WEDNESDAY, JUNE 1, 2005
American pressure on Beijing to revalue the yuan is now dominating the news, but China is following Japan as a manifestation of a much bigger problem. Globalization is broken. As now structured, it is undermining U.S. productive capability and becoming unsustainable.
Without fundamental change in the rules of globalization, any conceivable yuan revaluation now won’t have much impact on world economic imbalances. Remember that in the 1980s economists said a revaluation of the Japanese yen between 20 percent and 30 percent would balance trade. But the yen has more than doubled since then, and Japan still maintains a large trade surplus both globally and with the United States, as do all of the world’s major economies.
The real problem is that globalization is a different game for many countries than it is for America. While China’s peg of the yuan to the dollar is now the focus of criticism, most Asian countries have long managed their currencies to keep them weak against the dollar in order to stimulate their exports. Japan has spent over $300 billion in currency intervention in recent years to keep the dollar up and the yen and export prices down. In addition, many countries offer tax holidays, financial incentives and protected markets to attract new facilities in “strategic” industries that no one expects to move just because currencies fluctuate.
These actions follow from policies specifically aimed at accumulating large trade and dollar surpluses as a matter both of stimulating growth from exports and of assuring national economic sovereignty by avoiding dependence on foreign lenders.
While U.S. state governors extend financial incentives to attract investment, they have only peanuts to offer compared with foreign countries and of course, do not control their own currencies. The federal government has long shown no interest in attracting foreign factories to its shores or keeping U.S. factories there. Rather, America’s emphasis is entirely on consumption-led growth. Banks aggressively offer credit cards to students with only part-time jobs. Home equity loans with tax-deductible interest payments are used to pay for vacation trips. Not only does the White House call for tax cuts in war time, but tells consumers it’s their patriotic duty to buy more. Americans at all levels really do believe that debt and deficits don’t matter.
The confluence of America’s consumerism with the strategic, export-led growth policies of many other countries has produced a world with one net consumer, the United States, which now consumes about $700 billion a year more than it produces. All other major economies are net sellers, depending directly or indirectly on U.S.-bound exports for much or all of their growth. Because America consumes more than it makes, it must borrow from abroad to finance its excess consumption. In a kind of vendor finance program, a few foreign central banks provide the financing by buying U.S. Treasury bills and other U.S. assets.
Thus, globalization has evolved into a kind of pyramid scheme. To maintain global growth, the United States must consume and borrow ever more while foreign banks buy ever more U.S. Treasuries so their producers can export ever more.
America has long been ambivalent about this situation. Consumers love the low import prices, U.S. chief executives love the foreign tax holidays and the U.S. government loves the foreign lending that helps keep U.S. interest rates low. But the chronically overvalued dollar and the foreign investment incentives also cause a steady transfer of production and technology abroad while putting downward pressure on wages and building large foreign claims on future U.S. income. This results in political pressures and U.S. charges of unfairness against trading partners with big surpluses. In the past, cosmetic fixes like “voluntary” export restraint agreements were used to relieve pressure while the fundamental forces kept operating until the next fix.
Now the sustainability of the system has been put into question by the entrance of three billion new players from China, India and the former Soviet bloc at a moment when the Internet and global air express have negated time and distance along with the long standard economic assumptions that labor, capital and technology don’t move between countries.
These new players are unusual. While having the low wages of developing countries, several hundred million of them have first-world skills. That they are effectively next door and also planning to grow by exporting to U.S. markets dramatically increases the pressure on an already stressed system. Even for America there are ultimate limits on consumption and borrowing. U.S. borrowing already absorbs 80 percent of the world’s available savings. At 100 percent, the global economy will be in deep crisis.
The only way to avoid that is to insist that the globalization game be played the same way by all its players. Sure, China needs to revalue, but without other big changes, globalization as we know it will be on life support.
(Clyde Prestowitz is the author of ”Three Billion New Capitalists: The Great Shift of Wealth and Power to the East.”)