Globalization We Hardly Knew Ye

Source: Carnegie

A Reflection on Messiness, American Economic Exceptionalism, Perpetual Creative Destruction, Jobs, Language and the Current State of the U.S. Debate About International Economic Engagement. A Discussion Paper for a Carnegie Endowment for International Peace Roundtable Discussion

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By David J. Rothkopf

There is something familiar about the current political debate over trade and other aspects of international economic engagement. Bills to penalize companies for ?outsourcing? by prohibiting them access to federal contracts, tirades against ?Benedict Arnold companies?, entire campaigns built on opposition to free trade and globalization do not break new ground in terms either of purpose, rhetoric or technique.

At the same time, something about the current tenor of the debate has struck many veteran observers as being rather different. Recently, even the most enthusiastic free-traders, even those who were among the most ardent advocates of the benefits of globalization have begun changing their stance based on what they see as a change in national attitudes or in the facts and factors underlying those attitudes.

What happened? What is different? Is it just a momentary change in mood or is globalization really unfolding in a way that is unexpected and different? Is this a temporary phenomenon fueled by the current ?jobless? recovery or is this something that will change our attitudes and policies for the foreseeable future? What is the proper response for those who have long felt that globalization is an irreversible historical trend not a legislative agenda item, that the laws of economics remain the same even when they are unpopular? What is the proper political response for leaders in either party?

In the mid-90s, the Clinton Administration rode a wave of near euphoria about globalization into remarkable progress on trade issues and to a resounding consensus about the importance of international economic engagement. There was broad acceptance of the idea that both globalization and the technological revolutions that were facilitating it were the transforming forces of our time and that it was the responsibility of leaders to harness those forces for growth.

Today, it seems that there are a substantial number of people in the American electorate (and worldwide) who see globalization as suspect and technological revolutions as unreliable waves to ride. Politicians in both parties in the U.S., sensing this, are stepping back, hedging their bets, trading the over-simplified slogans of free trade for the over-simplified slogans of ?fair? trade. In short, the common, largely bi-partisan vision for the future that was seemingly shared by most Americans in the 90s (and for almost sixty years before that) has become blurred and, unnerved, leaders are choosing caution, reassessment and even significantly tougher stances against traditional trade liberalization as their new paths. Is this a healthy response to a better understanding of the true nature of globalization or does it perhaps simply reflect a better understanding of the character of this particular early, transitional phase in the history of globalization? Are there better approaches we might explore? What are they?

These questions need answers and the best answers are likely to come in private discussions among thoughtful observers of these trends?discussions that take place stripped of the distorting rhetoric, glare and lenses of the political campaign season. That is why we at Carnegie will convene on April 6th just such a discussion with the hope that its results might help us all better understand where we are and what, if any, constructive follow-up might be useful to shaping a new agenda for international economic engagement that is responsive to both America?s core need for growth and to our shifting political realities.

What Happened?

We can only speculate at what has caused this recent change in views. Nonetheless, cursory examination of circumstances does suggest a rationale for the change which may be useful in helping to determine an appropriate response.

For the purposes of argument, we might define the ?peak? of the pro-international economic engagement period as being 1993-1994 when the Uruguay Round of the GATT was approved, the WTO was consequently created, NAFTA was approved, the Summit of the Americas took place, the goals for achieving a Free Trade Area of the Americas by 2005 were established, APEC meetings were seen as important forums for heads of state from the Pacific Basin, Europeans were just two years into their single market process and were preparing for the introduction of a common currency, and the East Asian economic miracle was being widely studied and its export-driven approaches emulated. Elsewhere, a myriad other such developments were taking place as governments saw adapting to the imperatives of globalization as an urgent agenda item. There is no way to scientifically pinpoint the exact dates of such a highpoint and it varied from place to place, but there is no disputing that attitudes, priorities and outlook in the mid-90s were significantly different than they are today.

It is also worth noting the global context in which these events were taking place. The Cold War had just ended and a massive sigh of relief was heard around the world as the imminent threat of global thermonuclear war seemed to recede. The U.S. had just won with comparative ease its first major post-Viet Nam conflict in the Persian Gulf while suffering almost no casualties and enjoying broad national support for the effort. The U.S. economy was emerging from a recession and the first stirrings of a technology driven economic boom were being felt. The message of the campaign and the election of Bill Clinton and Al Gore was the ?changing of the guard.? For many, there was a clear sense in the air that we were at the beginning of a new era, new rules were being created thanks to an unprecedented wave of innovation, many of the problems that had dogged the world through the 20th Century were receding and that, as these things often happen, the emotional beginning of the new millenium was actually taking place roughly seven or eight years early.

