Do you remember the mantra of the Clinton era officials and commentators on globalization -- that free trade would make all nations rich, and that being rich they would become democratic and being democratic they would become peace-loving because democracies don't go to war with each other?
In view of rising tensions between China, Korea, Japan, and the United States, along with strong opposition to peace efforts in the Middle East, it might be time to reexamine the assumptions of that facile line of logic.
That globalization should mean peace is an old story. Prior to World War I, the world economy was more globalized and integrated than it would be again until the mid-1990s. As John Maynard Keynes famously wrote:
"The inhabitant of London could order by telephone, sipping his morning tea in bed, the various products of the whole earth, in such quantity as he might see fit and reasonably expect their early delivery upon his door-step; he could at the same moment and by the same means adventure his wealth in the natural resources and new enterprises of any quarter of the world, and share, without exertion or even trouble, in their prospective fruits and advantages; or he could decide to couple the security of his fortunes with the good faith of the townspeople of any substantial municipality in any continent that fancy or information might recommend. He could secure forthwith, if he wished it, cheap and comfortable means of transit to any country or climate without passport or other formality, could dispatch his servant to the neighboring office of a bank for such supply of the precious metals as might seem convenient, and could then proceed abroad to foreign quarters without knowledge of their religion, language, or customs, bearing coined wealth upon his person, and would consider himself greatly aggrieved and much surprised at the least interference. But, most important of all, he regarded this state of affairs as normal, certain, and permanent, except in the direction of further improvement."
It was precisely this global economic integration that led Norman Angell to publish his famous book, The Great Illusion. In it, he argued that war was madness and obsolete because the high degree of global economic integration meant there could be no winner.
Angell, of course, turned out to be correct, but that only became apparent after the devastation of World War I had proven the truth of his insight. Nor did that proof prevent a repeat of the war on a grander scale in 1939-45.
What is usually left out of the debate is discussion of two important possibilities. One is that economic development may not automatically lead to democracy. The other is that, by making countries rich, globalization can give them the means by which to act upon the settling of old grievances or demonstrations of manhood in a variety of dangerous ways. Becoming rich did not make early 20th century Germany a democracy but it did whet Berlin's appetite for "a place in the sun" and to match the might of the British navy. Being rich, democratic, and globally integrated did not induce Britain to cease exploiting its empire or to abandon the policy of keeping its navy twice as powerful as Germany's.
These facts suggest that policies aimed at stimulating globalization cannot be divorced from strategic considerations on the basis of the easy assumption that they will inevitably serve strategic ends by creating increasingly democratic conditions among trading partners. For a long time this has been the situation with regard to the policies of the United States and many other countries with regard to China. There has been much talk by top officials and leading commentators of encouraging, welcoming, and cajoling China into becoming a "responsible stakeholder" in the western-designed and largely western-managed global trading and investment system. Such talk not only condescendingly assumed that China would want to be a member of the western club rather than creating its own club, but also that having a seat at the western high table would soften its ambitions for sovereign equality and recovery of old territories and spheres of influence.
Now the contradictions of conflicting policies are becoming apparent. On the one hand, the United States promotes continued U.S.-China economic integration by accepting the asymmetries between the consumption-oriented laissez faire U.S. system and the investment-oriented Chinese system of mercantilism and industrial policy. Thus, Washington encourages companies like General Electric to respond favorably to Chinese policies that induce transfer of avionics and other technology to joint ventures in China while it refrains from offsetting the impact of China's currency management policies on U.S. domestic production. This is on the grounds that globalization is economically always a win-win proposition and that in any case it leads to democratization and thus to peace.
On the other hand, Washington has made the "pivot to Asia" the centerpiece of its foreign policy, has pushed for conclusion of a Trans-Pacific Partnership Free Trade Agreement that is aimed at reassuring Asian nations of America's commitment to them and excludes China, and now is challenging China's right to impose an Air Defense Identification Zone in the East China Sea despite the maintenance of such zones by U.S. allies Japan and Korea who actually inherited them as part of administrative apparatus of the U.S. Occupation of Japan and oversight of Korea during the Korean War. All of this, of course, is based on the perception that China may be a threat.
