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Chapter 7

THE GLOBAL MARKET AND ITS IMPLICATIONS

I recently replaced my electric razor. Nowwhen I open the top I see "made in China"instead of the earlier "made in Germany." Neither was manufactured in the United States. Itreminds me that my wife recently put together a package to send to our grandsons with foursmall toys, each made in China." Is anything produced in the United States anymore?

Current economics literature says that most things still are, although that is hard tobelieve when virtually all we buy as consumers is labeled otherwise; but whatever thepresent facts may be, the internationalization of the economy is increasing inexorably, albeitat varying rates, under the pressure of immense forces. The volume of both imports andexports for the United States has increased immensely in the past half-century, and theFederal Reserve Board has predicted a continuing upward trend, although the worldeconomic crisis that began in the fall of 2008 may force some temporary redirection.

As with most change, the globalization doesn't move at a constant pace. The Asianeconomic crisis that started in 1997 significantly impacted both the exports and imports ofan advanced economy like the United States. Those who understand the long-term forces atwork know, however, that, when all is said and done, the world will be more interactivetomorrow than it is today.

The factors bringing about a worldwide competitive economy are found mainly incommunications, transportation, the growth of a world capital market, and the increasingrole of multinational corporations.

Communications

Our review of recent scientific/technical advances showed that the global economynow features a vast technological network which uses devices unheard of a few years agoand which will soon be replaced by others more advanced. Optoelectronics, lasers, fiber-optics, space satellites, the Internet, telemedicine, electronic libraries, online universities each of these and many others intimately affect each locality at the same time they bring theworld into increased economic integration.

TransportationWhen transportation was still expensive, it was necessary to do the manufacturing of

goods near either the resources or the consumer. Today, capital investment flows towardthe places of cheapest production regardless of their location, because the resulting products

can be taken to market at low cost. Palletization and containerization have made thetransporting of goods much easier and non-labor-intensive. At the same time,miniaturization and the new materials sciences are making products lighter and less bulky,further reducing the cost of transport. Many products in the information age will beelectronic and wont need physical transportation at all.

The world capital market


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The Great Credit Crisis of 2007-2009 will have a long-term impact on globalfinance, and should lead to much restructuring of what came into existence before the crisis.But even a decade before that crisis hit us, global finance had become a majorphenomenon, as we see from a passage I wrote at the time:

World capital flows are massive and virtually instantaneous. A fax was able to

relocate an entire bank from Kuwait to Bahrain on the first day of Iraq's 1990 invasion ofKuwait. In One World, Ready or Not, William Greider spoke of the "ferocious" growth ofnational currency trading.1 Fred Block in Postindustrial Possibilities told how manybillions of dollars of savings can be moved between countries in seconds. The world capitalmarket involves bond and equity trading and international lending. Investments flow towardevery perceived profit opportunity.

Multinational corporationsWorld trade is increasingly conducted by corporations whose stock ownership, key

employees, headquarters, subsidiaries, places of manufacture, and markets are so spread-outamong countries that it is difficult if not impossible, other than by an arbitrary, superficial

criterion, to assign a national identity. A shipping label for the products of one electronicscompany says, "Made in one or more of the following countries: Korea, Hong Kong,Malaysia, Singapore, Taiwan, Mauritius, Thailand, Indonesia, Mexico, Philippines. Theexact country of origin is unknown." Note that the United States isn't among the countrieslisted even though the firm is by reputation an American company. Manipulation is used tomake products appear either American or foreign, according to whatever is desired. Indeed,companies find it desirable to lose their national identities, becoming multicultural as theyhire executives from many countries. Robert Reich famously asked the question, Who isUs?

An interesting thing about multinational corporations is their relation to technology,which is mainly brought into existence and used by such firms. At the same time,technology is causing economies of scale that will make large firms less important, sinceautomation allows shorter production runs that can be done by smaller firms. Many largecorporations are now loose webs of many small entities from a variety of entrepreneurialcenters.

Worldwide competition puts unrelenting pressure on firms to be the lowest-costproducer of quality goods or services, since to be otherwise is to invite failure in the struggleto survive. In turn, this creates pressure to use the lowest-cost labor or to do without labor ifat all possible.