Since this high point, however, a number of important factors affecting the collective psyches of both the nation and of policymakers have taken place. In late 1994 two major events resonated inside the Beltway. First, Newt Gingrich led his ?Contract with America? revolution to a major victory in the mid-term elections which consolidated the power of the right on Capitol Hill and created a dynamic in which the more extreme wings of each party held increased strength. (This is particularly important since these wings tend to ally where matters of trade and international engagement are concerned.)

Six weeks later, on December 20, the Mexican economy faltered and the Tequila Crisis began. This crisis, coming just a year after the approval of a NAFTA accord in which the Clinton Administration had invested a great deal of political capital, had a chilling effect on the willingness of Administration leaders to aggressively advance further trade liberalization measures. Despite the success of the Clinton team?s subsequent intervention on behalf of the Mexican government, this six week period effectively marked the end of aggressive pro-trade liberalization activities on the part of the Administration and within a very few years the rhetoric of the Clinton team became the language of ?fair trade?, a term explaining the shift in the emphasis of policies and programs to trade enforcement and away from market access talks and broader liberalization efforts.

It is important to note briefly here that speaking of any such shifts in mood as though they were absolutes is not accurate and could distort our conclusions regarding the issues before us now. Throughout the period just characterized as a kind of ?high water mark? for pro-liberalization, pro-globalization views, there was widespread and bitter opposition to NAFTA, the Uruguay Round and to other trade agreements. The fear of a ?giant sucking sound? was articulated and many had concerns that echo those heard today. Alternatively, following the policy sea-change noted above additional trade liberalization initiatives did continue to take place, but they were often smaller, often soft-peddled, and often over-shadowed by other initiatives. Nonetheless, during this period, it is important to note that the WTO took root and grew, the U.S. broke out of its annual China MFN brinkmanship with the approval of China?s entrance into the WTO, and a number of smaller agreements with Africa, the Caribbean and individual countries were approved or advanced. The mood however, was different. The words were different. And the pace of progress was different.

Later, other developments had an even greater impact on public attitudes and outlook. Inside Washington and outside the borders of the U.S., among policymakers and those concerned with the well-being of the populations of the developing world, the 1997-98 emerging markets crisis which impacted Asia, Russia and Latin America, was unsettling. Further, this crisis triggered a reassessment of the ?Washington consensus? as many noted that it had not inoculated practitioners against the cyclical upheavals that had historically dogged them and that certain countries that had adopted unorthodox approaches (maintaining certain trade barriers for example) such as China and Malaysia seemed to weather these storms better than those that had closely followed the Washington playbook. At the same time, a growing alliance of NGOs, labor unions and other activists began to conduct highly visible, organized protests outside of meetings of groups like the IMF, the World Bank, the WTO and the G-8.

Later, of immeasurably greater consequence, came the bursting of the dot com bubble, the stock market collapse, the loss of trillions of dollars of wealth that touched practically every American and ultimately recession. Shortly afterwards, even as the country was still reeling from these, the September 11th attacks underscored that the new global environment was a dangerous one and that the American people were vulnerable in ways that many had not imagined possible. The subsequent jobless economic recovery, business scandals impacting well-known names from Enron to Martha Stewart, the War on Terrorism, Afghanistan and Iraq and have only deepened the sense that we live in difficult times and that perhaps the optimism of the 90s was unfounded.

In short, there has been a sea-change in public mood that is discernible at every level of society including in the nature of the issues being debated in the current election season. Anti-trade, anti-globalization movements that were visible but secondary during the past decade have seemed to gain mainstream status or at the very least have gained ground versus where they were a decade ago.

What is Different?

Understanding that this change in context has impacted the debate is important if we are going to try to both respond to it and manage it properly.

Critics of globalization and proponents of anti-outsourcing and trade-restraining or protectionist measures would argue that other factors were in play. They would note that the primary problem confronting the U.S. economy is the recent and continuing job-crunch which is caused by the loss of manufacturing jobs and the phenomenon of outsourcing to emerging economies. They might say that globalization has not, in fact, gone as advertised and that many of the original assertions about it have been disproved. Recent studies have offered compelling evidence that NAFTA did not bring some of the benefits promised by its advocates during the heated political debate that preceded its implementation. Other analysts would cite the fact that the WTO has been inefficient, perhaps biased, almost certainly not up to the task of regulating global trade as it currently exists?that many trade agreements remain ineffectively enforced or worse.

