demos globalization and a new social contract

8/7/2019 DEMOS Globalization and a New Social Contract

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About De-

mos

Dmos is a non-partisan public policy research and advocacy organization. Headquartered in New York City, Dmosworks with advocates and policymakers around the country in pursuit o our overarching goals: a more equitableeconomy; a vibrant and inclusive democracy; an empowered public sector that works or the common good; and re-sponsible U.S. engagement in an interdependent world.

Dmos was ounded in 2000.

Miles S. Rapoport, President

Tamara Draut, Vice President o Policy & Programs

About the economic strAtegy institute

Te Economic Strategy Institute (ESI) is a private, non-prot, non-partisan public policy research organization dedi-cated to promoting U.S. competitiveness and economic leadership. Because national security and welare will increas-ingly depend on perormance in the global marketplace, the Institute is particularly concerned with developing na-tional and corporate strategies to assure that globalization works or America.

About the Author

Clyde Prestowitz is ounder and President o the Economic Strategy Institute (ESI) and is also Chairman o the ESIGlobal Forum and Publisher/Editor in Chie o the webzine www.smartglobalist.com.

Prior to ounding ESI, Mr. Prestowitz served successively as Deputy Assistant Secretary o Commerce, Acting As-sistant Secretary o Commerce, and Counselor to the Secretary o Commerce in the Reagan Administration. In thesepositions he led key trade and investment negotiations with Japan, China, Latin America and Europe and advised theSecretary on the development o U.S. international economic policy.

Beore joining the Commerce Department, he was Director o Global Marketing with the American Can Company,Vice President-Japan or Eqon Zehnder International, and Director o European Marketing and Plannng or ScottPaper Company. He served as vice chairman o the President Clintons Commission on rade and Investment in theAsia-Pacic Region and as a member o the U.S. Export-Import Bank Advisory Board. He also served on the Intel Corp.Advisory Board and is Strategic Advisor to the Chairman o FormFactor Corp.

Clyde Prestowitz regularly writes or leading publications, including Te New York imes, Te Washington Post,For-tune andForeign Aairs. He is the author o three best-selling books including: rading Places (on U.S.-Japan competi-tion),Rogue Nation, and Tree Billion New Capitalists. He is also the co-author and editor o several other books oninternational trade and business strategy includingAsia Ater the Miracle,Powernomics,Bit by Bit, and Te New NorthAmerican rade Order.

Mr. Prestowitz has a B.A. with honors rom Swarthmore College; an M.A. in East-West Policies and Economics romthe East-West Center o the University o Hawaii; and an M.B.A. rom the Wharton Graduate School o Business. Healso studied at Keio University in okyo. He speaks Japanese, Dutch, German and French.

AcknowleDgements

Robert Kuttner, William Baumol, Je Faux, Ralph Gomory, Damon Silver and Lori Wallach. None but the author bearsresponsibility or the result.

copyright

2009 Dmos: A Network or Ideas & Action

2009 Economic Strategy Institute


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De-

mos boArD

current members

Stephen Heintz, Board ChairPresident, Rockeeller Brothers Fund

Miles Rapoport, President

Ben BinswangerChie Operating Ocer, Te Case Foundation

Christine ChenStrategic Alliances USA

Amy HanauerFounding Executive Director, Policy Matters Ohio

Sang JiPartner, White & Case LLP

Clarissa Martinez De CastroDirector o Immigration & National Cam-paigns, National Council o La Raza

Arnie MillerFounder, Isaacson Miller

Wendy PurieoyPresident, Public Education Network

Amelia Warren yagiCo-Founder & EVP/COO, Te Business alent Group

Ruth WoodenPresident, Public Agenda

members, pAst & on leAve

President Barack Obama

om Campbell

Juan Figeroa

Robert Franklin

Charles Halpern

Sara Horowitz

Van Jones

Eric Liu

Spencer Overton

Robert Reich

David Skaggs

Linda arr-Whelan

Ernest ollerson

Aliations are listed or identication purposes only.

As with all Dmos publications, the views expressed in thisreport do not necessarily refect the views o the Dmos

Board o rustees.

esi boArD of ADvisors

Morton BahrFormer President, Communication Workers o America

Jacques DetigerFounder and Director, Vitol N.V.

Dan DimicoCEO, Nucor

Alred E. Eckes, Jr.Former Chairman, Intl. rade Commission; Pro. Ohio

University

Richard ElkusFormer Director, KLA encor

Robert GalvinFormer Chairman, Motorola

Ralph GomoryRetired President Sloan Foundation

Merle HinrichsChairman, Global Sources

Chalmers JohnsonPro., University o Caliornia, San Diego

Phong Hwoi KooFormer Director, Lucky Goldstar

Richard LammFormer Governor, Colorado

Regis McKennaChairman, McKenna & Co.

Bruce ScottPro. Harvard Business School

Claude SmadjaPresident, Smadja & Assoc.

Keisuke YawataPresident, Te Future Intl.

Te views expressed in this report do not necessarily representthe views o the Advisory Board.


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tAble of contents

i. introDuction 1

ii. globAliZAtion in theory AnD prActice 3

An Inadequate Teory o rade 3

Imperect Markets 4

One Global Economy, wo Economic Systems 5

Te Dollar as the Great Facilitator 6

Companies and Countries 6

iii. the price of globAliZAtion 7

Rising Inequality 7

Disappearing Jobs 8

Globalizations Exaggerated Benets 8

Undermining Democracy 9

Te Environmental Costs 9

iv. A new geo-economic strAtegy 10

Te Dollar 10

rade Agreements 10

Ending Fast rack and Setting New Rules or rade Agreements 10

Immigration and the H-1B and Similar Programs 11

A NAFA Renaissance 11

WO Reorm 12

Aligning Corporate and U.S. Interests 12

Strengthening Manuacturing 12

Eliminating Perverse ax Incentives 13

Supporting Eective Research and echnology Development 13

Re-Emphasizing Industrial Extension Services 13

A National Energy Development Program 13

v. A new sociAl contrAct 15

raining and Education 15

Liting the Burden o Benets 15

vi. regulAting globAl cApitAlism 16

International Labor Rights 17

International Environmental Standards 17

Global Financial Regulation 17

Organizing or Better Policy Making 17

vii. conclusion: globAliZAtion AnD lAisseZ-fAire 19


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i. introDuctionSince the end o World War II, American leaders

have promoted globalization as a orce that would au-tomatically raise U.S. and global living standards whilealso spreading democracy and establishing internationalpeace. Indeed, globalization was seen as largely synony-mous with Americanization and became a major element

o Americas geo-political strategy.

For a time, especially between 1950 and 1975, itseemed to work, as American and global median amilyincomes rose dramatically along with the volume o worldtrade and investment. O course, this was a period whenthe present wave o post World War II globalization had just begun. In retrospect, it might be argued that trade,prior to the 1970s, was only a small part o GDP, and thatlingering constraints against currency speculation andoreign capital movements actually contributed to therapid, stable growth o this golden period.

As globalization advanced in the 1980s and early1990s, incomes stagnated in conjunction with the reloca-tion o much U.S.-based production to oshore locationsand the development o chronic trade decits. As a result,the pros and cons o globalization became a matter o in-creasing debate. Still, most U.S. leaders and thinkers heldast to their aith in the power and benets o internation-al economic integration.

oday, with household wealth, income, and jobs evap-orating as Wall Street has gone onto the Washington liesupport machine amidst the collapse o the internationalnancial system, it is apparent that the globalization em-

peror is no longer wearing any clothes. We are in whatGeorge Soros calls the worst nancial and economic crisissince the Great Depression o the 1930s, and we must acethe act that globalization has many possible orms andmany meanings. Te one we have been pursuing since the1970s has crashed along with nancial markets.

In principle, the world trading system is expected tooperate in a balanced ashion over time. Chronically largetrade decits and surpluses are understood to be ulti-mately unsustainable and thereore undesirable. Yet EastAsia and the United States have now been running suchsurpluses and decits or the better part o 30 years.

Indeed, U.S. trade with Asian nations has come to re-semble a huge Ponzi scheme in which the United Statesconsumes ar more than it produces, incurs decits, andborrows money rom the rest o the world (especially Chi-

na, Japan and the Middle East) to nance its ever grow-ing international debt that as o September 2008 totaledover $13.6 trillion.1 Meanwhile, East Asian countriesalong with Germany produce ar in excess o domesticconsumption and export these surpluses to America andthe rest o the world. Further, they provide a kind o ven-dor nancing that long enabled excessively high rates oAmerican consumption which in turn kept the exporterseconomies growing and their employment rising. Tis,

o course , resulted in chronic trade imbalances and theaccumulation o enormous global dollar reserves and in-ternational capital ows that were a prime cause o theeconomic crisis o 2008-09. No one believes that theseimbalances are sustainable going orward.

In principle, exchange rates are expected to adjust toacilitate the adjustment o trade decits and surpluses.In act, a major reason why the global imbalances havebecome so large and so chronic is that a number o key ex-change rates have not been allowed to adjust sufciently.

