An article in Der Spiegel reports on declining support for globalization among Americans.
Democratic presidential candidate Hillary Clinton has distanced herself from the idea of free trade, a philosophy which has shaped America's worldview since the end of World War II. The theory holds that trade between nations automatically increases the wealth of all participants, and that any form of trade is better than no trade at all. Every American president since Harry S. Truman has spent a good deal of his time in office eliminating customs restrictions and barriers to trade.
Globalization and "free trade" have become synonymous with the United States going massively in hock to the world. Yes, most people think this is bad. No, they don't buy the arguments of some doctrinaire free market economists that the market will somehow make it all work out well in the end. Ricardo's theory of comparative advantage has been modernized into a strange form where our comparative advantage is the ability to borrow money from other countries. Somehow I don't think that is what David Ricardo had in mind.
MIT Nobelist economist Paul Samuelson says the consequences of globalization are negative for the United States.
Does he think that globalization is a zero-sum game, in which one party wins, and the other loses? No, he replied after he had finished his sushi. The world's wealth will continue to increase. But, he quickly added, unfortunately this won't apply to all groups within a society.
But won't the profits of globalization's winners offset the losses of its losers? No, he responded, not any longer. According to Samuelson, the consequences of globalization for the United States have been negative for some time now. Compared with Asia's rising economies, the country is now in a "win-lose" situation. Asia, says Samuelson, is gaining economic strength while America is losing its assets.
What are some of those consequences? Much higher prices for oil, minerals and other natural resources. Much more pollution. Greater habitat destruction. Much more intellectual property theft.
How can America compete by producing knowledge if the knowledge gets ripped off? Designs that get copied are designs that pay less in return for their development. Shrinkwrap software that gets used illegally on a massive scale by Chinese companies gives them a competitive advantage over US companies that pay to legally use software. The situation is analogous to how employers of illegal aliens can drive out of business any company that only uses higher priced legal labor. China can beat us by cheating. Shouldn't we object to this?
Morton Kondracke is displeased that Lou Dobbs is opposed to immigration. I'm displeased with ole Mort and think he ought to stop supporting policies that damage America. Mort's also unhappy that Hillary Clinton has serious doubts about whether Ricardo's theory comparative advantage describes what is happening with world trade.
And Democrats increasingly have turned anti-free trade. As a prime example, Sen. Hillary Rodham Clinton (D-N.Y.), wife of the president who pushed through the North American Free Trade Agreement, the World Trade Organization and normal trade relations with China, now questions the whole basis of free trade.
She — along with other Democratic presidential candidates — has called for a “review” of NAFTA and a “time out” on new trade agreements.
And, in a Dec. 3 interview with the Financial Times, Clinton said she would take a “hard look” at reviving the stalled Doha Round of trade talks aimed at reducing trade barriers around the world.
She went so far as to question whether the theory of “comparative advantage” — the idea that everyone benefits when countries sell their best products and services to one another, the whole basis of post-World War II U.S. international economic policy — “may not be descriptive of the 21st century economy in which we find ourselves.”
How dare she question established dogma. Well, heresy comes easily to me. So I'm with Hillary on this one.
In a New York Times column where he paints a pretty optimistic picture about the effects of the declining US dollar Tyler Cowen argues that the Chinese won't use their massive holdings of US dollars to cause a severe dollar crash.
Another worry is that a falling dollar puts the United States at the mercy of China. Dr. Brad Setser, a currency analyst at RGE Monitor, estimates that the Chinese hold about $1.2 trillion in dollar-denominated assets. China is likely to slowly diversify into other currencies, but Chinese leaders have no interest in encouraging a run on the dollar or a fire sale of dollar-denominated assets. China is in a more vulnerable position than the United States, if only because China is a poorer country and has underdeveloped capital markets.
Still, it would be naïve to argue that a weak or falling dollar can never hurt the United States. Extreme volatility can increase general anxiety and discourage economic commitments. If the dollar went into a true free fall, it would damage the reputation of the United States as a desirable place for foreigners to invest. That would hurt; but on the other hand a low dollar would mean bargains for foreigners, thereby attracting investment and limiting the potential negative fallout from a dollar collapse.