Many thoughtful critics of free-trade and the kind of policies that were advocated by the Clinton Administration and the first Bush Administration suggest that perhaps globalization is not unfolding as the kind of benign ?rising tide lifts all boats? force that it was originally described to be. They point to growing inequities between the rich in many societies and the poor who do not seem to be benefiting as much from the (still) unprecedented growth in international trade and investment flows. They note that globalization has been accompanied by a concurrent increase in market volatility and that as quickly as money can flow into markets it can flow out causing major disruptions. They observe that many advocates of globalization in the emerging world have themselves benefited disproportionately from the approaches they have advocated, fueling perceptions of corruption (often due to realities of corruption). The growing trade imbalance of the U.S., the impact of not terribly well coordinated global foreign exchange policies and the approach of exchange rate ?outliers? like China, and other such market disequilibria and flaws are signs to them that something is materially amiss.

More than any other issue which is currently cited by critics at the moment however is concern over how to handle the entrance into the global economy of the huge labor pool from the emerging world. Perhaps 1 billion workers will enter the global workforce in the next decade, virtually all from the emerging world. These pose the ultimate international dilemma of our time--one in which the single greatest economic policy question of our era is also the single greatest strategic and security policy question: how do we manage the enormous global labor disequilibrium that exists between the aging, atrophying workforces of the north and the burgeoning, youthful, impoverished workforces of the south? Do we embrace this emerging workforce as a future source of global wealth creation, new markets, and growth? If we do, how do we handle the resentments and fears of developed nation (U.S.) workers who see low-cost labor as a threat to the livelihoods? Or, do we try to ?manage? the entry of these workers into the global workplace which is to say, offset their competitive price advantages in an effort to protect jobs at home? One choice leads to political upheaval at home, the second to political upheaval abroad?at a time when it is increasingly clear to all that there is no such thing as a ?distant? problem. Anger overseas can boil over and burn us where we live.

Further complicating this picture is the fact that it is now asserted that many overseas labor forces are no longer simply threats to the jobs of blue-collar American workers. Rather, it is observed that it is now skilled jobs that are being won by increasingly well-educated workers from overseas. The fact that China and India are now among the world?s top producers of engineers (both ranking in the top 5) is a dimension of this. In fact, the reality that some of the industries thought a decade ago to be the ones that would fuel America?s future growth such as software are now seen to be actively outsourcing is seen as further evidence that what has happened is a paradigm shift (and on another level, another promise broken).

What is the Proper Response?

One potential response to the above critiques of economic engagement policies that were the hallmark of U.S. leadership for over half a century (overshadowing the periodic spasms of protectionism that we, like all developed nations, have grappled with) is to simply begin deconstructing them on the basis of what might be flawed economics or through identifying falsehoods or misconceptions.

This is a fairly straightforward exercise and, of course, it does not hurt to interject basic economic truths into these debates (although it is also folly to offer a rational response to an irrational argument?it reveals a misunderstanding of the nature of the debate into which you have engaged.) For example, while the fact that we have lost several million manufacturing jobs in the U.S. is often cited as a sign of the problem, less often noted is the reality that during the same period (the last decade) Brazil has lost 11 million manufacturing jobs, India has lost 16 million manufacturing jobs and China, for which such figures are more sketchy, has probably lost well over 20 million such jobs. In other words, manufacturing jobs are not being outsourced from America to some other place in the world, they are being outsourced to the past.

Similarly, while much is made of the jobs lost during the first years of this decade, the reality is that we lost jobs at roughly the same rate during the boom years of the 90s. The difference is that we also gained roughly 260,000 jobs a month during the same period. We are currently losing jobs at a rate that is perhaps what you might expect for an economy of our size and at our stage of development. But what we have seemingly lost for the moment that is much more troubling is our ability to stimulate the forces that fuel job creation.

It would also seem sensible to note that future U.S. economic growth and future U.S. job creation will depend on our ability to have better access to markets worldwide, that since we have already lowered our tariff barriers to among the lowest levels in the world, our doors are already open and our focus should be on getting others to open up too and then seizing the great opportunities that can come from this. After all, if we are only 5 percent of the world?s population, we seriously and somewhat absurdly limit our potential for growth when we only look inward and effectively ignore the other 95 percent who as a group represent much of the upside potential for our future. Further, since globalization will continue with or without us, many of the proposed ?equalizing? measures that are recommended by well-intentioned politicians in the U.S. end up only hamstringing the U.S. economy and making us less competitive?which hits us right where we don?t want it to: in the creation of new jobs.