Under all the conventional rules, the governments odeveloping countries are not supposed to be bailing out

the private banks o rich countriesas they are now do-ing. Indeed, orthodox economic doctrine holds that capi-tal ows to where it can achieve the highest returns; thatrich countries will supply capital to poor countries; thatdeveloping countries with a lot o unskilled, inexpensivelabor will produce labor intensive products and servicesthat they will trade or capital and technology intensiveproducts and services produced by developed countries;that the dollar will be a secure store o value anchor-ing the entire global economy; that globalization will bedriven largely by private enterprise; that it will be a win-win phenomenon providing net gains to all participatingcountries; and that the ew losers will be adequately com-pensated by the large number o winners. It has been ur-ther assumed not only that environmental impacts andcosts would be minimal, but also that by creating greaterwealth, globalization would inevitably oster the spread odemocracy and thus o peace.

At the present moment, however, just the opposite oall this appears to be the actual case. Capital is owingrom the poor to the rich countries where it is being in-vested in relatively low yield U.S. treasury bonds. Devel-oping countries are accumulating trade surpluses in capi-tal and technology intensive products and services whilethe United States has a large decit in these advancedtechnology sectors.2 Although exchange rates have notadjusted eectively in Asia and the Middle East, the dol-lar, until the recent economic crisis, had been steadily los-ing value relative to reely traded currencies like the euroand its role as a store o value is increasingly in question.Indeed, the Chinese and others are suggesting movementaway rom a ree dollar standard.

While globalization has helped tens o millions o peo-ple climb out o poverty in countries like India and China,other countries like Mexico have experienced decelerat-ing growth under conditions o greater globalization, and

U.S. Trade wiTh aSian naTionS haS come ToreSemble a hUGe Ponzi Scheme in whichThe UniTed STaTeS conSUmeS far more ThaniT ProdUceS, incUrS deficiTS, and borrowSmoney from The reST of The world.


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most countriesincluding the United Stateshave expe-rienced a growing divide between the ew rich who havemade great gains in recent years and the vast majoritywhose incomes have stagnated or allen. (In the UnitedStates, or example, the top 1 percent o earners doubledits share o total income between 1979 and 2000 while itis estimated that the median income o an American mar-ried couple in 2006 was reduced by $2135 due to global-ization.)3 Finally, globalization appears to be accelerating

environmental degradation and its benets or democracyworldwide are anything but clear. Democracy has grownstronger in some countries that have been integrated intothe global economy, but in recent years globalization hasalso bolstered undemocratic regimes in China, Russiaand the oil producing countries. Meanwhile, the growingpower o increasingly stateless corporations has under-mined popular rule in those countries where democracyhas long been strongest, including the United States.


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ii.globAliZAtionin theory AnD prActice

Inevitably many interrelated actors have producedthese perverse results. A theory o trade rooted in the pasthas resulted in policies whose assumptions are increas-ingly divorced rom reality as changing conditions haveturned globalization into something ar more complexthan mere commodity trade. Tis problem has been exac-erbated by the mathematization o economics and the riseo market undamentalism.

Out o these actors has arisen a global economy inwhich roughly hal the countries are more or less mar-ket driven, while the other hal are neo-mercantilist. Allclaim to be playing by the same ree trade rules when inact they are in adversarial competition. Te persistence othis one economy/two systems global structure has beenacilitated by the peculiar role o the dollar as the worldsmoney. Te contradictions have been urther exacerbatedby the tendency o global corporations to be more respon-sive to the authoritarian governments that globalization isstrengthening than to democratic governments. Tis hascombined with market undamentalism to oster compre-hensive deregulation and unequal competition betweencorporations and workers around the world. Finally, be-cause the theory takes little account o institutions or opublic goods and public interests, it not only enables but justies activities and policies that degrade the environ-ment while increasing global dependence on autocraticoil producing countries.

An inADequAte theory of trADe

Te conventional Hecksher/Olin/Samuelson (HOS)model o international trade is an evolution o David Ri-cardos brilliant concept o comparative advantage whichhe amously explained through the example o Britainspecializing in production o cloth and trading that orthe wine in whose production Portugal specialized eventhough Portugal could make both cloth and wine withewer man years o labor than Britian. (But it could makewine with many ewer man years than cloth.)

Whereas Ricardos trade ow determinants were di-erences in climate and technology, those o HOS arebroad actor endowments including land, capital and

skilled and unskilled labor. Tus countries rich in capitaland skilled labor are predicted to export capital intensive,high technology products in exchange or commoditiesand labor intensive products rom countries with muchunskilled labor.

Under this model, there is one, unique combination orequilibrium o production and trade that produces opti-mal benets or each country and or the world economyas a whole. Tus, specialization and trade is always andeverywhere a win-win proposition, and even i one coun-try protects markets or subsidizes exports, its tradingpartners remain better o by maintaining open markets.

Given the assumptions on which it is based, the math-ematics o this model are irreutable. Tat it can appar-ently increase welare and international comity withoutgovernment intervention has made this model extremelypopular. Tus, it has become deeply rooted as the ortho-dox guide to policy.

Te difculty is that the model was never intendedto deal with an increasing number o globalization situ-ations to which its conclusions are nevertheless routinelyapplied. As Paul Krugman has explained, the conven-tional models rest upon a number o unrealistic assump-tions such as perectly competitive markets, absence oeconomies o scale and technological innovation, xed

exchange rates, ull employment and ull utilization oresources, no cross border movements o capital, technol-ogy or labor, no costs o entering or exiting a business,no market ailures, no spillovers o know-how rom oneindustry to another, ull ability o labor and machinery toswitch rom one industry to another without cost withinnational economies, and perect inormation. At a timewhen trade was mostly in commodities and there was lit-tle cross border investment, these assumptions may haveapproximated reality, and trade patterns more or less re-ected the conclusions o the standard models.

None o this is true any longer. Indeed, Krugmanwrote in 1986 that

we are orced to recognize that industries that

account or much o world trade are not at all welldescribed by the supply and demand analysis that

lies behind the assertion that markets are best letto themselves. Much trade appears to require an ex-planation in terms o economies o scale, learning

curves, and the dynamics o innovationall phe-nomena incompatible with the kind o idealizations

under which ree trade is always the best policy.5

Indeed, Krugman pointed the way to so called Newrade Teory by demonstrating that a combination o

consumer preerences and scale economies provided amuch better explanation. He urther noted instanceswhen the technological advances o a developing countrycould diminish the overall welare o a more advancedtrading partner.

What was true in 1986 is even truer today. Pursuantto the unconventional analysis o Krugman, ormer IBMchie scientist Ralph Gomory and economics ProessorWilliam Baumol have recently developed trade modelsthat incorporate the assumptions o economies o scale,rapid technological change, and sudden shits in produc-tivity to more nearly approximate conditions in the real

The difficUlTy iS ThaT The model waSnever inTended To deal wiTh an

increaSinG nUmber of GlobalizaTionSiTUaTionS To which iTS conclUSionSare neverTheleSS roUTinely aPPlied.


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world. Once these conditions are introduced, the conven-tional conclusion o one equilibrium optimal or all par-ticipants is replaced by the potential or several dierentequilibria with some more advantageous or one partyand others more advantageous or other parties. Te keyhere is that achievement o economies o scale or o in-novation and other productivity changing techniques isidiosyncratic and largely unrelated to climate, geography,and actor endowment.

Once achieved, however, these conditions constitutebarriers to entry or newcomers that will be reinorced bynormal market dynamics. Tink Boeing or Intel or Mi-crosot. Having achieved global dominance in their in-dustries, they tend to be kept dominant by the normal dy-

namics o ree markets. Tis dominance enables them toearn extraordinary prots and to pay above average wagesand makes having them or other dominant companies andindustries very attractive to national governments tryingto improve the living standards o their citizens. Becauseeconomies o scale and innovation can be very much in-uenced by policy considerations and because countrieswith these kinds o industries will do better than thosewithout them, many national leaders will be tempted topursue activist policies to obtain them. But this meansthat trade can be adversarial as well as win-win, and thatthose who abstain rom activist policies may wind up asnet losers.

A urther problem is that the standard models are very much trade models and not globalization models.Tey take productive capabilities as xed and describethe trade that those capabilities provide. But as Erik Rein-ert and Korean economist Ha-Joon Chang emphasize intheir recent books How the Rich Countries Got Rich andthe Poor Countries Stay Poor and Bad Samaritans: TeMyth o Free rade and the Secret History o Capitalism,globalization is all about changing productive capabili-ties. Te objective is not so much to make more chariotsmore efciently, but to get rom chariots to tanks. Or tolook at it another way, what would happen in Ricardos

classic example i Portugal oered a tax holiday and theBritish textile companies began outsourcing productionto Portugal? Gomory and Baumol demonstrate that Por-tugal makes economic gains while Britain suers net eco-nomic losses.