I am reminded of how some people were convinced before World War I that a war between the major powers was no longer possible because they had too many shared interests as a result of mutually beneficial world trade. Well, my point is that individuals and countries are not always cool rational calculators of their interests.
If the people running China have Tyler's wisdom on where their best interest lie then they'll aim for a slow decline in the dollar against the Chinese yuan currency. If they have that wisdom they might even succeed in managing that decline. But, hey, governments aren't always wise. A libertarian-leaning free market economist like Tyler surely understands that. So we can't assured that the Chinese will make wise decisions about their capital markets and currency. In fact, China is currently undergoing a boom with a really immature capital market that very easily could blow up.
Well, turns out Tyler thinks China might slip into a massive depression within 7 years of last year and he even thinks the United States runs a similar risk. Tyler's pretty optimistic about what markets can accomplish. But he thinks for whatever assortment of reasons we haven't escaped from the risk of massive economic depression.
China's economic development and the continued intertwining of the Chinese economy with the whole world economy connects the rest of the world with a country that has a historic tendency to go into convulsions. This will create problems.
While the United States will still have a much larger economy than China in 2008 the absolute size of the Chinese economy's growth is expected to surpass the absolute size of the US economy's growth.
For the first time in modern history, China will next year contribute more to global economic growth than the United States.
The landmark moment was predicted yesterday by the International Monetary Fund and is the latest illustration of the fast-growing Asian country's importance to the world economy.
While China's economy is still far smaller than America's, it has overtaken the UK as the world's fourth biggest economy.
This portends an even bigger shift in store. When will the absolute size of China's economy surpass that of the United States? Also, how expensive will oil become as Chinese demand bids up the price?
China's rate of economic expansion is phenomenal.
China's gross domestic product expanded 11.5 percent in the first half, after recording a blistering 11.9 percent in the second quarter and 11.1 percent for all of 2006.
If they could maintain 11% annual growth their economic would double in just 7 years. If they can only maintain 8% annual growth they'll double in 9 years.
The dollar's decline against the Euro is shifting Chinese exports toward Europe.
Europe's trade deficit with China jumped 25 percent to a record in the seven months through July, increasing tensions on foreign-exchange policy ahead of a meeting of the Group of Seven nations tomorrow.
The EU, unlike the US, still runs a net trade surplus with the rest of the world. But the dollar's decline has made European goods more expensive relative to US and East Asian goods. Though on the bright side for the Europeans the rise of the Euro against the dollar has reduced oil prices for them in Euros.
The East Asians are selling US bonds.
The dollar crossed the barrier of $1.43 against the euro; the broader dollar index fell to 77.478, the lowest since the series began in 1973.
The plunge follows data released this week by the US Treasury showing a record $163bn (£80bn) exodus from all forms of US assets, led by unprecedented levels of US bonds sales by Japan, China and Taiwan.
The big US trade deficit has gone on for too long. Holders of US bonds have figured out that the pressures in favor of a correction have grown so strong that holding US bonds is a bad idea. Chinese holders of US bonds are thinking the Chinese yuan is going to rise against the US dollar and they do not want to hold dollar assets which will decline in value as the yuan rises.
When governments buy up companies around the world the market becomes less free.
WASHINGTON: For years, the Bush administration has shrugged off concerns about the trillions of dollars that the United States owes to China, Japan and oil-producing countries in the Middle East, arguing that these debts give no undue leverage to foreign governments.
But at a time of global financial instability, the administration has started to worry.
U.S. concerns - like those of many European policy makers - focus on a growing but little understood trend of foreign governments converting their debt holdings into "sovereign investment funds" that are acquiring assets in the United States and elsewhere - and could influence the markets when they buy and sell.
Businesses owned by foreign governments can hire lobbyists to represent the businesses. Then governments can use their business holdings to buy influence in other governments.