But as noted earlier, making such rational arguments, however well-founded (and no reasonably credible economist has yet effectively argued that benefits of efficient markets do not apply globally as they do locally), while of academic value, may not be the proper response to the current mood change if that mood change comes from visceral reactions to a transformed globally scene rather than from thoughtful economic or geopolitical analysis.

And that of course, is precisely the situation in which we find ourselves.

For this reason, we need to respond to the current situation on several levels. Keys to an effective response will hinge on our ability to:

--Recognize what is really fueling people?s concerns and understand the rational and irrational elements of it.

--Dig deep enough to identify whether there have been substantive changes either in the way the global economy is working or in our understanding of the nature of globalization that have fueled new attitudes and which should inform new approaches.

--Respond to rational elements with facts that are framed in an accessible way that also speaks to the irrational concerns and fears underlying anti-engagement views.

--Recognize at the most fundamental level that the first reaction to a difficult situation is fear and self-preservation and that the second reaction is to find a solution. The solution is what lifts one out of the fear and that absent a clear, plausible, vision for an alternative world that is more promising and secure, all we are left with are defensive reactions.

--Ensuring that the response addresses the core constituencies that are most effected by both fear and those who have the most to gain from advancing sound policies and ensuring that the message is clear and introduces a new vocabulary of hope and opportunity to the debate?in exchange for the current vocabulary of fear and doubt.

The reality is that very little beyond the speculative and the anecdotal has been done to understand the first two ?key? points cited above. It is important that we better examine the question: ?Is globalization working differently from what we expected?? Then, we need to answer: ?If so, why and how?? Or ?If not, why has the perception that it is gained ground and what should be done to address that fact?? Only with sound analysis leading to these answers can we produce both effective and appropriate political and policy responses to the current situation.

Having said that, it is worth noting the fundamental truth that power is a prerequisite to the application of policy and that therefore, having a good political response without a good policy response is probably more useful in the short-term than offering a good policy response that is not a good political response. In other words, in practical terms, it is as important to determine what is politically palatable as it is to determine what makes economic sense.

A Word About the Vocabulary

Consequently, while thoughtful economic and social analysis of the nature and consequences of globalization and specifically of trade liberalization on American workers and voters and on their counterparts overseas is essential, because of the importance of having a good political response, it is equally important?even if it seems less intellectually rigorous?to have a discussion about contributing factors to the current mood including specifically the vocabulary of the debate.

Today, words like ?outsourcing?, ?free trade?, ?WTO? and others deliver a message that is removed from their intended or strictly defined meanings. We need to recognize this so that we can actually employ terms that not only communicate what is intended but will be received by audiences in the way we intend. For example, while ?outsourcing? may be a natural phenomenon of globalization and of only minor material impact on the U.S. economy at this moment, it is perceived and presented by the media as a serious threat and even sound arguments to the contrary are going to face stiff headwinds in an attempt to change mass views. Outsourcing is a bogeyman that is effectively being used as a cudgel by economic demagogues to bash a wide variety of activities, whether they are positive or not or whether they are actually manageable or not. ?Free trade? means unfettered trade at this point. That is not an argument for abandoning the term. It is however, an argument for understanding that to many Americans it is no longer seen as the ?good? that it once was. For lots of Americans ?WTO? means ?world government? or ?faceless bureaucracy? and thus is going to be a threat regardless of context.

President Clinton used to use a term with his advisors to address issues like this which was ?meta-message.? This refers to the message that is communicated viscerally regardless of the message that is intended to be communicated. The meta-message is the collaborative by-product of a communications transaction between the communicator and the audience reflecting as much the views of the former as it does the thoughts and prejudices of the latter. Context matters much more in the meta-message than does detailed content largely because it is the cumulative of effect of words and actions that resonate in the minds of listeners who have many distractions and a disinclination to drill down into the nuances of policymaking. Also, largely, the meta-message impacts how a listener feels rather than what he or she thinks.

In the management of the debate on international economic engagement, in a world in which the net sense of many Americans is fear of the international, the meta-message on many of these issues will trend toward the negative because of context and recent history. This needs to inform decisions about how to present the next generation agenda.

Having said that, Americans remain a fundamentally optimistic people who expect the future to be better than past (this is a phenomenon on which much has already been written.) Consequently, a meta-message that is consistent with that optimism and plays to such deeply held feelings can be crafted that can accurately depict how we can use international economic forces to our benefit as we attempt to seize international economic opportunities. In this regard, it is as important that we remember that crafting a clear, credible, simply-expressed, positive vision of how to solve current problems is much more likely to win support than simply reacting to the negative?because people, at heart, do want to believe that their futures are bright.