Tis is an absolutely critical point because globaliza-tion today is much more about investment and the shito production bases through out-sourcing and o-shoringthan it is about traditional trade. In modern globalization,the role o exchange rates, taxes, regulations, labor rulesand investment subsidies is ar more important than thato taris and import quotas. Singapore, or example, did

not get rich because it had no taris. It got rich becauseit had a relatively weak currency, no taxes, tame unions, avery pro business regulatory environment, and plenty ocapital grants and ree inrastructure or companies thatwould agree to o-shore production rom their home baseto Singapore. Te same has been true o China, Ireland,and many other miracle economies. None o these ele-ments are included in standard trade models and none arecovered by international trade agreements.

In this context, the Gomory/Baumol ndings with re-gard to the eects o o-shoring are extremely importantbecause they directly contradict the current conventionalwisdom. Tis has been best articulated by ormer Coun-cil o Economic Advisors Chairman Greg Mankiw whoexplained in February, 2004, that the outsourcing ando-shoring o its service jobs is a good thing or the U.S.economy.6 Mankiws orthodox argument was that trade inservices over the Internet is just another orm o trade andbecause trade is always win-win, this new orm must beas much a plus or the U.S. economy as more traditionalorms.

But Mankiw was assuming that workers whose jobswere o-shored would nd new jobs with equivalent payand benets. He was also assuming that the o-shoringwas in response to market orces rather than policy ac-tions and that there would be no negative implications interms o long run innovation and productivity shits oroverall wage levels or the U.S. economy. What Gomoryand Baumol demonstrate is that these assumptions arenot necessarily valid. Teir views in this regard have re-cently been supported by such as Stiglitz and Krugmanand Intel Chairman Craig Barrett who has commentedthat the United States no longer has a lock on high tech,white collar jobs. Barrett has gone on to say that Com-panies may still orm in Silicon Valley and be competitivearound the world. Its just that they are not going to createjobs there (in the Valley).7

In short, conventional economic theory no longer

very well explains the reality of globalization and thus

tends to lead to sub-optimal policies.

imperfect mArkets

Te domestic analog to the conventional HOS inter-national trade model over the past 40 years has been theEfcient Markets (EM) model that holds the market to be

always correct in the sense that it sel-corrects to a uniqueequilibrium that optimizes general welare.

Just as the HOS model is an evolution o 19th centuryRicardian concepts, the Efcient Markets model is rootedin the 18th century thinking o Adam Smith who positeda world o perect competition (perhaps not too ar romreality at the time) and then amously concluded that wel-are is optimized through a unique equilibrium price osupply and demand established by each agent pursuinghis/her own selsh interest. Te modern EM version othis is based not on an assumption o perect competition,but on the notion that the expectations o market actors

in modern GlobalizaTion, The role ofexchanGe raTeS, TaxeS, reGUlaTionS,labor rUleS, and inveSTmenT SUbSidieSiS far more imPorTanT Than ThaTof TariffS and imPorT qUoTaS.


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incorporate all available inormation and that each mar-ket actor pursues his/her own interest in the expectationthat all other actors will do the same. Supply and demandare taken as given and the choices and expectation o theactors then determine a unique optimizing equilibriumprice. In this way, the market is efcient and always cor-rect. It is recognized that individuals oten have incom-plete inormation and may make individually incorrectdecisions, but it is held that the sum o the decisions o

all the actors is correct. Or, to be more precise, it is ar-gued that actors deviations rom the path o the long termequilibrium are not biased, but rather are random and selcorrecting. Tus, the market must always be right and canonly be distorted or sub-optimize as a result o govern-ment intervention.

In the wake o the Crash o 1929 and the Great De-pression when markets obviously did not optimize orsel-correct, the U.S. along with the rest o the capitalistworld developed a mixed economic system that remainedessentially one o market capitalism but with a signicantdegree o government regulation and oversight o marketsalong with Keynesian intervention to provide stimulusrom time to time.

When this system started to alter amid the staga-tion that arose in the wake o the Vietnam War in the1970s, many blamed the problems on mistaken govern-ment intervention. Indeed, Ronald Reagan amously ar-gued that government was the problem and that i we justderegulated and got the government out o things, theree market would solve all the problems. Tus, rom theearly 1980s, EM was invoked as the guide to U.S. domesticand international economic policy. Te ensuing wave oderegulation and downsizing o the nonmilitary orient-ed parts o the government (economic analysis, weatherorecasting, trade negotiating ofces, etc.) carried romthe Reagan Administration through both Republican andDemocratic administrations to the present. Particularlyimportant was the continuous deregulation and removal

o oversight o the nancial markets that took place over aperiod o more than twenty years. And even where regula-tion remained, the regulators were in thrall to EM think-ing and simply rerained rom regulating.. Tis not onlyaccelerated the already rapid pace o globalization, but en-sured that any problems in U.S. nancial markets wouldquickly become global problems as well.

Te allacies o this market knows best EM model arenow being demonstrated by what is generally acknowl-edged to be the worst economic crisis since the Great De-pression, ironically, or many o the same reasons. It turnsout that, while government can be a problem, so also can

lack o government be a problem, and the government is

now being asked to save the system rom itsel. Just asthe assumptions o HOS have proved invalid, so also aremany o the assumptions o RE and efcient, sel correct-ing markets at odds with reality.

one globAl economy, two

economic systems

Te conventional win-win view o liberal trade and theconusion o trade with globalization have led to a world

economy that ies the banner o universal ree trade butthat in reality is hal ree trade and hal neo-mercantil-ist. For the United States and other liberal traders, marketoutcomes are an end in themselves, government directiono economic development is limited, and achievement oa particular composition o trade or o a particular eco-nomic structure is not a policy consideration. Markets aregenerally open, and it is believed that development shouldbe guided by the natural unolding o comparative advan-tage. Tese countries allow their currencies to oat reelyin the markets, and do not aim as a matter o policy toaccumulate current account surpluses.

On the other hand, several important countries pur-sue a orm o neo-mercantilism. For them the marketmechanism is important but as a means to achieve rapidand/or a particular kind o growth rather than as an endin itsel. Te structure o the economy and what the na-

tion makes and trades are matters o the highest priority.Growth is export led. Domestic markets are not closedto exporters but are selectively protected in a variety oormal and inormal ways, and it is a policy objective toaccumulate continuous current account surpluses. Cur-rencies are managed to promote exports and comparativeadvantage is not seen as xed but rather as something tobe altered to improve perormance. A avored tool or do-ing this is investment incentives that induce companies torelocate production and research acilities.

Tis hybrid economic structure tilts the at worldto slide production and provision o tradable goods and

services and the jobs attached to them rom the neo-clas-sical to the neo-mercantilist economies. It also results inthe accumulation o huge trade surpluses and dollar re-serves by the neo-mercantilists while the neo-classicistsincur ultimately unsustainable decits and go ever deeperinto debt.

Tis apparently deleterious and unair structure hasendured because the argument o conventional econom-ics that the mercantilists are only hurting themselves bydistorting their own economies has inhibited the intro-duction o counter policies.

The efficienT markeTS model noT onlyacceleraTed The already raPid Pace ofGlobalizaTion, bUT enSUred ThaT anyProblemS in U.S. financial markeTS woUldqUickly become Global ProblemS aS well.

ThiS hybrid economic STrUcTUre...reSUlTS in The accUmUlaTion of hUGeTrade SUrPlUSeS and dollar reServeS byThe neo-mercanTiliSTS while The neo-claSSiciSTS incUr UlTimaTely UnSUSTainabdeficiTS and Go ever deePer inTo debT.


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the DollAr As the

greAt fAcilitAtor

Te role o the dollar as the worlds money is the keyto the enduring distortions o globalization because it al-lows both America and the neo-mercantilists to be irre-sponsible. Only the United States can buy and borrow inits own currency. As long as other countries keep largedollar reserves, America can consume more than it pro-duces and simply print dollars to cover the dierence.

Savings and decits really dont matter to the UnitedStates. America can cut taxes, reduce saving, and increasespending with no apparent cost. At the same time, howev-er, the neo-mercantilists can over-save and over-producebecause they can tilt the world by intervening in currencymarkets to keep the dollar strong and their exports ris-ing. (Germany, o course, runs large trade surpluses in theace o a strong, oating euro. But Germanys surplusesare mostly with other EU countries. On balance, the EUruns a current account decit and a big trade decit withAsia). Tey can also und the excessive consumption othe Americans by providing vendor nancing in the ormo purchases o U.S. assets, thereby providing the last linkin the Ponzi scheme chain.

In this way all discipline is removed rom the system.Te United States is ree to over-consume and over-bor-row while the neo-mercantilists are ree to over-produce,over-export, and over-lend. All parties may eel good ora while, but when the music stops, as it appears now to bedoing, there is going to be much pain. Tis could not bethe case but or the peculiar acilitator role o the dollar.

compAnies AnD countries

As part o their export-led growth strategies, many

countries oer big nancial incentives (tax holidays, capi-tal grants, ree land, etc.) to induce oreign companies tomove export-producing actories and key technologies totheir shores. Most U.S. companies with production acili-ties in countries like Singapore, China, Ireland, and Israelhave beneted rom these kinds o incentives.