The current tensions over China's ADIZ suggest that it may be time to decide what America really thinks of China. If China is no threat and is on to becoming a democracy as a result of globalization, then there is no reason to challenge its right to establish an ADIZ over the Senkaku/Diaoyu islands similar to the one Japan already maintains or to exclude China from the TPP free trade deal. On the other hand, if globalization is really not working to create democracy and peace, and if China really does pose some kind of threat to the United States, then Washington should explain what exactly that threat is and should reconsider its trade and investment policies with regard to China.
Too often in the past, we have seen that globalization has contributed to war rather than peace. We should not want that to happen again.
U.S. Navy photo by Ensign Jason M. Tross/Released
A while back, I chastised U.S. Trade Representative Michael Froman for not meaning a word he said about trade policy. Now, in the wake of the latest WikiLeaks release of a chapter of the proposed Trans-Pacific Partnership free trade agreement, I realize why he also doesn't want the American public to know a word about that or any trade deal.
In recent testimony before Congress, Froman emphasized that he would use "every available tool" to level the global trade playing field and reduce the U.S. trade deficit. That was laughable because Froman had already demonstrated that he was not going to touch issues like currency manipulation, indirect export subsidies, or mandatory investment and transfer of technology as a condition of market entry. This did not make him unusual. All of his predecessors had also promised to use every possible tool and none had.
All of them had also called on Congress to grant so called "Fast Track" authority to the President to negotiate free trade agreements that would then be submitted to the Congress for an up or down vote without possibility of amendment. The argument for this had always been that other countries' negotiators would never make their best, bottom line offers as long as they thought any deal might be subject to further amendment after it was submitted to the U.S. Congress. While it had a certain logic, this argument always suffered from the weakness of not being true. Because Fast Track ( now euphemistically called Trade Promotion Authority- TPA) attempted to handcuff Congress, it responded in kind by putting so many conditions on the granting of Frast Track authority that foreign negotiators were reluctant even to enter into negotiations and often found themselves negotiating with leading members of Congress more than with the official U.S. negotiators. In fact, Fast Track (TPA) did not grease the wheels of trade talks. If anything, judging by the recent history of World Trade Organization and U.S.-Korea Free Trade Area negotiations, it threw sand in the gears.
What the WikiLeaks leak revealed was that Fast Track combined with the TPP was not so much a mechanism for getting things through the Congress quickly and efficiently as it was a mechanism for getting around the Congress. The leaked TPP chapter was the one on Intellectual Property. Although it is actually about setting rules to restrain certain kinds of trade, intellectual property protection has in recent years become a mainstay of global free trade negotiations. That this is so is a manifestation of the fact that the negotiations have largely been captured by large, multi-national corporations whose patent and copyright portfolios convey a degree of monopoly rights that they would like to extend and strengthen.
After all, something can only be leaked if it is supposed to be unknown to all but a few authorized insiders. That is certainly the situation with the TPP. The global public, including the U.S. Congress and the legislatures of the other countries involved in the negotiations, has been kept in the dark about what is actually being discussed and what trade-offs are being made. But this is not the case for more than 700 "cleared" advisers to the U.S. negotiators. Mostly from major corporations, these advisers are privy to the negotiating texts and, at least in the case of the United States, provide the bulk of the information and proposals on which the negotiations are based. Having little analytical capability in the area of international trade and investment, the U.S. government must rely heavily on the affected traders and producers to develop and negotiate its agenda. While there is nothing wrong in principle with industry-government cooperation and collaboration, the present structure creates an imbalance of information and influence that favors a few industries while disadvantaging the general public.
The extent of this unbalanced influence and how it works can be seen in the contents of the leaks. The deal being proposed apparently includes measures like those contained in the Stop OnLine Piracy Act (SOPA) and the Protect Intellectual Property Act that have already failed once to achieve passage in Congress. It also includes demands by the United States for separate patents for different forms of the same drug. Thus, for example, a patent would be issued for drug Z in pill form. Then when the drug is produced in liquid form, a new patent would be issued, and when it was produced in gel form, yet another patent would be issued. This is something very unlikely to survive open debate in the U.S. Congress. Clearly what is afoot is that the non-transparent TPP talks are being used to make an end run around the Congress and the parliaments and publics of many countries to achieve far reaching special rights in the guise of free trade.
