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
There was a lot of good stuff in the President's State of the Union address last night, but a lot of it is not going to happen unless the Obama administration stops contradicting itself.
Repairing and upgrading infrastructure and education, facilitating and investing in production of more and cheaper energy, fostering domestic manufacturing and the re-shoring of production and jobs, reforming how we do healthcare to cut costs by paying for results rather than procedures, stoking R&D and innovation, and fixing our broken immigration system are all important and largely (or should be) bipartisan undertakings.
But does the White House understand that it is operating in a global economy, have any idea of what that is, or of how other countries conduct themselves in that environment?
The President announced that he is launching talks to conclude a Trans Atlantic Free Trade Agreement (TAFTA) between the United States and the European Union. This is a worthy initiative that I, along with a few others, have been promoting for nearly twenty years. It's worthy because the EU is by far the world's largest economy and the economic relationship between the U.S. and the EU dwarfs any other. The United States sells three times as much to the EU as it does to China, for example. Furthermore, the EU's attitudes and policies on international trade and investment are very similar to our own and its markets most nearly match ours in terms of openness to outsiders. EU wages are, if anything, higher than ours, as are its environmental, health, and safety regulations. So there will be no race to the bottom in a TAFTA. Nor are the euro and the pound sterling manipulated currencies, and the EU anti-trust regime is fully as tough as that of the United States. I believe a TAFTA could add 2 to 4 percentage points to U.S. GDP. So far so good.
But then the President reiterated a line from his inauguration address which said that the Trans Pacific Partnership Free Trade Agreement that he is hoping to complete with Canada, Mexico, Peru, Chile, New Zealand, Australia, Brunei, Singapore, Malaysia, and Vietnam (and possibly Japan) by October will level the playing field and promote American exports and jobs. He essentially equated the two proposed deals.
But they are in no way comparable. For starters, the TPP is likely to undermine the North American Free Trade Agreement (NAFTA) and the Caribbean Area Free Trade Agreement (CAFTA) and result in the loss of more than a million jobs in Mexico and the Caribbean, along with nearly 200,000 jobs lost in the United States. This is because under NAFTA and CAFTA textile producers in the Caribbean and Mexico who use U.S.-made fiber and yarn receive duty free access to the American market. The only manufacturing industries in the Caribbean are based on this deal, as is much of Mexico's manufacturing industry. These deals were done in the 1990s in part to mitigate illegal immigration and illegal production and shipment of drugs to the United States. A TPP will remove the tariffs on textile imports from much of Asia and take large chunks of the U.S. market away from Caribbean and Mexican producers and give it to Vietnamese producers that are heavily controlled and backed by their government, according to studies by the Mary O'Rourke Partners Group of economic analysts.
But that's just a small part of the problem. The main part is that the TPP does not at all address the issue of trade-related currency manipulation in which governments actively adopt policies aimed at promoting their exports and reducing their imports by lowering the value of their currencies. A good recent example is that of Japan. Before being elected, the new Prime Minister Shinzo Abe called for devaluation of the yen. Upon election he immediately began introduction of policies and rhetoric aimed at reducing the value of the yen. Not surprisingly, the yen has devalued by nearly 30 percent over the past few weeks. That would far outweigh any removal of a 5 percent tariff that might be achieved in a TPP deal. Yet the TPP has nothing with which to combat this kind of currency policy.
And it gets a lot worse. On Monday, I received an urgent email from an old friend in Tokyo who is a former top economist for Goldman Sachs. He had just seen on Bloomberg a comment by Treasury Undersecretary Lael Brainard saying in answer to a question about Tokyo's recent actions that the administration supports Abe's policies to stimulate the Japanese economy. In other words, the Obama administration apparently approves of Abe's efforts to weaken the yen as a way of subsidizing Japanese exports, many of which come to America, a country that needs to reduce its trade deficit in order to keep economic growth and job creation going.
Asked my Tokyo friend: "Do these people have any brains? Who do they work for? Who?"
Well, they all work for the president, and he hasn't figured out yet that the TPP and fiddling with currency values to promote trade surpluses and promoting manufacturing in America don't go together. So it was a good speech, but a very mixed message.
Mario Tama/Getty Images
This Black Friday is likely to be a particularly bleak one for patriotic-minded U.S. Christmas shoppers. From perennial bestsellers like the iPhone and Legos, to this year's new arrivals like the Kindle Fire and the MyKeepon musical robot, the most popular gifts this year all seem to be manufactured overseas. This may be the season that U.S. retailers pull themselves back in the black, but it looks like another grim winter for American manufacturing.
Or is it? You might not yet see the evidence on the shelves at Wal-Mart, but with a bit of good policy and good luck, U.S. manufacturing may well experience a renaissance over the next decade.