Tis highlights two key new aspects o globalization.First, although not incorporated into conventional tradeanalysis, these kinds o investment incentives along withmanagement o the value o the dollar have increasinglybecome the major determinants o the structure o in-ternational production and trade ows. Second, this has

become possible because the interests o companies andcountries have diverged as never beore.

Fity years ago, then General Motors Chairman En-gine Charlie Wilson told the U.S. Congress that what wasgood or General Motors was good or America. He waslargely correct. More recently, Intel Chairman Craig Bar-rett commented that: Intel will be okay no matter what.We can adjust to do our R&D and manuacturing wherev-er it is most economically advantageous.8 Conventionalwisdom holds that America has a comparative advantage

in production o micro-processors. In act, it is Intel thathas the advantage, and that advantage can be shited tomany other countries.

In 50 years, the corporation has evolved rom a kindo national institution into a quasi sovereign entity re-quently more powerul than national governments. Tewealth o nations now depends substantially on how andwhere global corporations deploy their assets, and thosedecisions are increasingly being made in response to neo-mercantilist policies rather than market orces. A phe-nomenon that led Barrett also to note that: In additionto being Chairman o Intel, I am also a grandather, andI wonder how my grandchildren are going to make a liv-

ing.

9

Tis quasi sovereignty o the global corporation hasbeen greatly stimulated by the laissez-aire wave o dereg-ulation and willy-nilly globalization o the past 30 years.Deregulation has enabled mergers, the creation o taxshelters, and intra-rm pricing that has resulted in globe-straddling companies that can easily avoid unwelcomeobligations while also inducing many governments andinternational organizations to strengthen protection ocorporate interests. Tus, or example, over the past thir-ty years global protection o intellectual property rightshas been enormously strengthened, while promotion oconsumer, labor, and environmental interests has lagged.

A particularly problematic aspect o the evolutiono the new global corporation is the impact it is havingon many societies. Te excesses o the raw capitalism othe 19th and early 20th centuries were eventually tamedin nearly all market/capitalist countries by means o na-tionally based regulations, union agreements, rules oincorporation, welare and unemployment insurance andso orth. Tese were all largely based on the assumptiono nationally rooted corporations. Globalization has en-abled the corporation to escape these harnesses with theresult that capitalism is increasingly showing ashes o itsold tooth and claw nature. O course there are corporatecodes o conduct and in many instances global corpora-tions introduce best practices standards that upgrade theworking environment in developing countries. But the actremains that over the past twenty ve years the returns tocapital have ar surpassed those to labor and workers havenot enjoyed income gains commensurate with the gainsin their productivity.

dereGUlaTion haS enabled merGerS,The creaTion of Tax ShelTerS, andinTra-firm PricinG ThaT haS reSUlTed inGlobe-STraddlinG comPanieS ThaT caneaSily avoid Unwelcome obliGaTionS.


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iii.the price ofglobAliZAtionSince 1979, as globalization has advanced and the dol-

lar has oated, imports to the United States have grownaster than exports, directly impacting millions o Amer-ican jobs.For example, trade with China alone has dis-placed over 2 million U.S. workers since 2001.10 Te merethreat o jobs being shipped overseas has in turn translat-

ed into reduced wages and benets and a general declinein the bargaining power o U.S. workers. A 2004 Galluppoll showed that 61 percent o Americans ear that they orsomeone close to them wil l lose a job because the employ-er is moving to another country. Te threat to o-shoreproduction, real or exaggerated, gives employers substan-tial leverage over their employees. It is interesting thatwhile the advocates o conventional Ricardian/HOS tradeinsist that trade is always win-win, they rarely note theStolper/Samuelson nding that open trade tends to equal-ize wages between trading partners. Te implication, ocourse, being that average wages in high wage countrieslike America wil l all toward the average in low wage trad-ing partners like China.

rising inequAlity

Not surprisingly, workers are receiving a shrinkingshare o the economic pie. Te gap between what workersproduce and what they receive has dramatically widened:between 1980 and 2005 productivity in the U.S. economyrose 71 percent, while the real compensation (includingbenets) o nonsupervisory workers rose 4 percent (non-supervisory employees make up about 80 percent o U.S.workers). In the tradable manuacturing sector, produc-tivity rose 131 percent while compensation o nonsuper-

visors gained 7 percent. (Figures B-1 and B-2).

Since the end o the last recession in 2001, the purchas-ing power o the typical American workers weekly pay-check has dropped 3 percent. Among working males, realhourly wages are now about where they were in 1973.

Economists dier in their estimates o precisely howmuch o the rise in wage stagnation and overall incomeinequality is attributable to imbalanced trade, but there islittle doubt that it has been substantial. Research on the1980s and early 1990s shows that trade ows alone ac-count or 10-30 percent o the growth in wage inequality,with some major studies suggesting even greater contri-butions.11 Such estimates are sufciently high by them-selves to warrant attentioneven as they may understatethe case by missing many o the ways that globalizationinuences other actors that contribute to wage inequal-ity, like de-unionization, the threats by employers to movejobs overseas, and the growing political inuence o mul-tinationals.12

Tat trade will make the distribution o income worseis embedded in undamental economic logic. When work-ers in a high-wage nation are thrown into competitionwith workers in less-developed countries, those at thebottom end o the wage ladder in the ormer will be rela-tively worse o and those at the top end better o.13

Deenders o the present mode o globalization tend todismiss this as a problem or a small number o unskilledworkers that can be handled with better job retraining andunemployment insurance. But globalizations losers nowextend way beyond the uneducatedand their ranks aregrowing. wenty-ve years ago, American workers wereassured by the promoters o ree-trade agreements thattheir better education and access to superior U.S. technol-ogy would allow them to produce more high-value-addedproducts. Americans would move up the global wage lad-der, while workers rom other countries would get thevacated lower-wage jobs at the bottom. But when skilled,high-paid jobs began to disappear, American workers were

Trade wiTh china alone haS diSPlaced

over 2 million U.S. workerS Since 2001


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told that they were still not skilled and educated enough.So i they want to maintain their living standards they aretold they will have to become much more educated andproductive and work harder and longer hours.

Yet Americans are working longer and are certainlymore educated. Te share o the workorce with collegedegrees doubled rom 15 percent in 1973 to 30 percentover the last three decades, while the share o high schooldrop-outs ell rom 29 percent to 10 percent. Still, theAmerican economy is not generating the promised good jobs. Projections by the Bureau o Labor Statistics con-clude that by 2014 the number o occupations lled bypeople with college degrees will rise by merely one per-centage pointrom 28 percent to 29 percent. Te shareo jobs or which college-level education is actually re-quired is projected to be just 21 percent.14

DisAppeAring Jobs

Te evidence is overwhelming that what was once

thought o as Americas natural comparative advantageskills, technology, and organizationcan now oten beduplicated or even surpassed by other nations. Outsourc-ing o-shore has now ratcheted up to jobs in research anddevelopment that Americans had assumed would alwaysbe ours because o our advanced technology, prestigiousuniversities, and Nobel-prize-winning scientists. Ameri-can transnational companies are locating R&D in India,aiwan and China, where the skills are high and comecheap. An analysis o 57 recent major research initiativeso the U.S. telecommunications industry showed that allbut ve were located outside the U.S. According to one

estimate, 80 percent o engineering tasks in product de-velopment can be easily outsourced. Another suggeststhat as many as 60 million U.S. workers are vulnerable tohaving their jobs shipped to another country.15 Princetoneconomist Alan Blinder, ormer vice chairman o the Fed-eral Reserve Board, recently warned that tens o millionso additional workers will start to experience an elemento job insecurity that has heretoore been reserved ormanuacturing workers. It is predictable that they will notlike it.16

Te notion that the U.S. economy can prosper by sell-ing high-value services while the rest o the world sells ustheir goods is now clearly not credible. Manuacturing isour most important source o productivity and motivatoro technological innovation. In act, most o the jobs andwealth creation associated with the inormation economyis tied to the production o goods. Our highest value ser-

vices are imbedded in the Boeing jets, Intel chips and JohnDeere tractors that we produce; success results rom set-ting trained people to work on problems in the context oday-to-day production, whether autos or pharmaceuticalsor Hollywood lms. Te more we o-shore production,the harder it is to compete in the world on the basis ohigher productivity and creativity.17

Te growing disconnect between many large Ameri-can employers and their employees is urther shreddingthe sense o mutual dependence that lies at the heart o aproductive workplace. Employers who are searching theglobe or cheaper labor have less incentive to invest inthe long-term development o their U.S. labor orce. Andworkers who are constantly threatened by o-shoring havelittle reason to eel loyal to the rm. Again, these attitudeshave spread beyond the sectors immediately impactedby trade and increasingly pervade the U.S. economy. AsTomas Kochan o MI has observed, writing with BethShulman, employers have replaced the basic social con-

tract at workthe norm that hard work, loyalty, and goodperormance will be rewarded with a good wage, dignity,and securitywith a norm that gives primacy to cuttingoperating costs and obtaining the highest possible shortterm prot.18

globAliZAtions

exAggerAteD benefits

While there is no doubt that globalization can gener-ate economic benets, those obtained to date have beenroutinely exaggerated in ways that tend to justiy risinginequality, job loss, and other costs.