This should not be fast tracked in the guise of a request for TPA. It ought to be subject to normal debate and amendment so that the public can actually achieve the benefits of free trade.
Update: I need to correct some misunderstandings in this post. While I did not say that SOPA or PIPI or ACTA are in the TPP agreement, I did mention that similar things are in the draft deal. Strictly speaking, this is not the case. To be very clear, I should also say that nothing so far made public about the deal indicates that it might contain elements contrary to U.S. law regarding intellectual property. Having said all that, I believe my larger point that the intellectual property provisions of the TPP as well as the TPP itself would not survive open debate in the U.S. Congress or public remains correct.
TOSHIFUMI KITAMURA/AFP/Getty Images
Just as events in Syria are demonstrating a huge shift in American foreign-policy doctrine in the Middle East, so are recent developments in the Asia-Pacific region signaling the same kind of shift there.
In Syria, it has become clear that the United States will no longer intervene just for the sake of enforcing its will wherever turmoil arises. Of course, this move is also a sign of the end of American hegemony. In the case of East Asia, the Obama administration's major policy initiative has been the so-called "pivot to Asia," and the centerpiece of that has been negotiation of the Trans-Pacific Partnership (TPP) free trade agreement. Although the free trade label sounds boring, the deal is not really about trade. Rather, it is about assuring Asian friends that America is still committed to them.
That's what U.S. Trade Representative Michael Froman and the State Department have been saying for the past couple of years. It sounds good. Who can object to assuring our friends of our commitment to them? But that bland, motherhood-and-apple-pie reassuring veils something of deeper significance. As a high-ranking Singaporean official once explained to me, China "is like a new sun in the solar system, and all the planets [countries] are readjusting their orbits." His concern and that of most other countries in East Asia and the Pacific is that his country will become fixed in the Chinese orbit with no counterweight to allow some freedom of action. What he wanted was for America to be the counterweight against China. What Froman is really saying is that America will indeed act as the counterweight. This is an expression of American hegemony in East Asia and the Pacific.
That the TPP is not just about trade is signaled by the fact that the negotiations over it have been held in strict secrecy. Few, including members of U.S. Congress who eventually must sign off on the deal, have any idea of what is actually in the draft agreement. But what definitely is not there is any provision to deal with the problem of currency manipulation.
Let me briefly explain that. A number of countries, through a combination of jawboning and using government funds to buy dollars in the international currency markets, act to keep their own currencies artificially undervalued. This is a way to make their exports less expensive and their imports more expensive. It is totally at odds with any concept of free trade, but there are no provisions to deal with it in any of the free trade agreements Washington has negotiated. The World Trade Organization has some vague provisions that have never been enforced, and the same is true of the International Monetary Fund. Thus, a country can negotiate to reduce its tariffs from, say, 10 percent to 5 percent or even to 0. These are 50 percent or 100 percent reductions of the tariffs and would be hailed as a major move to free trade. But at the same time, the country could intervene in the currency markets to drive its currency down by 10 to 20 percent and thereby totally offset the effect of the free trade deal. Indeed, this is pretty much what Japan is doing now. While negotiating the TPP, Tokyo has managed to reduce the value of the yen by about 30 percent. Moreover, it has managed to do this without hearing any voice of complaint from its TPP negotiating partners. The other partners don't complain because they mostly act in the same way. The United States doesn't complain because, as I said, the deal is not about trade so much as about showing commitment to its Asian friends.
But this past week saw what could be a very important development. Sixty senators wrote a letter to the U.S. president demanding that the problem of currency manipulation be addressed in the TPP negotiations before any deal is submitted to Congress for approval. This followed a similar action by members of the House of Representatives. The meaning of both actions is twofold. First, it signifies that as it now stands, the TPP deal may really not be able to gain passage through Congress. That is to say that the chances of its not being ratified are quite good. The second point of significance is that, as in the case of Syria, the U.S. Congress is telling the administration and the world that geopolitics no longer trump economic and domestic welfare considerations. Congress is saying that free trade deals now truly have to be about trade and not about reassuring allies of U.S. commitment to them. No longer will Congress agree to buy allies with distorted and lopsided trade deals.