Funds in the hands of sovereign governments are becoming huge.
Another concern is the sheer size and potential growth of these funds. Their estimated $2.5 trillion in assets exceeds the sum invested by the world's hedge funds. Also, Morgan Stanley, in a widely cited study, projects that these investment funds could grow to a staggering $17.5 trillion in 10 years.
Globalization isn't the triumph of the invisible hand.
As an example of what sovereign wealth funds can do, in May 2007 China bought 10% of Blackstone.
The Chinese government has agreed to pay $3bn (£1.5bn) for a 10% stake in US private equity company Blackstone.
It will give Blackstone a head start in Chinese takeover deals and allow China's government to tap into the global private equity boom.
China tried to buy oil company Unocal in 2005 but domestic opposition in the United States stopped the deal.
The role of China's government in their economy will limit how economically efficient China can become. But even if the Chinese government's interference eventually limits per capita GDP in China to half the US per capita GDP that still will translate into a total GDP more than twice the US. China's huge population mean that China doesn't have to become as efficient as the US in order to become economically much larger.
When US billionaires buy up US politicians there's a greater overlap in interests between the influence buyers and US regular folks than when Chinese billionaires, the Chinese government, and other foreign interests begin to do the same. The elites in the future won't even be your elites.
FRESNO COUNTY, Calif. — For decades, the fiercely independent fruit and vegetable growers of California, Florida and other states have been the only farmers in America who shunned federal subsidies, delivering produce to the tables of millions of Americans on their own.
But now, in the face of tough new competition primarily from China, even these proud groups are buckling. Produce farmers, their hands newly outstretched, have joined forces for the first time, forming a lobby group intended to pressure politicians over the farm bill to be debated in Congress in January.
Low priced illegal alien farm labor from Mexico can't compete with far cheaper farm workers in China.
Although some farmers may be suffering, American consumers have been big beneficiaries of cheap food imports. On the United States wholesale market, for example, Chinese garlic costs almost half the price of garlic that is grown domestically.
The farmers need to embrace automation and push for big innovations in farm equipment designs. They can't compete on labor costs. Their only chance for survival is to use more capital and far more advanced and robotic capital equipment.
I'd rather the US government spend on automation research and development than on subsidies. The research would eventually lower costs and prices. The subsidies to the growers will keep up prices and delay the development of productivity enhancing equipment that the growers need to stay competitive. We doom our domestic industry to backwardness if we subsidize backwardness.
The fruit and vegetable farmers produce much economic value on about 5% of the land area that the major grain crops use.
The group’s combined cash receipts of $52.2 billion rival or exceed those of the five major commodity crops, which are expected to generate $52 billion this year.
...
While generating close to half of farm receipts, the specialty crops are grown on just 11 million acres of farmland, versus 215 million for the major commodity crops.
China subsidizes its farmers. Plus, it buys large amounts of US government debt in order to keep down the exchange rate for the yuan so that Chinese imports are cheap in dollar terms.
China’s farmers, who are broadly subsidized, have the advantage in that their nation’s currency, the yuan, is tightly regulated to maximize trade opportunities. And the country has a glut of workers for the labor-intensive jobs of growing and harvesting fruits and vegetables.
Why not order the US Federal Reserve to buy Chinese debt as a way to drive down the price of the US dollar against the yuan?
But the foreign competition extends well beyond China. Brazil and Mexico have longer growing seasons and more sunshine from locations closer to the equator. US agriculture must compete with technology and capital equipment. No imported labor can lower labor prices low enough to make US farmers competitive. Plus, the imported labor is subsidized labor. We pay for the schools, medical care, crime, and other costs that the farmers do not pay when they hire illegal aliens.
Another sign of globalization for the US economy is about to be reached.
Sometime next year—perhaps around Christmas 2007, if current trends continue—the U.S. will hit a milestone. For the first time in recent memory, the cost of imported goods and services will exceed federal revenues. In other words, Americans will soon pay more to foreigners than they do to their national government.