For example, one recent analysis claims that expandedtrade over the past 30 years provided gains o between $800billion and $1.5 trillion to the U.S. economy in 2004over8 percent o that years GDP.19 I so, it would have been asubstantial contribution to the countrys growth. But theevidence doesnt clearly support this claim.

Most o the assumed economic gains came in theorm o lower prices. Te principal source cited or thelower price benet is the Bush Administrations 2006Eco-nomic Report o the President, whose evidence is that im-port prices rose 9 percent between 1990 and 2004 whilethe prices o all goods and services rose 60 percent.20 Butimports are concentrated in goods. Comparing the pricechange o domestic and imported goods under the samemethodology yields a savings rom imports to the averageAmerican o about $36 a year. A gain, but hardly sub-stantial enough to justiy any costs. Further, the calcula-tions used to show vast benets rom greater variety andproductivity gains are based on unrealistic and internallycontradictory assumptions. An analysis more consistentwith standard economic principles suggests a one-time2004 gain rom imports not o 8.0 percent o GDP, but o0.7 percent.21

The GrowinG diSconnecT beTween manylarGe american emPloyerS and TheiremPloyeeS iS fUrTher ShreddinG The SenSeof mUTUal dePendence ThaT lieS aT ThehearT of a ProdUcTive workPlace.


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A central problem with claims o huge gains rom ex-panded trade is that they come not rom actual experi-ence but rom simulations o what might happen underextremely unrealistic conditions. Among other things,they assume a state o permanent ull employment. Tus,by denition, trade can never permanently cost any work-ers their jobs. Moreover, these models simulate only tradeunder idealized assumptions and circumstances, not glo-balization. Tey do not incorporate the ndings o Bau-

mol and Gomory nor the cost to America o relative losso production, and loss o scale economies by dint o in-dustrial displacement. Nor do they incorporate the $13trillion loss o U.S. asset values as the result o the tradeimbalance induced economic crisis o 2008-09.

A more comprehensive eort to estimate the impacto a possible ree trade deal in the Doha Round o radealks was done by the Carnegie Endowment or Interna-tional Peace in 2006. It came up with a benet to the U.S.economy rom a potential deal o $4.6 billiona gain oless than one hal o one percent o U.S. GDP, or about $15per person.22 Te U.S. International rade Commission

estimates the total costs to America o import constraintsat roughly $14 billion, or $50 per person.23

While trade surely provides some benets, it is notlikely that the benets received by the majority o workingamilies outweighs the costs they suer rom the lowerwages and benets, job losses, insecurity, declining assetvalues and other orms o allout rom the present modeo globalization.

Statistically, it may be possible to show net benetsrom globalization on an overall national basis. But i 98percent o the population is not receiving these benets,

there must be some question as to whether they are re-ally net benets. Moreover, i the rising inequality is dueto the company/country disconnects, then no amount oretraining, education, and portable pensions and healthcarethe normally recommended nostrumswill changethe situation.

unDermining DemocrAcy

Tere are also growing reasons to question anotherpromised benet o globalization: Tat it strengthensdemocracy worldwide. Far rom spreading democracy,globalization seems to have the opposite eect in someplaces. Te state capitalist autocracies o Russia, Chinaand the oil producing nations have grown in power as glo-balization has gained momentum.

Tese nations are nancing the United States while in-creasingly challenging it on the international stage. Teyare also intimidating and to some extent guiding globalcorporations. For example, many companies accept Chi-

nese censorship on their websites and even turn employ-ees over to the Chinese police upon request. Many alsoreadily assist the Chinese Internet Police with equipmentand technology. Indeed, it is striking that Washington hasraised no human rights uss about this. But the reason isnot too hard to nd. All these major corporations are bigpolitical players with signicant lobbying operations inWashington.

Te key problem is an asymmetry o power over cor-porations between democratic and authoritarian regimesthat disadvantage the democracies. In Washington, a ma-jor global CEO is not only a business leader. He or she isalso an important political player who makes big PAC do-nations, maintains legions o lawyers and lobbyists, helps

to shape legislation, and inuences regulatory decisions.op political leaders have many reasons to court CEOs.In Beijing or Riyadh or Moscow, however, the CEO is asupplicant just like everyone else. He doesnt le law suitsagainst these governments, and he needs to maintain a-vor and keep the bureaucrats and party operatives happy.Moreover, he will use his inuence in Washington to dowhat is necessary to curry avor in the authoritarian capi-tals. In this way, many in the global business communityhave become lobbyists or autocratic regimes. Tis is notto say that it cant or never works the other way around,but the power relationships are such as to make it morenatural or global rms to yield to Chinas Internet police

than to demand that they drop their censorship.

the environmentAl costs

Globalization is now accelerating global warming andenvironmental degradation. Tis is because the tiltedworld is relocating energy intensive production to theleast energy efcient countries while also increasing theenergy intensiveness o the supply system. Many worldgirdling supply chains are only possible by dint o expressair reight operations. But these gobble much more energythan sea shipment or local production. With a carbon taxmuch o-shoring would make no sense. By the same to-

ken, great strain is being put on water and other naturalresources because many developing countries are unableor unwilling to manage them on a sustainable basis. Soagain, the supply chains exploit them without paying theull cost.

By the same token, globalization is exacerbating glob-al dependence on a ew, authoritarian countries in a dan-gerous way. Tis is partly due simply to rapid economicgrowth in China, India, and elsewhere, but also to the actthat production is being moved to less energy efcient ar-eas and also to the act that as a result o the tilted distor-tion, production is being moved uneconomically in waysthat lengthen the supply chain.

far from SPreadinG democracy,GlobalizaTion SeemS To have TheoPPoSiTe effecT in Some PlaceS.

GlobalizaTion iS exacerbaTinG GlobaldePendence on a few, aUThoriTarian oilProdUcinG coUnTrieS in a danGeroUS wa


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iv.A new geo-economic strAtegyJust as the United States has a geo-political strategy,

it must have a geo-economic strategy. Indeed, to have therst without the second is simply nonsensical. Tis strat-egy must be based on the recognition that without beingeconomically competitive America wil l not be able to pro-vide an attractive uture or its children nor adequately de-

end its interests and reedoms in the present. It must alsobe recognized that neither domestically nor internation-ally is the market always right. It needs oversight and oc-casional policy guidance or correction. Finally, in this ageo globalization in which market/capitalism has slippedthe traces o national regulation and taming mechanisms,it will be necessary to establish global regulatory andtaming arrangements. Tus, under a new globalizationregime, the rights o workers need to get the same atten-tion as the intellectual property rights o corporations,the interests o consumers and the environment shouldbe treated as seriously as those o investors, and globalnance must be transparent and sensibly regulated.

Te new agenda can be divided into those issues thatmust be addressed immediately and those that are longerterm in nature.

the DollAr

Negotiations similar to those o the Plaza Agreemento 1985 should be launched immediately to coordinate asubstantial (40 to 50 percent) revaluation o a number omanaged Asian currencies versus the dollar and the euroover the next two to three years. Tis would also have toentail an agreement to halt strategic currency manage-ment activities. A second longer term objective o the dealwould be a reversal o savings and consumption patternsin the United States and Asia. Once the current recessionis behind us, Washington would promise to balance theederal budget over the business cycle and to reorm poorly

targeted consumption incentives like the tax deductibilityo interest on home equity loans, while key Asian and oilproducing countries and Germany would undertake toincrease domestic consumption. China could upgrade itssocial saety net, and a true liberalization o Japans hous-ing and consumer credit markets might do wonders. Teoil countries also need to improve social saety nets andgreatly upgrade their inra-structure.

Ater this initial deal, the IMF or a new body repre-senting the major currencies (dollar, euro, yen, and yuan)must continue to coordinate policy and manage appro-priate currency adjustment. Its mission must be to push

the global system toward balance. o this end it shouldeect a transition to a more stable global currency sys-tem. One possible option would be a basket o currencies.Indeed, the IMFs Special Drawing Rights (SDRs) alreadyrepresent a currency basket and an exchange o dollars orSDRs (China has actually suggested something like thisrecently) might be used as a device to get away rom ex-cessive reliance on the dollar. Regardless o how it is done,the end result must be a system that makes neo- mercan-

tilist currency management and U.S. abuse o the privi-lege o printing the dominant currency impossible.

I starting such discussions proves difcult, Washing-ton could jump-start them by declaring a balance o pay-ments emergency under appropriate articles o the WOand announcing plans to impose a surcharge on imports.It could also initiate unair trade proceedings against anumber o countries on grounds o illegal subsidies (TeAgreement on Subsidies and Countervailing Measures)and/or nullication and impairment o concessions. Itcould also ormally call or ofcial consultations by theIMF with certain o its members regarding their currency

management practices. Tis, o course, would be strongmedicine, but it would surely stimulate discussion, and itis all perectly legal and in keeping with both the rules andspirit o open, rules based trade.

trADe Agreements

No matter what one thinks is the core problem o ourexploding trade decit (e.g., low savings, currency distor-tions, trade deals, skill deciencies, the tax code, oreignmercantilism) the reality o Americas present condition isthat the more trade deals it does, the larger the trade andcurrent account decits grow. Tus, the knee jerk promo-tion o more trade agreements beore we address the awsin our trade policy simply makes our competitivenessproblem worse and drives us urther into debt.