The end of American hegemony will be mourned by many around the world and in America, but it is likely to be a very good thing for U.S. workers and the American middle class.
Photo: Kent Nishimura-Pool/Getty Images
Note: This is a guest post from Richard Elkus, a Silicon Valley venture capitalist and executive who is the retired CEO of Prometrics Corp. and Vice Chairman of Tencor, Inc.
My book, Winner Take All: How Competitiveness Shapes the Fate of Nations (2008),was based on my experience in electronic audiovisual recording and the production of equipment used in the manufacturing of semiconductor devices, areas that in one way or another affected every other product and market on earth. The products from these technologies have proliferated exponentially since inception. For example, video recorders in 1970 had a market approximating two hundred million dollars and a unit volume measured in thousands. Today, the cell phone market alone, embodying cameras and displays, is measured in billions of units. At the core of all of this functionality sits one indispensable device that processes the information: the semiconductor. Today you can't build a car, an airplane, a train or a boat, let alone a television set or a computer, without using electronic audiovisual recording and the semiconductor. These technologies and their respective products and markets are essential to economic growth. For the United States, they are at the core of economic competitiveness, military strength, and political might.
Audiovisual communication products have grown exponentially in technical complexity and function. Yet the cost of those products has dropped precipitously. The first video recorders cost thousands of dollars each. Today a cell phone including a camera can cost under a hundred dollars with better features and performance. The consumer loves the result: great products at ever-decreasing prices. On the other hand, the cost of manufacturing facilities to make those products has risen exponentially. From 1983 to 2008 the cost of a fabrication facility to manufacture semiconductor processors rose from fifty million to five billion dollars. Now, five years later, that facility can cost up to fifteen billion dollars. The economic bet is that the products resulting from this equation (very expensive capital equipment manufacturing millions of technological products at a low price), will create markets large enough to pay for the investment plus a handsome profit.
Innovation, product development, and the commercialization of technology products can produce spectacular results. In 1997, Apple was on the verge of bankruptcy when Steve Jobs returned to the position of CEO. With singular determination to focus on a few products, Jobs set Apple on a fifteen-year course to become the most valuable company on earth, more valuable than the market capitalization of Microsoft and Google combined. Jobs set out to control the integration of software and hardware in a way that the consumer could hardly have imagined. Jobs didn't just change lives; he altered the course of audiovisual communications.
Apple's product lines rely on parts from various vendors. One of those vendors, Samsung, provides key components to Apple, including semiconductor processors. This presents a major problem. Samsung, unlike Apple, is vertically integrated. It produces its own semiconductors as well as the products that use them. Samsung's Galaxy smartphone is the iPhone's largest competitor. The relationship between Apple and Samsung has become strained as they continue to fight over intellectual property rights. Apple needs another source of supply. But other semiconductor manufacturers are difficult to come by and once chosen require extraordinary investment by all parties to the relationship. A new relationship like the current one with Samsung will be very hard to break.
Intel's launch of the microprocessor was perfectly timed for the PC market. Coupled with Microsoft's Windows, Intel established a monopoly in PCs and became the largest semiconductor manufacturer in the world with the highest profit margins. Its manufacturing expertise remains preeminent. Intel's investment in R&D and capital equipment, unrivaled in the past, now has two competitors of like size: Samsung in Korea and TSMC in Taiwan. Unlike Samsung, Intel produces semiconductors but not end-use products. As the wireless market began to expand it did so without Intel as the market leader. Other cheaper processors suited for the wireless environment took Intel's place, including Samsung's processor used in the Galaxy and the iPhone. As the world goes wireless and the PC becomes less a factor in the marketplace, Intel's outlook appears less predictable than in years past.
Intel is producing processors for Apple computers but not the iPhone and related wireless products. So here are two major U.S. companies, powerhouses in their respective fields, each, potentially very valuable to the other. Intel's engineering and manufacturing expertise combined with Apple's success in wireless communications, in some mutually beneficial way, might be a winning combination. And it's made in America. Perhaps the relationship of Apple and Intel should be revisited.