We're almost there now. Imports cost us about $2.2 trillion a year; the federal government collects $2.4 trillion in revenues. Why is that important? Because for the past 70 years, Washington has been the 800-pound gorilla, more powerful by far than any other force in the U.S. economy. That's not true anymore. The federal government remains plenty influential, but the global economy is more so.
This will come as a rude shock to Representative Nancy Pelosi (D-Calif.), the presumptive Speaker of the House, Charles B. Rangel (D-N.Y.), the likely chairman of the House Ways & Means Committee, and other newly enfranchised leaders in the Democratic Party.
The tone of the article is that the power of the US government to influence the US national economy is going down. High taxes can drive businesses abroad for example. But that does not hold for all industries or all levers of policy. Even the argument that the article makes about the Federal Reserve losing power to control longer term interest rates seems wrong to me. The Fed has huge levers. For example, it could buy up all the debt in the market if it so chose. In other words it can print money. It could also change bank reserve requirements and make other changes to expand or contract the money supply.
That rapid acceleration of imports is made possible by currency exchange rate fixing by East Asian governments. They do this by purchasing US financial instruments in the form of corporate bonds, mortgage bonds, and government bonds. As a result we are going into hock to the world and becoming what Warren Buffett calls "Squanderville". This folly deserves far more attention than it gets from either major US political party.
The argument in the article is that the US government is losing control of the US national economy as the economy becomes driven more by global economic forces.
Since 1995 imports have risen from 12% of gross domestic product to about 17%. And foreign money finances about 32% of U.S. domestic investment, up from 7% in 1995. In other words, the U.S. is more open to the global economy than ever before, and the links run in both directions. Now many of the levers affecting the U.S. economy are located not in Washington but in Beijing, London, and even Mexico City.
Mexico City? I don't think so. Tokyo certainly. Seoul even. Frankfurt and Paris too.
The massive US government funding of medical research has not translated into a trade surplus in medical products. Companies do product development and production abroad for research funded in the US.
But in the brave new world of the global economy, where companies move factories and facilities around the world like game pieces, it's no longer a given that U.S. workers benefit directly from U.S.-funded research. One worrisome example: Despite federal outlays of over $125 billion for medical research over the past five years, the U.S. has a large and growing trade deficit in advanced biotech and medical goods. "The era in which we could assume that increased U.S. public investment in R&D automatically generates domestic growth is over," says Jeff Faux of the liberal Economic Policy Institute.
This is especially troubling to me because a decrease in political support for research seems plausible as a result of this trend. How to make more of the results of research translated into products developed and produced in the United States?
One commenter on that article on the Businessweek web site argues that surely we can still benefit from increased spending on education. I do not believe it. In fact, I think education needs to be modernized by recorded lectures and web courses to reduce the amount of labor in schools. Most of the teachers and professors should be automated out of jobs and shifted into more wealth-generating work.
Between 2001 and today, imports rose by three percentage points as a share of GDP, one of the main reasons that job growth was so slow. By comparison, the import share rose by only one percentage point or so in the recoveries of the early 1980s and the early 1990s.
What is billed as a greater integration of the US economy in the world economy is in fact a huge increase in imports coupled to a much smaller growth in exports. The US trade deficit with China has grown from $17.9 billion in January 2006 to $23 billion in September 2006. It has doubled since the January 2004 deficit of $11.5 billion. Going back even further it has quadrupled since 1998. This is what some nutty economists call "free trade". But I'm with Warren Buffett. This nonsense is squanderville. The US is on track to hit another record yearly trade deficit in spite of the drop in oil prices.
The shortfall declined 6.8 percent, to $64.3 billion, from an all-time high of $69 billion in August, the Commerce Department said Thursday. The drop of $4.7 billion was the biggest one-month decline since February 2001.
Even with the improvement, the deficit is on track to set a record for the fifth consecutive year. Through September the deficit is running at an annual rate of $781.6 billion, surpassing last year's all-time high of $716.7 billion.