Te rst step thereore is to do no urther harm. Con-gress should immediately impose a strategic pause on alltrade negotiations and postpone approval o agreementsnot yet signed until we have a credible program, agreed toby Congress and the President, (1) to reduce the currentaccount decit at least to the point at which it is not ris-ing aster than our incomeroughly about 2 percent oGDP; (2) to improve American competitiveness. Tis doesnot mean opposition to trade or to trade talks in the nearuture. But it does mean having a serious strategy beoreproceeding.

enDing fAst trAck AnD setting

new rules for trADe Agreements

Te Presidents authority to put trade agreements toan up-or-down vote has essentially stripped Congress oany signicant role in their negotiation. Te result is tradedeals that are written by inuential lobbiescommonlythe people the trade negotiators have worked or or willwork or when they leave government.

in ThiS aGe of GlobalizaTion in whichmarkeT/caPiTaliSm haS SliPPed TheTraceS of naTional reGUlaTion andTaminG mechaniSmS, iT will be neceSSaryTo eSTabliSh Global reGUlaToryand TaminG arranGemenTS.


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New rules or the trade agreement process should in-clude required measurable objectives or U.S. negotiators,such as:

Core labor rights (those already agreed to by themembers o the International Labor Organization)and internationally agreed environmental stan-dards having the same enorceable status as inves-tor rights;

No restrictions on U.S. or state governments romavoring domestic production (including the U.S.based production o non-U.S. corporations) in eco-nomic development policies;

No extraordinary investor privileges or the settle-ment o disputes;

Inclusion o protections against currency manipula-tion;

Objective measures o reciprocally open marketsand enorcement provisions; and,

Assurance o basic levels o judicial independenceand democratic norms in the negotiating partner.

Specic milestones should be included in negotiat-ing instructions that provide Congress an opportunityto judge whether key objectives have been achieved. TePresident would, o course, continue to have the right tosubmit to Congress whatever agreement he or she wishes,but, i the objectives are not met, the agreement would notget ast track privileges.

immigrAtion AnD the h-1b

AnD similAr progrAms

It is clear that the uture will belong to those coun-tries with the most skilled workers. America should make

every eort to develop the skills o its own people and tobe a magnet that will attract skilled people rom othercountries. At the moment, U.S. immigration policy isskewed toward attracting low skill people while makingit difcult or high skill people to stay. For example, manystudents rom around the world get their Ph.D. degreesat top U.S. universities. Having graduated, they are otenrequired to leave the country. In act, our policy should beto grant a green card to any oreigner graduating rom aU.S. university with an advanced degree, especially i it isa degree in science or engineering. We should also makeit easy or skilled oreigners to come to America to startnew companies.

At the same time, there is a need to be discriminatingwith regard to our H-1B visa programs. Although thereis justication or companies in special temporary situa-tions to be allowed to import workers with critical skillsand unique talents, there is no justication or a govern-ment policy that systematically encourages importingskills instead o creating them at home or that encouragesimporting low wage workers who compete with domes-tic workers under the pretense o providing special skillsthat are not readily available domestically. It is a mockery

o the promises that have been made to Americans thatglobalization would provide job ladders with upward mo-bility.

Moreover, the H1-B and similar programs have beenabused. Te denition o a labor shortage is vague andincreasingly stretched to the point where the approval ishardly more than a routine rubber stamp. Among otherabuses, employers have been ound to request oreignworkers or acilities in low-wage states with relativelysmall supplies o highly technical labor, only to employthem at low wages in higher-wage areas.

A thorough congressional review o these programspurposes and an evaluation o their operation are needed.Existing contracts must be honored, but, with careullydened exceptions, new applications should not be ap-

proved pending such a review.

A nAftA renAissAnce

Te North American Free rade Agreement (NAF-A) succeeded in integrating the three North Americaneconomies to the point o no return. oo many economicchannels have been redirected north-south to reverse thecourse o economic integration. But it ailed to deliver onits promisesincluding its promise to stem the tide o un-documented workers crossing the border in search o jobsthat pay enough to support them. Te immigration issuecannot be solved with walls or guest worker programs.It can only be solved with the creation o sustained andbroadly shared growth in the places the vast majority oimmigrants come romprimarily Mexico.

Since we cannot go back, we must go orward and re-place NAFA with a more comprehensive agreement. Terst task is to establish a set o rules or the common mar-ket that recognizes the three NAFA nations joint eco-nomic uture. Te rules would include, at a minimum, abill o rights or citizens o North America, enorceablein all three countries, which would reestablish rights orpeople at least as strong as the extraordinary protectionsNAFA gives to corporate investors. Tese rights would

include guarantees o reedom o association and collec-tive bargaining across borders, as well as public transpar-ency in government dealings with the private sector.

o support this revision, we also need a continentalgrand bargain in which Canada and the United Stateswould commit substantial long-term aid to Mexico in or-der to nurture higher and sustainable economic growth,while Mexico commits to policies (independent tradeunions, adequate minimum wages, equitable taxes, assis-tance to its depressed arm sector) that assure wages in allthree nations rise with their productivity.

Since we cannoT Go back, we mUSTGo forward and rePlace nafTa wiTha more comPrehenSive aGreemenT.


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Finally, we should begin discussions toward a NorthAmerican customs union to manage oreign trade in theservice o the needs o the people o all three countriesand to develop a North American option in response tothe growing regional economies in Europe and Asia.

wto reform

Over the longer term, the currently prevailing hal-ree trade, hal-mercantilist system o globalization must

be replaced by the establishment o a one economy-onesystem regime. o do this the WO will have to be com-pletely revamped with new standards, rules, and author-ity. Most Favored Nation and National reatment stan-dards are no longer sufcient. Tere must be just one kindo WO reatment in all economies. Global rules mustbe created to break up and regulate cartels. Distributionand marketing channels must be equivalently open in allmarkets not only de jure but de acto. It must be possibleto appeal on such issues not just to national courts butto objective international dispute settlement bodies. Sov-ereign investment unds and state controlled enterprisesmust be subject to international scrutiny and to transpar-ency and rules that assure they are operating completelyoutside the political realm. Likewise, tax holidays, capitalgrants, and other nancial incentives used to bribe globalcorporations with regard to location o plants, labs, andheadquarters must be subject to common WO and IMFdiscipline. Nor should the WO and other internationalbodies wait or complaints to address these issues. Rath-er, they should maintain continuous monitoring o realmarket developments and apply discipline wherever andwhenever necessary.

Again, it may be difcult to obtain agreement on ne-gotiating such rules. Tereore, the United States andother interested countries should not hesitate to leWO and IMF complaints and take the actions allowedby international law against measures and policies thatdistort globalization. Financial investment incentivestargeted to particular industries and companies can be

attacked under the anti-subsidy rules while toleration ocartels and avored positions or state related enterprisescan be attacked under the nullication and impairmentrules. Again, the U.S. authorities should not wait or com-plaints. Because o their greater sensitivity to authoritar-ian regimes than to democracies, global corporations willhesitate to bring complaints or ear o retaliation romauthoritarian neo-mercantilist regimes. Tereore, U.S.and other aected ofcials should monitor conditionsproactively and sel-initiate appropriate actions. Again,these are sure to stimulate negotiations.

Aligning corporAte

AnD u.s. interests

Washington must give serious thought to measuresthat will better align the interests o global corporationswith those o the United States. A start could be the cre-ation o a war chest with which to match the nancialinvestment incentives o the neo-mercantilists. Tere isprecedent or this. In the late 1980s, the Bush adminis-tration created a war chest to match the export subsidies

o other countries. Te objective was to orce negotiationo some disciplines on export subsidies in the UruguayRound o WO negotiations. It worked. In this new case,Washington could undertake to match the tax holidaysand capital grants that other countries routinely oer toinduce global companies to locate within their borders.Washington could also apply the corporate income tax soas to give a tax credit, like the R&D tax credit, or cre-ation o certain levels o value added production or cer-tain kinds o jobs.

At the same time, the asymmetry in the relationshipo the global corporation to authoritarian and democratic

regimes must be corrected. One step would be or theUnited States and other democratic governments to workwith business leaders to develop codes o conduct to gov-ern corporate responses to such things as censorship andcoercion o employees. Such codes could be incorporatedinto the WO or could be established independently bythe International Chamber o Commerce which couldmonitor behavior and also adjudicate complaints andimpose penalties. A second step must be much more re-strictive rules on the type and amounts o donations bycorporate political action committees and by corporateexecutives to political leaders and political campaigns. Athird step could be establishment o an active monitoring

project by the U.S. Commerce Department to determinewhen U.S. corporations are being coerced and to bringthis activity into the sunlight.

strengthening mAnufActuring

A competitiveness agenda or the 21st century mustmake manuacturing a priority. Despite the conventionalportrait o manuacturing as an obsolete economic sector,it must be a part o our uture. We cannot earn our wayback to trade balance (or anywhere near it) in a way thatincreases real incomes without increasing exports morerapidly than importsand because goods account or a

ar larger portion o our exports than services, we willhave to achieve most o the export increase with exportso goods.