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Yesterday afternoon, I attended one of those Washington meetings at which the Chatham House rules were in effect. Doubtless all of my readers know that Chatham House is a London foreign affairs think tank whose rules mandate that no participant in a meeting be quoted by name outside the meeting. This is supposed to encourage free and open discussion, but in my experience it can also lead to great works of fiction. Thus, you will have to take it on faith that I am not making this up and that the discussion I am about to report actually took place.
Several senators and members of the House of Representatives, Fortune 100 CEOs, eminent writers, and high Obama administration officials were present when the discussion turned to the question of negotiating international free trade agreements. Or, to be more precise, the focus was on the absence of conclusion of such agreements. One very well known senator led the discussion by saying it was well nigh unforgiveable that the United States had negotiated no new free trade agreements in the past five years. He said this was evidence of a woeful lack of leadership in the White House and in the Congress. In particular, he excoriated the Obama administration for having not yet concluded the proposed Trans-Pacific Partnership (TPP) free trade agreement now under negotiation.
A high-ranking member of the administration replied that the trade representative is working as hard as he can on bringing the deal to fruition. A former high-ranking member of the administration seconded that and added that it is absolutely essential to get this deal done. He went on to say, however, that opposition and lack of interest in Congress could doom it. That unleashed a round of comments about how the people in this country and even in Congress don't understand that these trade deals are good for them. There was much lamentation about the ignorance of Congress and the need to better educate it.
Why? I wondered. The most optimistic projections of the impact of the TPP on the U.S. economy shows a gain of only one half of one percent of GDP by the year 2025. That is a rounding error. Given the assumptions that go into these kinds of projections, the potential for a big negative impact is quite high. Indeed, if precedent is any guide, the TPP will likely increase the U.S. trade deficit, reduce U.S. economic growth, and cause further unemployment. Trade deals in the past have always been presented as things that "level the global playing field", reduce the U.S. trade deficit, increase U.S. exports, create jobs, and raise incomes. Yet, with a few exceptions the opposite has been the case in the recent past. For example, the Korea-U.S. free trade agreement that went into effect a year or so ago has been followed by a sharp increase in the U.S. trade deficit with Korea. The reports yesterday of median U.S. household income remaining about where it was in the 1970s, suggests that trade deals have not had a major positive impact on the U.S. economy, or, at least not enough of one to offset other negative trends.
So why had this group become so animated about the need to do a deal that at best will have only a tiny positive impact and that at worst could have a significant negative impact on the U.S. economy?
Religion. That's the only answer. This elite group has a god called trade or perhaps globalization. The details of these trade agreements don't really matter because regardless of what they are the results of the deal will be presented as a big success and as having greatly increased the welfare of the public.
That's what used to be called That Old Time Religion.
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U.S. Trade Representative Mike Froman had a phone call on Monday with what his office called a "broad cross section of stakeholders" to review the state of the negotiations for concluding the Trans Pacific Partnership (TPP) free trade agreement.
How do you like that wording -- "stakeholders"?
For me, it raises a lot of questions about what exactly is going on in the trade representative's office. Over the past forty years there has been a great debate in business schools and corporate circles over the pros and cons of "stakeholder" and "shareholder" philosophies of corporate management. In post World War II America, the ruling doctrine was the stakeholder philosophy. The Business Roundtable in those days issued a mission statement for CEOs that said they should be primarily concerned with satisfying responsibilities to their customers, employees, the communities within which they operated, the nation, and finally the shareholders.
That view began to change in the 1980s in favor of the notion that the main objective of the corporate CEO is to take care of the shareholders and to do so by maximizing earnings per share. In the late 1990s, the Business Roundtable changed its guidance and advised CEOs to adopt the shareholder first doctrine. Subsequently, optimizing shareholder welfare (mainly short-term profits) has become the driving concern of most American CEOs.
Has the trade representative become a convert to the old time religion? I guess it depends on what he means by stakeholder. According to his press statement, those participating in the phone call included representatives of business, labor, academia, the environmental and public health communities, and advocacy groups (I thought they were all advocacy groups). Froman insisted that he wanted to hear from all of them and that this deal is going to be a "high standard" free trade agreement that will "level the playing field" or American workers and business.
