Chapter 7 THE GLOBAL MARKET AND ITS IMPLICATIONS

I recently replaced my electric razor. Now when I open the top I see "made in China" instead of the earlier "made in Germany." Neither was manufactured in the United States. It reminds me that my wife recently put together a package to send to our grandsons with four small 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 to believe when virtually all we buy as consumers is labeled otherwise; but whatever the present facts may be, the internationalization of the economy is increasing inexorably, albeit at varying rates, under the pressure of immense forces. The volume of both imports and exports for the United States has increased immensely in the past half-century, and the Federal Reserve Board has predicted a continuing upward trend, although the world economic 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 Asian economic crisis that started in 1997 significantly impacted both the exports and imports of an advanced economy like the United States. Those who understand the long-term forces at work know, however, that, when all is said and done, the world will be more interactive tomorrow than it is today. The factors bringing about a worldwide competitive economy are found mainly in communications, transportation, the growth of a world capital market, and the increasing role of multinational corporations. Communications Our review of recent scientific/technical advances showed that the global economy now features a vast technological network which uses devices unheard of a few years ago and which will soon be replaced by others more advanced. Optoelectronics, lasers, fiberoptics, 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 the world into increased economic integration. Transportation When transportation was still expensive, it was necessary to do the manufacturing of goods near either the resources or the consumer. Today, capital investment flows toward the 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 the transporting 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 be electronic and wont need physical transportation at all. The world capital market

The Great Credit Crisis of 2007-2009 will have a long-term impact on global finance, 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 major phenomenon, 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 of Kuwait. In One World, Ready or Not, William Greider spoke of the "ferocious" growth of national currency trading.1 Fred Block in Postindustrial Possibilities told how many billions of dollars of savings can be moved between countries in seconds. The world capital market involves bond and equity trading and international lending. Investments flow toward every perceived profit opportunity. Multinational corporations World trade is increasingly conducted by corporations whose stock ownership, key employees, headquarters, subsidiaries, places of manufacture, and markets are so spread-out among 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 electronics company says, "Made in one or more of the following countries: Korea, Hong Kong, Malaysia, Singapore, Taiwan, Mauritius, Thailand, Indonesia, Mexico, Philippines. The exact country of origin is unknown." Note that the United States isn't among the countries listed even though the firm is by reputation an American company. Manipulation is used to make products appear either American or foreign, according to whatever is desired. Indeed, companies find it desirable to lose their national identities, becoming multicultural as they hire executives from many countries. Robert Reich famously asked the question, Who is Us? 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, since automation allows shorter production runs that can be done by smaller firms. Many large corporations are now loose webs of many small entities from a variety of entrepreneurial centers. Worldwide competition puts unrelenting pressure on firms to be the lowest-cost producer of quality goods or services, since to be otherwise is to invite failure in the struggle to survive. In turn, this creates pressure to use the lowest-cost labor or to do without labor if at all possible. The search for the lowest-cost labor is made feasible by the ready availability of workforces all over the world that are accessible through the ability of capital to flow to them and to some extent by the growing ease of national migration. Their products may then be transported or communicated inexpensively and quickly. Labor, both skilled and unskilled, already exists in large pools throughout the world, as is apparent with the hundreds of thousands of engineers China graduates annually, who are on average paid far less than engineers in the United States. Moreover, as time goes on, businesses will less often need an engineer, since as high-tech jobs become more "user-friendly" they can be performed by less-skilled people. The result is a vast increase in the pool of workers