The search for the lowest-cost labor is made feasible by the ready availability ofworkforces all over the world that are accessible through the ability of capital to flow tothem and to some extent by the growing ease of national migration. Their products maythen be transported or communicated inexpensively and quickly. Labor, both skilled andunskilled, already exists in large pools throughout the world, as is apparent with thehundreds of thousands of engineers China graduates annually, who are on average paid farless than engineers in the United States. Moreover, as time goes on, businesses will lessoften need an engineer, since as high-tech jobs become more "user-friendly" they can beperformed by less-skilled people. The result is a vast increase in the pool of workers


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available to a firm. It also means that workers anywhere are in increasing competition withworkers everywhere.

Economists cite the fundamental rule of supply-and-demand in agreeing that thelong-term tendency will be a decline in wages in the well-paying advanced economies and arise in wages for workers elsewhere. This will not, however, be anything like a uniform

phenomenon. The Third World work-pool is an immense ocean compared to the number ofworkers in the developed nations. What is most predictable is that over time wages in theThird World will increase slightly while those in the developed countries will declinesharply.

This undercutting of wages in the advanced economies by low-pay world labor will,however, occur only of the near- and medium-term. Only slightly further removed is thereality that non-labor-intensive and extremely low-cost production using a combination ofcomputers and science will out-compete even low-pay international labor. The dirt-cheapChinese engineers may find little demand for their services. Even where some labor will beneeded, its cost will be only a fraction of the total production cost. This doesn't meanworkers in the developed nations will get their jobs back or that their wages will be restored

to previous levels. It means that work itself will become increasingly obsolete.

The reigning worldwide free-trade ideology co-exists with much national industrialpolicy, suggesting a gap between words and conduct. Since World War II, and especiallysince the collapse of the Soviet Union, free trade has been the prevailing ideology in worldtrade and among the Davos elite meeting in such conferences as The World EconomicForum. The United States has lead the way in promoting the theory of global free trade. Thishas accorded with a near-universal acceptance of the thinking of the early nineteenth centuryeconomist David Ricardo. Ricardos Law of Comparative Cost postulated that free tradebenefits every country through an international division of labor. Indeed, the free tradeposition, with its stress on openness and mobility, is what appears most consistent with thenew developments in communications, transportation, the world capital market, andbusiness organization.

This appearance is bound to change, however, as the new technology's displacementof firms, industries and workers comes to match the marvels of innovation as a primaryreality confronting the world's peoples. This will force peoples everywhere to lookinward" to assure themselves a mode of survival that they cannot attain otherwise. In thatscenario, the ideology of free trade, unless adapted to fit the new conditions, will not appearnearly so beneficent and all-rewarding. A purpose of this book is to show how the ideologymust be changed if it is not to become obsolete and at the same time overwhelminglyrejected by the world's peoples, including by most Americans.

Free trade proponents complain about the extent of government intervention and willbe among the first to agree that, even at present and during the free-trade emphasis of thepost-World War II period, the world has not been as committed to free trade as the rhetoricand ideology lead us to believe. This is true of the United States as well as of virtually everyother country. The GATT [General Agreement on Tariffs and Trade], which involvedseveral "rounds" of international negotiation on trade issues over many years, wassupposedly dedicated to removing trade barriers, but the economist Robert Kuttner has saidits "assumptions are mercantilist" and that it "remains weak and riddled withcontradictions.2 To see this, it will help to look at the protectionism and industrial policy


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that has deviated from pure free trade in the conduct of several of the major economicpowers:

China. With its high tariffs and artificially low currency exchange rate, China haslong ranked among the worlds more protectionist countries, rivaling Japan in that regard.The theft of intellectual property and Chinas requiring companies who wish to do business

with it to give it their technology have contributed to its economic growth. The U.S. tradedeficit with China has for several years grown in major annual increments.

Continental Europe. The European Community has not been reluctant tosubsidize its agriculture, new technology and major industrial companies such as AirbusIndustrie. There have been local-content rules, quotas on incoming foreign goods, andmanaged markets.

