit into--into balance and force us to raise savings in this country so that we can finance some of this investment and--and spending on education.

Fareed Zakaria: But at the end of the day both of you think that we should do this by--these kinds of measures and not protectionism?

Clyde Prestowitz: Oh absolutely.

Martin Baily: Absolutely.

Fareed Zakaria: Well at least on that issue we all agree. Thank you very much.

Clyde Prestowitz: Thank you.

Martin Baily: Thank you.

Fareed Zakaria: Pleasure.

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