Moreover, developing technological comparative ad-vantages that can employ large numbers o people dependson the existence o manuacturing. Tere is much aboutthe process o technological innovation that remains amystery, but we do know that it involves trial-and-errorand requires hands-on access to the production process.

moST favored naTion and naTional

TreaTmenT STandardS are no lonGerSUfficienT. There mUST be jUST one kindof wTo TreaTmenT in all economieS.


19/28

A manuacturing base is also essential or national se-curity. oday, components o systems that are essential tomilitary security are outsourced and supply lines are ex-tended around the world.24 Tis structure not only makesU.S. national security vulnerable to disruption, it createsconstant pressure or an expanded American militarypresence around the world to protect the outsourced sup-ply lines.

Te targeting o manuacturing is not an argument orpreserving any single industry, particularly since manyo the products we will make in the uture will be dier-ent rom the products we are making today. Rather, it isan argument or providing the necessary supports andincentives or a healthy oundation o skills, technology,inrastructure, and capital or goods production that canexploit the changing demand in the domestic and globalmarketplace in ways that support high wages.

A high-wage strategy will require a shit in the pat-tern o uture growth toward an industrial base o per-haps 10 million more workers over the next decade. Tis iscertainly not an impossible goal in a labor orce that nownumbers 150 million, but it will require a dramatic changerom policies that have discouraged long-term investmentin manuacturing and have signaled to young people thatthey would be better o becoming international lawyersor nanciers than engineers. Some o the specic ways to

send the appropriate signal regarding competitiveness tothe private sector are included in the ollowing sections.

eliminAting perverse

tAx incentives

Many countries use special tax incentives, capitalgrants, and other nancial incentives to induce directinvestment by global corporations. Tis has oten causedo-shoring o perectly competitive U.S. based produc-tion. Te United States should match such incentive pack-ages while calling or establishment o international rulesto govern them. Further, U.S. tax rules should be amend-

ed to remove provisions that make it more attractive toinvest abroad than at home.

Indeed, U.S. integration into the global economy re-quires us to rethink our whole approach to taxation. Othernations, or example, use border-adjustable value-addedtaxes to avor exports over imports. A progressive VA issomething that ought to be considered as an instrumentto level the playing eld.

Further, U.S. corporate tax rates are among the high-est in the world. Yet, as a result o some o the above provi-sions and other loopholes, actual corporate tax payments

have been relatively low. It would be better to reduce thecorporate tax rate to 15 to 20 percent and at the same timeto remove the complicated and distorting loopholes.

supporting effective reseArch

AnD technology Development

Federal support or R&D and innovation has danger-ously diminished and should be at least doubled. But inintegrating the global economy, simply providing unds

or companies, universities, and research centers or thiswork can easily be counterproductive, because the result-ing products and processes are increasingly likely to beproduced in other countries. Not only have Americanrms become global, but so have universities, with part-nerships and subsidiaries around the world. Harvard, orexample, now reers to itsel as a world university.

In the global economy, ideas cannot be stopped at theborder. By its very nature, research and innovation needto be ree o bureaucratic constraints. We need govern-ment policies that increase the chances that research anddevelopment wil l be channeled to production in the Unit-ed States. Precedents or guiding the location o end-useproduction already exist in the area o military-sensitiveR&D.25

re-emphAsiZing inDustriAl

extension services

We do not have to invent a new program or aid to

U.S. manuacturing. Over the past 20 years local andstate-based eorts to provide technical, managerial, andnancial assistance to small- and medium-sized rmsproducing in the U.S. have grown into a rich network otalented people. States and municipalities have developedan institutional inrastructure that connects businesseswith technical and business schools. Tese eortswiththe great advantage o being locally basedshould be en-riched and expanded throughout the country.

A nAtionAl energy

Development progrAm

American history is ull o examples o successulgovernment leadership in the creation o great industriesthat propelled U.S. growth and prosperity. Te U.S. gov-ernment nanced the rst assembly line; subsidized rail-roads, metal ships, and jet planes; organized the highwaysor the auto industry; and nurtured long distance com-munication, electric power, and computer technologies.It organized the technical assistance, marketing, and -nancing that made American agriculture the most prot-able in the world.

we need GovernmenT PolicieS ThaTincreaSe The chanceS ThaT reSearchand develoPmenT will be channeled

To ProdUcTion in The UniTed STaTeS.

Today, The moST PreSSinG economic iSSUeaffecTinG oUr naTional SecUriTy iS oUrdanGeroUS reliance on imPorTed enerGy


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Many o these great national enterprises were mo-tivated by security concerns. oday, the most pressingeconomic issue aecting our national security is our dan-gerous reliance on imported energy. Although this de-pendence is widely recognized by the public and policymakers, the policy debate is stalled. Ideological blindershave limited the discussion to supply-side proposals toaccelerate the draining o U.S. o-shore oil reserves anddemand-side proposals or large increases in the price o

energy that are ercely resisted by a public that has cometo rely on cheap energy.

But there is now a great opportunity to develop a se-ries o 21st century industrial sectors devoted to the gen-eration o alternative energy that can spur technologicaladvances and at the same time generate high-wage jobs.

Te ederal government began such an eort duringJimmy Carters presidency in the 1970s. But in the wake othe radical ree market ideology that later dominated ed-eral policy and the drop in oil prices in the 1980s, orwardmotion was abandoned. One result is that the European

and Japanese governments nurtured their own alternativeindustries and overcame our lead in this area. oday, theJapanese have 50 percent o the global market or solartechnology, and the Europeans serve 90 percent o themarket or wind turbines.

We should mount an Apollo-like project to aim orAmerica to become energy independent and even to be-come an exporter o energy. No single silver bullet pro-gram will do it. It is impossible to say exactly which com-binations o alternative uels hydrogen, solar, bio-mass,wind, geo-thermalwill prove the most eective. Butneither was it possible to know just what combination otechnologies would get us to the moon when John F. Ken-nedy made that commitment in 1960. What is critical is

the commitment that gives American workers and inves-tors the condence that time and money spent developingskills and businesses in the alternative energy sector canpay o.

Te Apollo Alliance, a coalition o business, labor, andenvironmental organizations, has proposed a $300 bil-lion eort over 10 years to kick-start and nurture a majoreort.22 American policy makers have the skills, the re-sources, and the public support or such a program. Allwe need is the will.

ideoloGical blinderS havelimiTed The diScUSSion To SUPPly-Side ProPoSalS To acceleraTeThe draininG of U.S. off-Shoreoil reServeS and demand-SideProPoSalS for larGe increaSeS

in The Price of enerGy.


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v.A new sociAlcontrActtrAining AnD eDucAtion

Te experience o the advanced nations that havebeen most successul in competing in the global economywhile maintaining high incomes and nancial security(e.g., Sweden, the Netherlands, Denmark) has demon-

strated how social saety nets and partnerships with tradeunions can enhance competitiveness by using the periodso unemployment that accompany economic growth andchange to upgrade the skills and exibility o workerswhile supporting their incomes.

Because the U.S. has lagged ar behind these bestpractices, we need a large and serious upgrading o ourtransition assistance in ways that support good jobs.

First, any such strategy must provide or much moregenerous assistance or the unemployed. Te currentlevels o support (averaging roughly $260 a week or a

maximum o six months) are obviously inadequate. Sec-ond, the system o education and job training needs to becompletely revamped and upgraded to the levels o ourmore advanced competitors. Te cost o a minimal sys-tem or adjustment is in the order o $75 billion per year.Te Danes, whose economy competes in the world andwho enjoy high and rising incomes, spend 4 percent otheir GDP on such programsthe equivalent in the U.S.economy o about $500 billion.

Te recent urry o proposals to solve the adjustmentproblem with wage insurance does not meet the criteriaor an efcient and humane program: the proposals on the

table encourage a downgrading o skills and are nancedby taxing workers and/or reducing unemployment com-pensation. Tus, they propose that the losers in the eco-nomic transition, not winners, support the other losers.

lifting the burDen of benefits

For much o the American middle class, the socialsaety net has depended on a system o health care andpension benets provided by employers. But globalizationhas put employers under great competitive pressures tocut costs. Te pressure comes rom both low-wage coun-tries, where workers get ew i any benets at all, and more

advanced nations, where government shoulders more othe health care and pension burden. Globalization alsogives U.S. companies that can aord such benets theopportunity to escape paying them. As a result, benetsare shrinking and jobs with benets at all are becomingscarcer. For middle-aged and older workers, losing such ajob can be a calamity.