India. Oddly in light of Indias recruitment into multinational corporate activity,Business Weekreported in late 1995 that "India is on strike against foreign capital."3

Japan. Japan has blocked foreign goods by import quotas and a series of non-tariff barriers. Extensive regulatory obstacles have been placed in the way of imports.Millions of rice farmers have been subsidized and protected from competition. The

domestic market is relatively closed. Malaysia. In 1991, prime minister Mahathir Bin Mohamad laid down an

ambitious plan for a long-term industrial policy called Wawasan 2020 or Vision 2020,designed to expand the Malaysian economy eight-fold and to make the countryeconomically self-sufficient. Although, as is to be expected with so many such programs,the effort has lagged behind the original hopes, it remains an aspiration amid instability andcorruption.

South Korea. Trade surpluses with the United States have resulted from far-reaching industrial policy, including an undervalued currency and policies to protectdomestic industry.

The United States. Despite free-trade rhetoric and overall intention, U.S.

administrations have long found it politically necessary to adopt a substantial amount ofindustrial policy and protectionism. Even the Reagan administration, despite its strongideological commitment to free trade, instituted a voluntary system of import quotas on

steel so that the U.S. steel industry could re-engineer itself. It is frequently noted that theUnited States' leading role as a military power has involved spending trillions of dollars onarms. This inherently supports and stimulates industry. An important side-effect is that itamounts to a substantial "industrial policy."

The United States has especially promoted free trade in agriculture, but hasnt beenable to be consistent with this in its own policies. In 2005, some 1.2 million farms received$15 billion in subsidies, reflecting the strength of the powerful farm lobby.

In noting these things, we shouldnt lose sight, of course, of the fact that even this

amount of protectionism has not been such as would shield the U.S. economy from thehollowing-out effects of a tidal wave of low-cost world competition.

What are we to make of the gap between philosophy and action? Are all of thesecountries, and many others besides, renegades acting badly when they should know better?

Something to notice is thateven in the relative absence of the gigantic forces thatare impacting the world economyeach of these nations has to some extent put aside freetrade ideological pressures enough "to do what it has to do." That is what the German


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economic thinker Friedrich List urged Germany and other nations to do in the earlynineteenth century when they were faced with English commercial dominance. List,contrary to the impression held by many who have heard of him but almost certainly havenot read him, was clear about the benefits of free trade, but wanted his own countrymen(and by extension the peoples of all nations) to participate meaningfully in it. He knew they

couldn't do this if their efforts at self-development were instantly undercut by lower-costimports from an already-commercially-dominant England.Free trade thinking expresses a theory that is elegant in its stress on worldwide

betterment through a division of labor in which each country's people produce what they canmarket most cheaply. But the theory focuses almost exclusively on the benefit toconsumers. It pays little regard to how a people in their role as producers (which isnecessary to their having the means to become consumers) can gain viability, or maintain itonce it is gained, in a circumstance of hard-pressing external competition. Accordingly, it issignificant that all countries have felt it necessary to deviate from the pure theory.

This should give market theorists pause. If mankind universally perceives the needto deviate from the theory, one is prompted to question whether the theory really is

sufficient, even though it unquestionably sees much that is valuable. The body of thinkingrightly argues that "each party to a voluntary transaction benefits, as the party perceives it, orelse the party wouldn't be willing to enter the transaction. We will discuss the "theory ofthe transaction"its problems as well as it strengthslater. For now it is enough to notethat almost every nation has seen that the theory doesn't fully meet its peoples practicalneeds.

As global competitive pressures for ever-lower costs force enormous worldwidedisplacement, each people will be driven to rely on their particular political structures toassure all their citizens' participation in economic life, since the market by itself won't beable to give that assurance. This will cause what will ostensibly be massive departures fromfree trade theory. However, if the theory is adjusted, as it must be, to address the newrealities, there will no longer be a gap between theory and practice. Instead of criticizinggovernments for "protectionist" programs and "industrial policies," the world may well findit worthwhile to acknowledge each government's need to take the measures it finds essentialto look after the interests of its own citizens.

