Issue #10, Fall 2008

The Next Globalization

The biggest challenge of globalization isn’t trade. It’s reining in health care and energy costs—and preparing American workers and business to compete.

It’s a safe bet that every economic policy adviser in Washington has some version of the following fantasy. The president-elect calls and asks you, confidentially, to explain the current state of the American economy. Leave all political considerations at the door, he says, or leave them to me. Just tell me: What works, and what doesn’t?

In my version, I tell him that the answer to both questions is globalization–and unless he understands why, his economic record won’t be much better than George W. Bush’s. I tell him that globalization, and America’s responses to it, have helped drive not only the extraordinary economic progress of China and other developing nations but rapid productivity gains in the United States as well and, until very recently, healthy growth and low inflation. But there’s bad news, too. Globalization is also implicated in the historic slowdown in U.S. job creation, the flat incomes of most American working families, and the recent roller-coaster prices of many assets and commodities, from housing to oil.

Globalization on the scale required to produce those large effects is a fairly recent development. In 1990, 18.5 percent of everything produced in the world was exported across a border; last year, those levels reached 31.6 percent, or 70 percent greater than the economic output of all of Asia and 21 percent larger than America’s GDP. There has never been another time when trade has expanded so much and achieved the dimensions that can affect the conditions and paths of virtually every economy. There is nothing the next President can do to turn back or divert these developments. Nor should he, even if he could, want to turn America away from a process that has helped propel the most rapid modernization ever seen in many developing countries, the fastest global growth of any five or ten-year period on record, and, here in the United States, the largest productivity gains in 40 years.

While the sheer dimensions of these developments would hold any President’s attention, he would be dangerously mistaken to think of this as traditional trade, writ very large. The full nature of globalization has become apparent in perhaps only the last 10 years, and the next president needs first to understand precisely how it works. This is not just a matter of U.S. companies outsourcing jobs to foreign subsidiaries or native firms in low-wage countries. Rather, the salient political factor of contemporary globalization is that it has become so pervasive as to affect every aspect of the economy, even seemingly unrelated elements like health care and energy costs.

As a result, improving most Americans’ futures will mean responding to the new demands that globalization makes well outside the traditional concerns of trade. What will determine whether the next President presides over better economic times will be the depth of his political commitment to rein in fast-rising health care costs, make Americans work and live more energy efficiently, see to it that every worker who wants to can work well with computers and the Internet, and help new businesses get started and survive. This agenda will be harder to carry off than election-year favorites like taxing foreign profits, restricting offshore outsourcing, and slapping duties on foreign producers who dump their goods on U.S. markets at below cost. But globalization is creating a new world that demands new responses. If American policymakers understand its forces, they can harness them to advance the central economic mission of progressive politics, higher living standards for all.

Old and New Globalization

For centuries, trade was mainly a matter of large companies in Europe–and, later, America–buying commodities and other resources in Asia, Africa, and Latin America, bringing them home to use in their own manufacturing, and then selling the finished goods at home or to consumers and businesses in other developed countries. That pattern was established through colonization and persisted well into the postwar period, when it was reorganized through the General Agreement on Tariffs and Trade (GATT) and the Bretton Woods pact on fixed exchange rates for currencies.

In the 1970s, these arrangements began to give way to the forces that would bring on modern globalization, beginning with the floating exchange rates that replaced Bretton Woods and a threefold increase in the price of oil by OPEC. Companies, especially American ones, began to look hard for places where everything except oil would be cheaper, and soon they were contracting to produce slag steel, footwear, apparel, and other basic goods in places like Korea, Taiwan, and Brazil. At the same time, Germany, Japan, France, Italy, and others had finally rebuilt their own manufacturing capacities to U.S. standards–much of it financed through U.S. foreign direct investment. These two developments hit American manufacturing workers hard that decade, costing more than two million jobs.

Most American political debates and policy prescriptions are stuck in that period, with globalization understood as something operating purely at the institutional and corporate level, and on balance a drain on American workers (as in the debates over offshore outsourcing). Whether the charge is “hollowing out of U.S. manufacturing” (Pat Buchanan) or “encouraging companies to leave the country” (Senator Sherrod Brown), it usually depends on a traditional view of trade dominated by low-priced imports of basic goods. But the world has moved on. As Western companies began moving basic steel and garment plants to Asia and Latin America, many of these developing countries were investing furiously to upgrade their infrastructures beyond a basic production capacity. The Asian Tigers were first, producing the so-called miracles in Taiwan and Korea. By the 1980s, they and others were creating business environments and skilled workers in large numbers that could do more than mine ore, smelt metals, sew clothes, and grow rice–and they also began generating incomes that could buy the electronics, automobiles, and pharmaceuticals that advanced economies produced.

Issue #10, Fall 2008
 
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Marion:

A note about spelling:



1. "To reign" is to rule.



2. "To rein in" is to bring under control.



I believe that Mr. Shapiro meant to use the spelling that reflects the second meaning when he wrote, "It's reigning (sic) in health and energy costs . . .;" the sentence should read, therefore, "It's reining in health care and energy costs . . . ."



Now I'll get back to reading the article!

Sep 15, 2008, 7:50 AM

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