This is where I began to get a bit confused. I was a U.S. trade negotiator back in the 1980s (yes, I'm getting old) and have been a commentator on trade and globalization ever since. I don't remember any agreement being described as "low standard" deal. And how many times have U.S. negotiators leveled the playing field? I did it myself at least twice and there were many more such levelings after my time. How much more level can the field get? I mean, if there are still trade problems, maybe it has nothing to do with the shape or plane of the field. Maybe it's the game. Maybe we and our trade partners are not playing the same game. If that's the case, if we're playing Adam Smith/David Ricardo while our trade partners are playing strategic export led growth, then fiddling around with the level of the field isn't going to solve any problems.
But wait -- I have been told now for nearly fifty years that free trade is always and everywhere a win-win proposition. So if all these countries with whom we are negotiating want free trade and we want free trade and all the stakeholders want free trade, why don't we all just agree to keep our markets open and take home our winnings?
But it's clear from the rest of Froman's statement that it doesn't work that way. He told his stakeholders that things were going to get a bit difficult, that they wouldn't all be able to get 100 percent of what they wanted, and that he was going to have to make difficult decisions.
What does that mean -- difficult decisions? Sounds like he's not actually going to get all the market opening he wants and that maybe he's going to open some U.S. markets that some of his stakeholders don't want opened. But that must mean he's going to "pick some winners and losers"? Some stakeholders are going to be favored and some will apparently wind up getting the short end of the stick. Isn't that exactly the "industrial policy" that all real free traders abhor?
So who are the winners actually going to be? A good bet would be that despite all the fancy talk about stakeholders, it's going to be the shareholders -- the guys at the Business Roundtable who dominate the "cleared advisors" to the trade representative and who, of course, are investing most of the money that's being invested to make this deal happen. They own it, so it's likely that they will win something from it.
Now, according to free trade doctrine, the winners are supposed to compensate the losers because the overall winnings are theoretically enormously larger than the losings. But don't hold your breath waiting for that to happen, even though in this case, the big loser could well be a majority of the people.
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George Mitchell died last week. The obituaries rightly lauded him as the father of the shale gas and oil revolution. Yet, in their eagerness to apotheosize Mitchell, the editors of our leading media left out the mother of this revolution - the federal government.
I don't want to take anything away from Mitchell. He was a great investor, philanthropist, and entrepreneur who doggedly pursued the idea that shale could be made to yield its vast oil and gas content. But contrary to the classic picture of the lone wolf inventor who persists alone in the face of indifference, ridicule, disappointment, and even contempt, Mitchell had a partner -- the American taxpayer and the federal government.
This image of Washington as a partner is not easily accepted by most Americans who prefer to the federal government as at best a pest and often a downright enemy. But the truth is that virtually none of America's great inventors and entrepreneurs did it on their own. In the overwhelming majority of cases, they received taxpayer supported federal help along the way.
For example, sometimes I ask audiences if any of them know who invented the Internet. The responses always include such as Bill Gates, Steve Jobs, Larry Ellison, Intel, and IBM. No one ever mentions the Defense Advanced Research Projects Agency (DARPA) which was the real inventor and developer of the basic Internet technology. Nor does anyone ever mention the National Science Foundation's long years of nurturing the Internet before it became commercially viable. Nor does anyone ever mention the role played by major U.S. universities who used federal funds to establish the first Internet centers and hubs. But the hard truth is that the U.S. government was the inventor and developer of the Internet.
The story is similar in the case of shale gas and oil. As Alex Trembath, Michael Schellenberger, and Ted Nordhaus of the Breakthrough Institute have noted, the U.S. government spent billions over three decades to make shale gas and oil a reality. The effort began in the 1970s as a somewhat quixotic, patriotic undertaking by the government's energy agencies and then the Department of Energy to respond to the oil crises of the time and to prevent the United States from becoming dependent on imported energy. Long known as lacking in innovation, the private companies of the energy industry showed little or no interest when the feds showed up offering them funds for joint research and development. Mostly, the oil and gas companies turned it down and told the feds to get lost. Mitchell's great virtue was that he took the money. Here are just a few of examples of the federal largess that supported and drove Mitchell's work.