Even during the past century and a half it would arguably have been wisest to haveseen free trade in a different light than pure free trade theory does: to see it as something thathas much to contribute if in a given case it serves the needs of a people. That would havereflected a much better understanding of the measures all peoples have felt a need to adopt.An open competitive market would then have been seen to occupy a certain sphere that issupremely important but that isn't the only sphere. Ultimately, free trade theory, to be mostsound, will have to come to that understanding.

We have seen that the present forces at work in the world economy erode nationalidentity and sovereignty, but that this is offset by many movements for local and ethnicidentity. Moreover, in the not-too-distant future the measures needed to overcome thedisplacement of workers and whole economies will necessarily put the nation-state, andperhaps some regional confederations, at center stage. Because of this, the issue of nationalsovereignty is a matter ofebb and flow.


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The ebb: the move away from national identity and sovereignty. It has long been afact that some major U.S. firms no longer want to be identified as "American." CyrillStewart, the chief financial officer of Colgate-Palmolive Co. has said "there is no mindsetthat puts this country first." Harald Malmgren writes of "the agnostic global capital market,which has no national loyalties." 4

In his bookThe Great Betrayal, Patrick Buchanan discussed the trade agreements,NAFTA and GATT. He said that "to opponents, NAFTA was always about more than jobsgoing south; it was about American sovereignty going south." He considered theundermining of national sovereignty so important that today "within both parties,nationalists are now in rancorous conflict with the globalists. And it is true not only inAmerica. This is the new conflict of the age that succeeds the Cold War."5

The trade agreements override state and municipal laws where they conflict. WorldTrade Organization (WTO) disputes are decided secretly, with no outside appeal. Theagreements are put through with limited debate, and are so long that legislators arent able toread them.

The transfer of power away from representative institutions shows the strength of

ideology and of a worldwide elite whose interests are served by that ideology. We haveseen that the late Harvard historian Samuel P. Huntington, in his monumental 1996 bookThe Clash of Civilizations and the Remaking of World Order, spoke of "the Davos Culture."He explained that "each year about a thousand businessmen, bankers, government officials,intellectuals, and journalists from scores of countries meet in the World Economic Forum inDavos, Switzerland." He said "Davos people control virtually all international institutions,many of the world's governments, and the bulk of the world's economic and militarycapabilities."6 From this, we would gather that Buchanan is on solid ground when he speaksof a new "rootless transnational elite" whose members are "unencumbered by any nationalallegiance."7

This disavowal of national loyalties isn't because the individuals involved are evil ormisdirected, even though a given nation's patriots will think their values offensive.Everything about the global economy future necessities aside creates this mindset.When a product is designed one place, built another from components coming from severalcountries, financed internationally, marketed everywhere, and involves effort by people ofseveral different countries, it is dysfunctional for those involved to embrace any seeming"provincialism."

This flight from nationality appears in several ways:

Increasingly, money and people are making themselves invisible to nationalgovernments through offshore banking and tax havens in a largely uncontrolledenvironment. Whether this will be reversed by improved regulation in the wake of theeconomic crisis that hit in late 2008 remains to be seen.

Multinational corporations use various techniques to optimize their advantage visa vis governments. These include accounting practices that understate profits in placeswhere taxes are high and shift them to countries that have little or no taxes.

Economic "blackmail" is commonplace between governments and firms. Chinahas the leverage to insist on local production facilities and technology-transfer to itself as theprice of Boeing's selling airplanes to it. But so also do firms tell many governmentslocal,state, national (not just in one country but in several) that burdens must be lessened andamenities provided if the firm is to locate a facility within that government's jurisdiction.


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This works not just for a company that is scouting prospective locations; a threat to movecan be used to pressure a government to provide benefits in order to retain an already-existing facility. All companies and all governments must engage in this, or else lose out tothose that do. Thus, this is a systemic matter, to be solved if at all by a change in the rules ofthe game, not one properly attributable to an individual firms overreaching. In his One

World, Ready or Not, Greider argues that the United States needs a Constitutionalamendment that will do away with the abuse and establish a level playing field: anamendment that will prohibit all governments state, local and federal from grantingspecial tax favors to corporations in exchange for industrial investments.8

Competition forces the firms to play the game, since in a competitive market wherethe spoils go to the low-cost producer every advantage has to be sought. When onescompetitors do it, that doesn't just make it rightit makes it necessary.

