Authors: Clyde Prestowitz
The rest of the story is well known. Japan caught up to and surpassed the United States in several key industrial sectors and technologies, and today enjoys a per capita income that, depending on exchange rates, is sometimes greater than that of the United States. Korea, Taiwan, Hong Kong, Singapore, and Malaysia quickly learned to imitate Japan and then added a new twist – they courted foreign investors and lured American and other companies to take advantage of lower costs by locating factories within their borders. Soon the world was talking about the Asian ‘tigers’ and ‘dragons.’ More recently, the North American Free Trade Agreement (NAFTA) has led to a 137 percent increase in Mexico’s exports and made it America’s second largest trading partner (after Canada) and a major target of U.S. investment.
Taking the world economy as a whole, over the past fifty years freer trade has been a major growth factor as exports and imports have increased more than one-hundred-fold while global GDP has grown 4 percent annually.
Moreover, the rise of China and India into the ranks of the newly industrializing economies has made a major dent in world poverty levels. Millions of people in these two most heavily populated countries have moved above the $2 per day income that defines extreme poverty. It cannot be emphasized enough that America’s contribution to this is central and indispensable: The United States absorbs 25 percent of Asian and 60 percent of Latin American exports with its huge trade deficits and is the direct or indirect cause of 35 percent of total global investment in factories in developing countries.
Can globalization be good for non-Americans? Without question. Is it organized to maximize global welfare? Let’s see.
BUT AMERICA OWNS THE SANDBOX
he foundations of today’s global economic system were laid in 1944 at the Bretton Woods resort in New Hampshire, where the Allies reached agreement on the key elements of the financial structure that would be put in place upon conclusion of World War II. The objective was to avoid a repeat of the ‘beggar-thy-neighbor’ protectionist trade policies and competitive currency devaluations that brought the economic disaster of the Great Depression and the rise of fascism. At Bretton Woods, the United States and Great Britain determined that the new international system would depend on universal rules to enforce openness and mutually agreed responses to particular difficulties. It was here that the IMF was established as arbiter of the new system, and the World Bank was created as a multilateral funding mechanism for the development of third world countries. The United States insisted upon and was granted decisive voting rights in both institutions.
A great debate raged over the nature of a new international payment system, with the great British economist John Maynard Keynes arguing for creation of a new international currency that would be backed by gold and called the Bancor. Keynes’s rationale was that such a currency would place all the system’s members on equal footing. The objective was to keep the system operating in equilibrium. Thus if a country began to run a trade deficit, rather than simply devalue its currency it would be forced to adopt austerity measures at home that would enable it to export its way out of difficulty. The IMF would facilitate this adjustment by making transitional loans in exchange for the austerity programs. It was also proposed that countries running trade surpluses adopt policies to stimulate their economies, and that temporary tariffs be imposed on their exports. Capital flows between countries were to be strictly regulated and controlled so that national interest rate policies could effectively adjust the domestic economies.
In die end, the United States insisted that the dollar and not the Bancor would be the international currency. It would be freely convertible into gold at a fixed rate, while every other currency would be pegged at a fixed rate to the dollar. Changes in currency rates could be made only upon agreement with the IMF, which in effect meant with the United States. The capital controls (which limited international banking opportunities) were also part of the final agreement, but the temporary tariffs on trade surplus countries were abandoned. Countries running deficits would be automatically disciplined to adjust, since they would need to finance their deficits by obtaining transitional loans from the IMF – or so it seemed at the time.
The new system worked beyond all expectation. International trade soared as tariffs fell by 73 percent between 1947 and 1961, and Europe and Japan recovered so quickly it seemed miraculous.
By the early 1960
, the huge American trade surpluses of the immediate postwar years had been turned into inexorably growing deficits, as the rising productivity of the European and Japanese economies made their goods increasingly competitive in the now relatively open U.S. market. America had insisted on the dollar as the international currency because this gave us the advantage of paying for whatever we wanted in our own currency. Still, the deficits exposed some unexpected difficulties. Without the temporary tariffs on surplus countries’ exports proposed by Keynes, there was no pressure on them to raise the value of their currencies or reduce exports, and they began accumulating large piles of dollars in their coffers. Because they effectively created extra reserves in the banking systems of the surplus countries, these dollars tended to enlarge money supplies and stimulate inflation. In effect, the U.S. trade deficits, as long as they were priced in dollars, were an export of inflation and an example of the United States’s escaping the discipline that applied to all others in the system. But there was a remedy. The quid pro quo for acceptance of the dollar as the international unit of payment had been the U.S. promise to hold the dollar’s value against gold and to make it freely convertible into gold at a fixed price. Led by France, some countries began to turn in their dollars for gold; throughout the 1960
, U.S. gold reserves shriveled. Faced with the agonizing choice of either maintaining the system by subjecting itself to the same discipline as other countries and adopting domestic austerity measures, or scrapping the system, the United States scrapped the system. Moreover, it took advantage of its great power to do so unilaterally. As the effort to pay, without a tax increase, for both the war in Vietnam and the Great Society domestic programs inevitably inflated the U.S. economy, the strain on international payments became unbearable; and on March 3, 1971, President Nixon simply suspended the convertibility of the dollar into gold. This created a de facto dollar standard in place of the gold exchange standard and made the dollar the world’s fiat currency, for whose management the United States undertook no obligations to the rest of the world. Other countries’ currencies would float against the dollar, and their economies would have to adjust according to the vagaries of U.S. economic policies. After all capital controls were lifted on New Year’s Day 1974, the United States could truly buy whatever it wanted with its own money without consequences to itself or obligations to others. This was real freedom. As for the rest of the world, Nixon’s Treasury Secretary, John Connally, perfectly captured the American view when he said: ‘We had a problem and we are sharing it with the rest of the world – just like we shared our prosperity. That’s what friends are for.’