The Irony is that Mitchell spent much of his time lobbying the congress to keep these programs alive with sufficient funding.
So as we remember Mitchell as one our great innovators and entrepreneurs, let's also pause for a moment to thank our great bureaucrats as well.
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There continues to be much talk of currency manipulation with China and Japan usually identified as the main culprits. While there is no doubt that these two have long managed kept their currencies undervalued to boost exports, today's main practitioner of the black art remains hidden.
Unidentified and even herself not fully aware of what she is doing, the German ship of state sails blithely along, racking up record trade surpluses and wreaking havoc in its wake.
Yes, I said Germany. I know it gave up its beloved deutsche mark to join the euro zone and I know that the euro floats and is itself not a manipulated currency like the yuan, the yen, the Swiss franc, and the Brazilian real. But the truth is that the euro is not really a single currency. For instance, does anyone believe that the euro used in Cyprus is the same as the one used even in Greece let alone Germany? Does anyone think that the Spanish euro is the same as the German euro? To ask the question is to answer it.
The EU economy is far from the integration of the U.S. or Chinese markets. This is true in many respects, but most glaringly in finance. The EU may have a common currency but it certainly does not have a common banking or financial system. And here is where the essence of German currency manipulation is most apparent. It is the Germans who have steadfastly resisted any common guarantee of national debts and any common bank supervisor.
The differences in the various euros can be seen in the different interest rates that EU governments pay on their euro bonds. Germany is presently paying 1.58 percent on its long term debt. This compares to a bit over 10 percent for Greece, 6.3 percent for Portugal, 4.67 percent for Spain, 4.38 percent for Italy, and 1.88 percent for Finland just to cite a few examples.
Because the European Central Bank sets a common short term interest rate for short term euro debt and because the eurozone countries all price their exports and domestic transactions in euros, we have the illusion that they use one currency. But the truth is that the international rate of exchange of the euro to the dollar (presently $1.31/E) and other currencies is an average of the rates of the various national euros. As such, the euro today is far too strong for the peripheral countries. Were Italy, for example, to change back to Lira in place of euros, it would be a much devalued Lira that would greatly facilitate Italian exports while making imports from Germany, for instance, much more expensive. At the same time, the present euro is much weaker for Germany than would be any new deutsche mark that might replace it. Thus, German exports are being indirectly subsidized and stimulated and German imports inhibited by an artificially and systematically undervalued currency.
Of course, few in Germany recognize this and even fewer are willing to admit it publicly. At a recent meeting of Chinese and German leaders that I happened to attend in Shanghai, the Germans were robustly proud of their export virtuosity and competitiveness. They insisted that domestic austerity and export led growth were the keys to success and that other countries should imitate Germany, as they believe China has been doing. They argued that German export success is entirely due to the innovativeness and quality of German industry, and they insisted that Germany should not under any circumstances guarantee or take any responsibility for the debt and the health of the banking systems of other eurozone countries. Thus, in effect, they insisted on continuing to manipulate an undervalued German euro. Of course, they would all deny that that is what they are doing. But the denial doesn't change the facts.
Worse, is the fact that as a result of German leadership the whole eurozone is coming more and more to resemble Germany. Trade deficits are falling along with employment and imports while exports are rising somewhat.
The German trade surplus is now $245 billion or 6 percent of GDP. This is the largest surplus of any country despite the fact that Germany's GDP is only the world's fourth largest at about half the size of the Chinese GDP and a quarter that of the U.S. GDP (by comparison, China's trade surplus is about $217 billion). Now imagine that the whole eurozone reached the German surplus level of 6 percent
The global economy would come under severe strain if anything like this number materialized.
A few years ago I suggested that the solution to the eurozone crisis was for Germany to go back to the old D Mark. This would effectively have resulted in an upward revaluation of the German currency and would have automatically devalued the euro against the D Mark thereby allowing the peripheral eurozone countries to achieve growth and debt repayment without the crushing austerity that has now driven unemployment to record levels. Critics accused me of secretly wishing to undermine the euro. Of course, my suggestion was not adopted and the result now is that rather than the euro it is much of the eurozone itself that is being destroyed.
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Clyde Prestowitz is the president of the Economic Strategy Institute and writes on the global economy for FP.