A recent report from Booz and Company, based on a sector-by-sector analysis of U.S. industry, concludes that, in principle, the American market could be supplied most economically by factories located in the United States in about 90 percent of all manufacturing industries. For the ten percent of industries like apparel and shoes that are truly labor-intensive, off-shore production is fully justified. On the other hand, U.S. manufacturers are already competitive in about 45 percent of manufacturing industries -- microprocessors and polysilicon, for example -- not only in the North American market but globally. As for the remaining 45 percent -- a category that includes such industries as machine tools and optical fiber -- Booz and Co. conclude that there's no reason U.S.-based manufacturers couldn't effectively compete to supply the U.S. market, if only corporate executives, labor, and the U.S. government worked together to optimize productivity and minimize costs.
One of the main obstacles in reaching this type of cooperation, may be overcoming the conventional wisdom that there's no way for companies to turn a profit by manufacturing in the United States. But as the following five examples of companies both large and small show, it's not only possible, it's already happening:
The company that produces more than 85 percent of the microprocessor chips that power the world's computers makes most of them in the United States. Making these chips is not labor intensive because it's mostly high-tech robots in sealed factories -- inexpensive Asian workers provide no particular advantage in their production.
The economies of scale, the high quality, and the high productivity generated by Intel's large U.S. facilities in New Mexico, Arizona, and Oregon and its highly-skilled and experienced work force make the United States the most competitive place in the world on an operating-cost basis to make these chips. Of course, there are important Asian microchip producers like Korea's mighty Samsung, but without special financial subsidies like tax holidays, free land, and capital grants their cost competitiveness is no better and often worse than that of U.S. based producers.
Just last week, it announced that it is moving production from of its compact machines from Japan back to the United States in order to be able better to serve the markets of North America, Europe, and the Middle East. This represents a kind of historic shift. I was living in Japan in the 1960s and 1970s when Cat began producing these machines there on the grounds that Japan-based production was more cost effective.
Caterpillar executives say the demand for small tractors and semi-hydraulic excavators, once primarily came from job sites in Japan's cramped urban centers, but the majority of the customers are now in North America and Europe. The new facility is expected to create as many as 1,000 new jobs. The company also opened a new plant in Winston-Salem, North Carolina, this week.
This French manufacturer produces industrial gases like liquid oxygen, carbon dioxide, and liquid nitrogen that are used in the steel, oil, and natural gas industries. Just two weeks ago, it started up its new factory in Rancho Cucamonga, California, to better supply increasing demand for its products in the southwest United States. This factory will double the company's production capacity in America, along with its U.S. workforce.
The U.S. Auto Industry
Cars, of course, are not products you never think of. In fact, you think of them all the time -- and for the past 40 years you probably thought of them as being better and less expensively made abroad for export to the United States. Now, however, America has suddenly become the place where all auto companies, both U.S. and foreign, want to make cars. For example, Ford Motor Company is bringing production of its Fusion model back to Flat Rock, Michigan, from Mexico despite the fact that its Mexican workers are paid $3.35/hour compared to the more than $33/hour earned by its Flat Rock workers. Honda is investing more than $300 million to expand production of light trucks and engines at its Alabama factory. Chrysler is investing $1.7 billion to develop a new Jeep and upgrade its Toledo, Ohio, production facilities that will employ 1,100 new workers. General Motors is expanding its former Saturn assembly plant near Knoxville, Tennessee, to make the Chevrolet Equinox. This will bring 1,900 new jobs to the state. GM is also expanding production of the Chevy Volt. It plans to make 60,000 of them next year at its venerable Hamtramck plant in Detroit; 15,000 will be exported.
Bob's Space Racers
The Daytona Beach company, an industry leader in arcade gaming with business in every state and 118 countries, is bringing production of the Whac-A-Mole game back from China. Why? "The costs are more equal now, so we're able to manufacture some of those products in the United States," says CFO Mike Lane. "Labor costs in China are increasing. Shipping across the ocean is expensive. Plus, we have better quality control in the U.S."
Lane and his colleagues found that the travel and verification costs of manufacturing outweighed the advantages of cheap labor. Now, Whac-a-Mole is being brought back to the United States where it was first developed over 40 years ago.
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So the force may be with U.S. manufacturing after all. But for the "re-shoring" wave to really build momentum, the government needs vigorously to offset the currency manipulation and match the financial investment incentives that lure U.S. companies toward manufacturing abroad. For example, Washington should take steps to impose countervailing duties on imports that are being indirectly subsidized by currency manipulators, who buy dollars on a steady basis in order to drive up the exchange rate of the dollar -- thereby making U.S. imports cheaper and exports more expensive than they ought to be, based on market forces. And Washington should also coordinate with state economic development offices to and arrange to match the free land, capital grants, and tax holidays that countries like China, Singapore, and France use to lure investment and production that should remain in or go to the United States based on the dictates of market forces.
Maybe the Obama administration and U.S. economists and business leaders will wake up to this potential in the coming year. Now that would be something to really be thankful for.
Clyde Prestowitz is the president of the Economic Strategy Institute and writes on the global economy for FP.