The virtually unlimited ability to print the world’s money gave America immense advantages in shaping the framework of globalization. Most importantly, it allowed America to become the world’s consumer of last resort: We could forget about saving and run continuous trade deficits. Whereas other countries had to keep their trade more or less in balance over time and only consume roughly as much as they produced, the United States did not have to sell anything in order to buy. It could simply print dollars. The dollar standard also greatly facilitated overseas investment by U.S. companies and allowed the United States to run a cumulative current account deficit of nearly $6 trillion while investing cumulatively some $1.1 trillion abroad by the end of twentieth century.
But the dollar was not America’s only tool. The sheer size of the American market, the spread of English as the world’s
, and immense U.S. military power have all worked along with the dollar to put America in the driver’s seat of globalization. Take the movie and television broadcasting industries. If you are an American moviemaker or broadcaster, you start with a potential domestic audience of 280 million people, compared with about 60 million if you are French and 80 million if you are German. Of course, if you are Chinese or Indian you can count on billions, but your audience will be strictly domestic. As an American, however, you can also count on billions because, in addition to U.S. viewers, people around the world whose second language is English are part of your potential market. Not surprisingly, Americans make more movies, TV shows, and recordings than anyone else and American pop culture has become globally pervasive.
Similar dynamics apply in other areas. U.S. military power means that America is far and away the world’s top arms supplier, but it also creates a huge flow of resources to support American technological leadership. The Internet, for example, originated as ARPA-Net, the network of the Defense Department’s Advanced Research Projects Agency (ARPA). That single development, begun over twenty-five years ago, means that today 75 percent of global Internet traffic is switched through the United States and handled at some point by U.S. carriers.
Finally, U.S. military might reinforces the role of the dollar by making America the safest of havens. Even though it is swimming in dollars, the world continues to hold them because, in a time of uncertainty, where else would you put your money?
From this position of strength, American negotiators like me have marked out the playing field. Early in the game, the United States gained exemptions from the free-trade rules for its politically sensitive agricultural and textile markets, effectively allowing them to remain highly protected. In the first twenty years after the establishment of the GATT, U.S. negotiators assumed the superior competitiveness of other U.S. industries and freely opened U.S. markets without reciprocal opening from trading partners. As imports surged in the late 1970
, however, American diplomats toughened their stance. In industries such as autos and color television, they demanded ‘voluntary’ restraint from exporters such as Japan and strongly suggested that the establishment of factories in the United States would be a wise course of action. This was a cynical and hypocritical way of continuing to profess the virtue of free trade while enjoying the forbidden fruit of protectionism. Of course, our trading partners were outraged, but they had few choices. The U.S. consumer, even if restricted, was the main buyer in town, and anyhow, all the exporters needed those U.S. carrier task forces over the horizon to protect them. The charade served even more to dampen pressures for protectionist measures from American political constituencies that were losing jobs to imports.
The preferred course for U.S. negotiators, however, was to push hard for opening of foreign markets and establishment of rules that would benefit particularly competitive (or influential) American industries and companies. This was a sensible policy, but its implementation could lead to bizarre results. Because the United States rejects as a matter of principle any notion of industrial policy or economic strategy, its negotiating agenda is largely determined by chance and intense corporate lobbying. Thus the U.S. tobacco industry, whose products are very competitive, enlisted the U.S. Trade Representative to open global markets for American tobacco even as the Attorney General was suing the industry for misleading the public about the carcinogenic effects of smoking. Some commentators wondered why the United States wanted to export cancer.
Intellectual property protection has been another area of great emphasis. The whole concept is distinctly western. In much of the rest of the world, the view is that we only stand on the shoulders of those who have gone before us. Thus the notion that I, all by myself, may invent and own a particular idea is seen as egoistical. Nevertheless it is the lifeblood of the U.S. high-technology industry, and U.S. negotiators have made it a high priority to incorporate strong patent and copyright protection in the international trade rules and to strictly enforce them. To take another example, firms making strategic products such as airplanes or semiconductors object to the investment requirements that some developing countries try to impose as a condition of selling into their markets. U.S. negotiators have succeeded in getting prohibition of such requirements incorporated into the global trade rules. Another instance of deft U.S. diplomacy occurred in the late 1980
when the Japanese banks looked as if they would run away with the international store. The U.S. Treasury led negotiation of the Basle Accord, requiring banks to increase the core capital in their balance sheets. This not only leveled the playing field for U.S. banks, which typically adhered to higher capital requirements than Japanese banks, it also induced substantial buying of U.S. Treasury notes at a time when the United States badly needed to finance its deficits.
There was a moment in the 1980
when it appeared that Japan might be on the brink of taking the game away from the United States as, along with its banks, its electronics, auto, steel, and machinery firms took the lead in key world markets. But in the Plaza Accord of 1985 (after New York’s Plaza Hotel, where it was concluded), the United States persuaded Japan to revalue the yen, setting in train a series of events that eventually resulted in the bursting of the Japanese bubble in 1992. That, along with the end of the Cold War and the spectacular rise of the American stock markets in the 1990
, erased any doubt about whose game it was. Fukuyama’s end-of-history argument that liberal democracy linked to market capitalism has proven itself the ideal national model developed an important corollary: that it was specifically the American form of market capitalism that would serve as the example others could ignore only at their peril. In this model, the overriding purpose of the corporation is to maximize returns to shareholders. Management’s interests are aligned with those of shareholders through generous grants of stock options that raise management’s compensation to more than 400 times that of production workers (compared with more than 40 times in 1980) because top managers are seen as business-world equivalents of major sports stars.
The role of government is to deregulate, privatize, and get out of the way. Above all, the free, unbound market is seen as the best allocator of resources and the engine of development.