In this context, governmental regulatory standards decline beyond what is calledfor by the simple plea for "deregulation." The process leads to a search for the bottom asreasonable regulatory parameters are abandoned in the competition to attract or retain firms.It isn't just the standards in the developed countries that are affected; the process keeps a

downward pressure, too, on the standards the less developed nations might otherwise adopt. International institutions are continuing to develop at odds with national

sovereignty. Before the WTO was voted on, the attorneys general of 42 American stateswarned that the United States "would be obligated to change local, state and federal lawsdetermined by a secret WTO panel to be GATT-illegal,' or to face perpetual tradesanctions." Shortly before he became Speaker of the House, Republican CongressmanNewt Gingrich called the adoption of the WTO a transformational moment."

In diplomatic and military affairs, a vastly significant mental change is evident whenwe see American soldiers assigned to serve the United Nations rather than their owncountry. Reflecting this seismic shift, Al Gore, while vice president, spoke of 15 Americanswho died patrolling Iraqi skies, expressing condolences "to the families of those who died in

the service of the United Nations." Governments find themselves less in control of economic policy, and the

international flow of money acts as a sovereign power in its own right. It has been said thatindividual countries are losing control over their own economies.

The flow: tendencies toward a reaffirmation of national sovereignty. There willneed to be a reassertion of national prerogatives as displacement demands the politicalaction we are describing in this book. It won't be long before the low-cost production of theworld market undercuts agriculture and industry everywhere, displacing hundreds ofmillions, most likely billions, of people. Potentially, they will be awash in goodsbut willface a crisis caused by the quandary of how to find a way to share in them by plugging intothe income-stream.

For two hundred years the movement of displaced peasants into industrial cities hascaused revolutionary situations, such as in Russia before the revolutions of 1905 and 1917and in Iran before Khomeini deposed the Shah. Those cauldrons will be as nothingcompared to the cauldrons created by worldwide displacement. Masses of people willdemand action. The only mechanisms from which they can demand it are nationalgovernments and perhaps some regional groupings, since mankind is ill-suited to having aworld government that can be counted on safely to assume the task of overseeing the world'seconomy and varied civilizations.


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In addition to the coming demographic and political realities, there is also the moralreality that such mechanisms shouldbe resorted to if a global market will for many peoplebring disaster rather than well-being. In almost anyone's philosophy, and certainly withinclassical liberalism as best conceived, the well-being of people is the ultimate measure.

A reassertion of national sovereignty is also implied by the many movements

worldwide for local and ethnic identity.In her bookA New World Order, Anne-Marie Slaughter argues that the nation-state,not world government, will be at the heart of the world system she sees developing.Nevertheless, the nations will engage in a great many networks among ministers and other

officials, providing a web of governance that brings the nations together in shared policies.She doesnt mention it, but we will want to notice that such networking, which she describesas already occurring to a very large extent, almost certainly embodies the cosmopolitanoutlook and ideology of the world elite. If that is so, it keeps the form of nationalsovereignty while in fact running toward international governance.

ENDNOTES

1. William Greider, One World, Ready or Not (New York: Simon & Schuster, 1997), p.206.2. Robert Kuttner, The End of Laissez-Faire (New York: Alfred A. Knopf, 1991), pp.117, 127, 7.3.Business Week, October 9, 1995, p. 137.4. Harald B. Malmgren, Technology and the Economy, in Brock and Hormats, ed.s.,

The Global Economy (New York: W. W. Norton & Company, 1990), p. 103.5. Patrick J. Buchanan, The Great Betrayal (Boston: Little, Brown and Company, 1998),pp. 264-5.6. Samuel P. Huntington, The Clash of Civilizations and the Remaking of the WorldOrder(New York: Touchstone Books, 1996), p. 57.7. Buchanan, Great Betrayal, p. 97.8Greider, One World, p.323.

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