Te reality is that American workers can no longer relyon a voluntary employer-based social saety net, nor canAmerican products be sufciently competitive i employ-ers have to compete with oreign rms that do not have

that benets burden. Successully competing in the worldmarket will demand greater government participation inhealth care and the provision o pensions.

In both areas, efciency and mobility require universalaccess and public accountability. It should be possible tobuild universal systems or health care and pensions thatcan be built on existing successul programs like Medi-care and Social Security.

aS a reSUlT [of GlobalizaTion],benefiTS are ShrinkinG andjobS wiTh benefiTS aT allare becominG Scarcer.


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vi.regulAtingglobAl cApitAlismGlobalization means dierent things to dierent peo-

ple, but as U.S. national policy it has meant the ollowing:

Removal o traditional barriers to trade, such as tar-is;

Ater 1980, removal o non-tari barriers such as

subsidies and quotas, as well as some orms o socialregulation;

Unilaterally open U.S. markets. When countries ol-lowing export-led, neo-mercantilist growth strate-gies restricted access to their markets, U.S. policyhas been to avoid any counter action and even toavoid any domestic industrial policy action thatmight assist U.S. industries impacted by the indus-trial policies o our trading partners;

A double standard applied to some U.S. industriesthat continued to enjoy subsidies and protections,such as agriculture;

A tilting towards the interests o U.S. nancial capi-tal, at the expense o U.S. workers and manuactur-ing industries. Especially, emphasis on maintaininga strong dollar has worked to the benet o WallStreet but to the detriment o Main Street produc-ers;

Te deregulation not just o barriers to trade, but onancial regulations limiting speculative movemento global capital;

Te unthinking (or lack o an overall economicstrategy and policy coordination) creation o myriadtax, investment, and regulatory incentives that havethe eect o encouraging the outsourcing o domes-tic production to oreign locations;

Te negotiation o bi-lateral and regional so calledree trade agreements such as NAFA that are real-ly more about acilitating U.S. investment overseasthan about trade; and,

Emphasis on market undamentalism, the notionthat markets always optimize and always sel-cor-rect. Tis has led to the dismantling or weakeningo regulatory and other institutions that served tobalance market ailures and volatility such as tradeunions, wage regulations, taxation o capital, andtacit or explicit industrial policies.

Whats needed now is to revisit this de acto Americandenition o globalization. We need to redene the ruleso global commerce so that the sel-destructive tenden-cies o a market system are harnessed once again to servea broad public interest; and the interests o America as anation o citizens and working amilies take precedenceover the interests o nancial speculators and statelesscorporations. Ultimately, the challenge goes beyond a bet-ter and more balanced set o rules or trade, or a more de-liberate manuacturing policy or the United States. Telarger issue is how to regulate global capitalism.

Just as the past century was punctuated by struggleswithin nations to balance property rights with social andlater environmental protections, and to make sure thatunregulated nancial markets did not set o periodic de-pressions, the eort to harness a market system to servea broad social purpose must now be global. Tis is armore difcult an enterprise, since there is no global gov-ernment, no global citizenship, weak global civil society,and even weaker global regulatory institutions. So multi-

national corporations and global nanciers have a mucheasier time evading nation-bound democratic counter-weights.

Tese counterweights include the entire range o ar-eas where markets generate either excessive risks or so-cially intolerable extremes: labor rights and saeguards,environmental hazards, nancial speculation, and social

standards generally.Regulating global capitalism really operates in two di-

mensions. Te rst involves questions o economic and so-cial equity. o the extent that nation-states once providedcounterweights to the inequality o private market orces,globalization under current ground rules undercuts allo those balancing mechanisms. It is not accidental thatthe past 30 years o rising inequality and weakened so-cial saeguards was precisely a golden era or global laissezaire. And despite the claims o its partisans, this was nota golden economic age or sustainable growth.

Te second dimension involves symmetry between

and among nations. Te alliance between western multi-national corporations and mercantilist, autocratic coun-tries, has produced advantages or the corporations, butdisadvantages or the United States. Global corporationscan benet rom and thereore acquiesce in the mercan-tilist practices o some countries. It is a Devils bargainthat undercuts American competitiveness in the long run,deprives American workers o decent jobs, while con-tributing to a pattern o development abroad that leadsto grotesque extremes o inequality, reinorces a lack odemocratic rights, and worsens the pillaging o the envi-ronment.

At the same time, we need to appreciate that the cur-rent rules o globalization harm ordinary people in thedeveloping global South as well as in the advanced North.Tis is not an argument or a rivalry between working peo-ple in dierent nations, but a necessary eort to wrest con-trol rom elites who play o workers in the north againstworkers in the south to the detriment o both, and whoare willing to sacrice broadly based prosperity in ourown nation or the sake o their own advantage by drivingdown global wages and social standards. Properly recon-structed, a global trade and regulatory regime could leadto a more balanced orm o capitalism, North and South.

The efforT To harneSS a markeTSySTem To Serve a broad SocialPUrPoSe mUST now be Global.


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So regulation o global capitalism is necessary, both todeend and expand social balance within nations, and tohave more symmetrical trading practices between tradingnations. Te WO has utterly ailed to achieve either.

Te current set o rules governing global economic re-lationswhat Renato Ruggiero called the constitution oa single global economyis inadequate, and should berevised, on at least three major ronts.

internAtionAl lAbor rights

Te absence o any social and human dimension tothe regulation o the market would not be tolerated with-in the domestic economy o most developed nations norin many less-developed nations. Te institutions chargedwith managing the global economythe WO, the IMF,and the World Banknot only reject responsibility orsuch a dimension, but by ideological culture and policyactively undermine social and human concerns in theiroperations. When challenged, the bureaucratic responseis that labor rights are the responsibility o the Interna-tional Labor Organization. Tis assertion is disingenu-

ous. While the WO has the power to protect investorsthrough trade sanctions, and the IMF and the World Bankthrough their loans and grants, the ILO, a tripartite struc-ture in which business, government, and labor represen-tatives have equal voting rights, has neither the ability northe authority to protect workers.

It is oten charged that labor rights are a smoke screenor protectionism and that developing nations do notwant their workers protected. Surveys show that mostpeople in the worlds nations think that labor rights andenvironmental standards should be a part o trade agree-ments. Te resistance comes rom elites in both rich and

poor nations who have a common interest in weakeningworkers bargaining power everywhere.

It is time or the United States government to stopdragging its eet on the issue o international labor rights.We should not be a party to any new WO trade nego-tiating round that does not provide workers the equiva-lent protection that it gives investors. At a minimum thismeans making the core standards prescribed by the ILO,including the right to join a union and bargain collective-ly, enorceable with trade sanctions.

internAtionAl environmentAl

stAnDArDs

One o the paramount challenges or global governanceis a new global regime or reducing carbon emissions. SirNicholas Stern had called global climate change historysgreatest case o market ailure. Only a global regulatorystructure will produce a comprehensive shit to a cleanenergy path. Tis may entail carbon trading schemes orcarbon taxes, but whatever the instruments the overallproduction o greenhouse gases must be reduced.

Since the wealthy countries expect newly emergenteconomies such as China and India to ollow a muchcleaner energy path than the rich countries did, this newglobal regime will require the advanced countries both toset a good example by drastically reducing their own car-bon emissions, and to acilitate transer to the third world.However this is achieved, it will not be accomplished byree trade.

globAl finAnciAl regulAtion

Te current nancial collapse is vivid evidence o thedangers o deregulated global capitalism or, worse, capi-talism that is privately regulated or private nancial in-terests. As nancial standards were weakened in the U.S.

and the U.K., new institutions and products with the po-tential to create grave systemic risk were allowed to grow,outside the regulated system. Hedge unds, private equity,mortgage brokers, credit rating agencies all were essen-tially non-transparent and had no capital standards. Newproducts such as sub-prime loans and derivatives basedon them were also unregulated. Tough these practicesbegan in the Anglo-Saxon countries, the damage hasspread worldwide.

Deregulation produced more deregulation in a race tothe bottom. Ostensible eorts to begin global regulatoryharmonization, such as the Basel Accords, actually al-

lowed banks to dene their own capital standards. Whenthe crisis came, the Basel standards, written largely byand or bankers, proved oblivious to every major abuse.

orgAniZing for better

policy mAking

Seen rom the vantage point o the U.S. national inter-est, trade should be an instrument or expanding Ameri-can living standards and opportunities, not a goal in ando itsel. But the way both the Congress and the execu-tive branch are organized makes negotiating and approv-ing trade deals the number-one priority and obscures the

more undamental questions o the U.S. role in the globaleconomyboth to the public and to policy makers them-selves. It also makes it even easier or special private inter-ests to drive public decision making.

Reocusing globalization policy on economic policy,rather than deal making, would be enhanced with twoshits in government organization:

Each branch o the Congress should establish a Se-lect Committee on Globalization, to include mem-bers not only rom the Ways and Means and FinanceCommittees (whose present jurisdiction over trade

aS financial STandardS were weakenedin The U.S. and The U.k., new in

demos globalization and a new social contract

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