available to a firm. It also means that workers anywhere are in increasing competition with workers everywhere. Economists cite the fundamental rule of supply-and-demand in agreeing that the long-term tendency will be a decline in wages in the well-paying advanced economies and a rise 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 of workers in the developed nations. What is most predictable is that over time wages in the Third World will increase slightly while those in the developed countries will decline sharply. 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 the reality that non-labor-intensive and extremely low-cost production using a combination of computers and science will out-compete even low-pay international labor. The dirt-cheap Chinese engineers may find little demand for their services. Even where some labor will be needed, its cost will be only a fraction of the total production cost. This doesn't mean workers 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 industrial policy, suggesting a gap between words and conduct. Since World War II, and especially since the collapse of the Soviet Union, free trade has been the prevailing ideology in world trade and among the Davos elite meeting in such conferences as The World Economic Forum. The United States has lead the way in promoting the theory of global free trade. This has accorded with a near-universal acceptance of the thinking of the early nineteenth century economist David Ricardo. Ricardos Law of Comparative Cost postulated that free trade benefits every country through an international division of labor. Indeed, the free trade position, with its stress on openness and mobility, is what appears most consistent with the new developments in communications, transportation, the world capital market, and business organization. This appearance is bound to change, however, as the new technology's displacement of firms, industries and workers comes to match the marvels of innovation as a primary reality confronting the world's peoples. This will force peoples everywhere to look inward" to assure themselves a mode of survival that they cannot attain otherwise. In that scenario, the ideology of free trade, unless adapted to fit the new conditions, will not appear nearly so beneficent and all-rewarding. A purpose of this book is to show how the ideology must be changed if it is not to become obsolete and at the same time overwhelmingly rejected by the world's peoples, including by most Americans. Free trade proponents complain about the extent of government intervention and will be among the first to agree that, even at present and during the free-trade emphasis of the post-World War II period, the world has not been as committed to free trade as the rhetoric and ideology lead us to believe. This is true of the United States as well as of virtually every other country. The GATT [General Agreement on Tariffs and Trade], which involved several "rounds" of international negotiation on trade issues over many years, was supposedly dedicated to removing trade barriers, but the economist Robert Kuttner has said its "assumptions are mercantilist" and that it "remains weak and riddled with contradictions.2 To see this, it will help to look at the protectionism and industrial policy

that has deviated from pure free trade in the conduct of several of the major economic powers: China. With its high tariffs and artificially low currency exchange rate, China has long 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. trade deficit with China has for several years grown in major annual increments. Continental Europe. The European Community has not been reluctant to subsidize its agriculture, new technology and major industrial companies such as Airbus Industrie. There have been local-content rules, quotas on incoming foreign goods, and managed markets. India. Oddly in light of Indias recruitment into multinational corporate activity, Business Week reported 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 nontariff 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 country economically 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 and corruption. South Korea. Trade surpluses with the United States have resulted from farreaching industrial policy, including an undervalued currency and policies to protect domestic 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 of industrial policy and protectionism. Even the Reagan administration, despite its strong ideological 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 the United States' leading role as a military power has involved spending trillions of dollars on arms. This inherently supports and stimulates industry. An important side-effect is that it amounts to a substantial "industrial policy." The United States has especially promoted free trade in agriculture, but hasnt been able 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 the hollowing-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 these countries, and many others besides, renegades acting badly when they should know better? Something to notice is that even in the relative absence of the gigantic forces that are impacting the world economy each of these nations has to some extent put aside free trade ideological pressures enough "to do what it has to do." That is what the German

economic thinker Friedrich List urged Germany and other nations to do in the early nineteenth 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 have not 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-cost imports 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 can market most cheaply. But the theory focuses almost exclusively on the benefit to consumers. It pays little regard to how a people in their role as producers (which is necessary to their having the means to become consumers) can gain viability, or maintain it once it is gained, in a circumstance of hard-pressing external competition. Accordingly, it is significant that all countries have felt it necessary to deviate from the pure theory. This should give market theorists pause. If mankind universally perceives the need to 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 thinking rightly argues that "each party to a voluntary transaction benefits, as the party perceives it, or else the party wouldn't be willing to enter the transaction. We will discuss the "theory of the transaction" its problems as well as it strengths later. For now it is enough to note that almost every nation has seen that the theory doesn't fully meet its peoples practical needs. As global competitive pressures for ever-lower costs force enormous worldwide displacement, each people will be driven to rely on their particular political structures to assure all their citizens' participation in economic life, since the market by itself won't be able to give that assurance. This will cause what will ostensibly be massive departures from free trade theory. However, if the theory is adjusted, as it must be, to address the new realities, there will no longer be a gap between theory and practice. Instead of criticizing governments for "protectionist" programs and "industrial policies," the world may well find it worthwhile to acknowledge each government's need to take the measures it finds essential to look after the interests of its own citizens. Even during the past century and a half it would arguably have been wisest to have seen free trade in a different light than pure free trade theory does: to see it as something that has much to contribute if in a given case it serves the needs of a people. That would have reflected 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 is supremely important but that isn't the only sphere. Ultimately, free trade theory, to be most sound, will have to come to that understanding. We have seen that the present forces at work in the world economy erode national identity and sovereignty, but that this is offset by many movements for local and ethnic identity. Moreover, in the not-too-distant future the measures needed to overcome the displacement of workers and whole economies will necessarily put the nation-state, and perhaps some regional confederations, at center stage. Because of this, the issue of national sovereignty is a matter of ebb and flow.