One advantage of the Democrats taking over Congress is that they will apply some political pressure to cut back the size of the US trade deficit. That advantage does not make up for their Open Borders approach to immigration though.
A Chinese car company may ship an entire high tech engine plant from Brazil to China.
In the latest sign of this country's manufacturing ambitions, a major Chinese company, hand-in-hand with the Communist Party, is bidding to buy from DaimlerChrysler and BMW a car engine plant in Brazil. Because the plant is so sophisticated, it is far more feasible for the Chinese carmaker, the Lifan Group, to go through such an effort to move it 8,300 miles, rather than to develop its own technology in this industrial hub in western China, the company's president said Thursday. If the purchase succeeds — and it is early in the process — China could leapfrog competitors like South Korea to catch up with Japan, Germany and the United States in selling some of the most fuel-efficient yet comfortable cars on the market, like the Honda Civic or the Toyota Corolla.
The guy negotiating the deal for the Chinese car company isn't from the car company. He's a senior Chinese Communist Party official. Think about that. Of course the banks in China will probably be ordered to lend money to finance the deal. Some would have us believe that the massive US budget deficit at 5.8% of GDP is just the product of the natural workings of the market. I see currency markets and capital markets manipulated by governments and am highly skeptical of this claim.
Will DaimlerChrysler and BMW join other companies in selling the Chinese technology that'll get used to undersell them?
Ford and GM look increasingly like road kill run down by globalisation and the United Auto Workers. How can Ford and GM avoid bankruptcy once Chinese cars made with very cheap labor and embodying lots of Western technology hit the market in the United States? As things stand now GM is bleeding cash and is a few years away from bankruptcy already. That road to bankruptcy could get accelerated by events at GM's former division Delphi. Delphi's employees might go on strike when Delphi, now operating under a bankruptcy filing, cuts wages and benefits. A halt of Delphi's production lines would, in turn, stop many GM production lines. Can't build cars without engine, brake, and transmisson controllers.
About Delphi, here's what I wonder: How quickly could Delphi shift production abroad or into plants in other states in event of a strike? Also, how rapidly could GM substitute controllers from other controller makers? GM could do some engineering work in advance to qualify some controllers as drop-in replacements should Delphi go out on strike. Might be prudent to do that, especially for models that sell at healthy profits.
A new study that will be presented today to the National Academies, the nation's leading advisory groups on science and technology, suggests that more and more research work at corporations will be sent to fast-growing economies with strong education systems, like China and India. In a survey of more than 200 multinational corporations on their research center decisions, 38 percent said they planned to "change substantially" the worldwide distribution of their research and development work over the next three years — with the booming markets of China and India, and their world-class scientists, attracting the greatest increase in projects.
They claim they aren't doing it for lower salaries. One of the conductors of this study quoted in the article was gullible enough to believe them. But the companies want to pay the least amount of money per high IQ worker as they can manage. It is as simple as that.
Looked at on a world scale there is a benefit to this trend in terms of accelerated technological development: More high IQ workers total will be employed doing research and development. Why? Companies will hire more researchers if price per researcher is lower.
However, even as companies outsource they will lead the drumbeat for more science and engineering education in the United States. Part of this is patriotism. Part of the motive for the call for more technical education is a desire for a larger supply of smart technical workers so that employers can pay each worker less in the United States too.
The American executives who are planning to send work abroad express concern about what they regard as an incipient erosion of scientific prowess in this country, pointing to the lagging math and science proficiency of American high school students and the reluctance of some college graduates to pursue careers in science and engineering.
Some of that reluctance among Americans to pursue technical educations is due to lower salaries driven by both a shifting of technical work abroad and the import of foreign technical workers to do the work in the United States at lower salaries than natives get paid. Another problem is demographic trends that are leading to a dumber population. But the inequality taboo enforced by intellectuals on America's political left effectively has removed the most important evidence about America's long term problems outside of the sphere of public debate. As a result not only the population but the political debates have become dumb and dumber.