The ebb: the move away from national identity and sovereignty. It has long been a fact that some major U.S. firms no longer want to be identified as "American." Cyrill Stewart, the chief financial officer of Colgate-Palmolive Co. has said "there is no mindset that puts this country first." Harald Malmgren writes of "the agnostic global capital market, which has no national loyalties." 4 In his book The Great Betrayal, Patrick Buchanan discussed the trade agreements, NAFTA and GATT. He said that "to opponents, NAFTA was always about more than jobs going south; it was about American sovereignty going south." He considered the undermining 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 in America. 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. World Trade Organization (WTO) disputes are decided secretly, with no outside appeal. The agreements are put through with limited debate, and are so long that legislators arent able to read 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 have seen that the late Harvard historian Samuel P. Huntington, in his monumental 1996 book The 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 in Davos, 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 military capabilities."6 From this, we would gather that Buchanan is on solid ground when he speaks of a new "rootless transnational elite" whose members are "unencumbered by any national allegiance."7 This disavowal of national loyalties isn't because the individuals involved are evil or misdirected, 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 several countries, financed internationally, marketed everywhere, and involves effort by people of several 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 national governments through offshore banking and tax havens in a largely uncontrolled environment. Whether this will be reversed by improved regulation in the wake of the economic crisis that hit in late 2008 remains to be seen. Multinational corporations use various techniques to optimize their advantage vis a vis governments. These include accounting practices that understate profits in places where taxes are high and shift them to countries that have little or no taxes. Economic "blackmail" is commonplace between governments and firms. China has the leverage to insist on local production facilities and technology-transfer to itself as the price of Boeing's selling airplanes to it. But so also do firms tell many governments local, state, national (not just in one country but in several) that burdens must be lessened and amenities provided if the firm is to locate a facility within that government's jurisdiction.

This works not just for a company that is scouting prospective locations; a threat to move can be used to pressure a government to provide benefits in order to retain an alreadyexisting facility. All companies and all governments must engage in this, or else lose out to those that do. Thus, this is a systemic matter, to be solved if at all by a change in the rules of the 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 Constitutional amendment that will do away with the abuse and establish a level playing field: an amendment that will prohibit all governments state, local and federal from granting special tax favors to corporations in exchange for industrial investments.8 Competition forces the firms to play the game, since in a competitive market where the spoils go to the low-cost producer every advantage has to be sought. When ones competitors do it, that doesn't just make it rightit makes it necessary. In this context, governmental regulatory standards decline beyond what is called for by the simple plea for "deregulation." The process leads to a search for the bottom as reasonable 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 states warned that the United States "would be obligated to change local, state and federal laws determined by a secret WTO panel to be GATT-illegal,' or to face perpetual trade sanctions." Shortly before he became Speaker of the House, Republican Congressman Newt Gingrich called the adoption of the WTO a transformational moment." In diplomatic and military affairs, a vastly significant mental change is evident when we see American soldiers assigned to serve the United Nations rather than their own country. Reflecting this seismic shift, Al Gore, while vice president, spoke of 15 Americans who 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 that individual countries are losing control over their own economies. The flow: tendencies toward a reaffirmation of national sovereignty. There will need to be a reassertion of national prerogatives as displacement demands the political action we are describing in this book. It won't be long before the low-cost production of the world market undercuts agriculture and industry everywhere, displacing hundreds of millions, most likely billions, of people. Potentially, they will be awash in goods but will face a crisis caused by the quandary of how to find a way to share in them by plugging into the income-stream. For two hundred years the movement of displaced peasants into industrial cities has caused revolutionary situations, such as in Russia before the revolutions of 1905 and 1917 and in Iran before Khomeini deposed the Shah. Those cauldrons will be as nothing compared to the cauldrons created by worldwide displacement. Masses of people will demand action. The only mechanisms from which they can demand it are national governments and perhaps some regional groupings, since mankind is ill-suited to having a world government that can be counted on safely to assume the task of overseeing the world's economy and varied civilizations.

In addition to the coming demographic and political realities, there is also the moral reality that such mechanisms should be resorted to if a global market will for many people bring disaster rather than well-being. In almost anyone's philosophy, and certainly within classical 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 book A 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 describes as already occurring to a very large extent, almost certainly embodies the cosmopolitan outlook and ideology of the world elite. If that is so, it keeps the form of national sovereignty 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 World Order (New York: Touchstone Books, 1996), p. 57. 7 . Buchanan, Great Betrayal, p. 97. 8 Greider, One World, p.323.