Conclusions

The purpose of this paper is to stimulate discussion, to frame questions rather than to offer answers. It is to prime the pump for a collective discussion among leading thinkers in these areas that addresses the key questions posed above.

However, if only to stimulate discussion further, let me offer just a few of my own conclusions from preliminarily grappling with the issues covered in this paper:

--The laws of economics remain what they were. Removing barriers to global trade not only produces more efficient markets and growth, it is especially beneficial to a country that is home to disproportionate amounts of capital, know-how and productive capacity and a disproportionately small share of the global population. We can not secede from the planet earth without suffering great losses. We also cannot drive global regulations as we would our own. Our withdrawal will only be met by the advances of others. Protectionism is a misnomer because it exposes us to new risks.

--Having said that, we are at an early phase in the process of globalization. Thanks to recent advances in technology, markets have become increasingly interdependent. Governments, the ultimate lagging indicator, have followed with laws to facilitate what has already largely happened. Tariff barriers have been dramatically reduced. But, our regulatory regimes and our understanding of the dynamics of globalization and how it is likely to unfold given the different comparative advantages and disadvantages of different regions and countries is limited. Clearly, even the laws that we have created have not been fully enforced. Had they been, however, we would see that there were not sufficiently nuanced to account for other factors from burgeoning non-tariff barriers to social, political and economic reactions to the uneven nature of liberalization.

--The uneven nature of the progress of globalization?it?s messiness?is not only not well understood but it is so complex that it is fairly hard to predict. Actions by governments, industry and science have unintended consequences. We need to build a system that not only recognizes these facts but is designed both to liberalize while managing the messiness, the upheavals and disequilibria that are inevitably going to be part of this transitional period of history in which we are living.

--Among the most important things we have learned is where the gaps in prior theories or programs may have been. We still need to figure out how to absorb massive new segments of the global labor market into the global economy while minimizing disruptions at home and abroad. We need to find a way to do this by introducing standards and harmonizing regimes in ways that do not create new barriers or inequities. We must recognize that we live in a rapidly changing environment in which volatility, acceleration, amplification, decentralization, asymmetry and other changes in the character of communication and social, business and government interaction mean that old formulas will not work, do not apply and perhaps can be improved upon. Finding ways to liberalize markets and integrate them also creates new challenges to finding effective mechanisms for then ensuring that there are the just social consequences and sustainable political environments that are necessary to actually achieving and maintaining the benefits such open markets can provide.

--In short, we need to recognize that liberalization alone is not enough for transitional times like this and that it needs to be complimented with a new generation of global agreements that manage the transition in ways that produce the global growth with global benefits that we all need while minimizing the kind of localized disruptions that are of greatest domestic political consequence wherever they are felt. We need liberalization with justice which means not intrusive regulatory regimes but instead means effective international institutions that can monitor and insure compliance.

--The truth is that we don?t seek free trade but gradually freer trade?and that this has always been our objective. For policymakers seeking progress in this area the secret is identifying what is achievable in the near term?which means recognizing and responding to factors driving the global and domestic mood regarding these issues. In the end this will remind us that all international economics are, in fact, local. What this means is that the public attitude toward engagement overseas is directly related to how well they are doing at home. In other words: job growth and consumer confidence are pre-requisites for enthusiasm for new global initiatives.

In fact, if we seek a couple of simple, straightforward, over-arching conclusions they may be:

In terms of the economics of globalization and international economic engagement nothing has substantively changed?the difference is that we now better understand what we didn?t know before?we understand the limitations in our understanding of this transition to globalization, how it is likely to unfold and what the consequences will be. We also know this will not be a straight-line process, that it will be ?messy? with benefits coming faster to some than to others, with different speeds of development, posing different challenges to policy-makers in different places, facing momentary ?Schumpeterian moments? of upheaval as reinvention to meet new realities takes place. In short, we need to embrace a kind of relativistic theory of globalization in which, while it affects all, it affects them differently and is perceived differently by all while it is happening.

Secondly, where there has been a major change…where there really is something different…is in the public mood and that this is of critical political importance. It means that a new set of public concerns need to be addressed and that the objectives of global growth that everyone seeks need to be advanced using a new vocabulary and in a way that is directly responsive to those concerns. That will almost certainly mean that the focus needs to be on seizing the promise of the new environment, finding comparative advantage in succeeding in that environment, being home to the industries and culture that will drive innovation in that environment and thus creating the best new jobs available in that environment. This is the one issue on which the upcoming U.S. presidential election is likely to turn…with the winner being the person who offers the most compelling positive vision, program, message and meta-message that convinces voters that they can lead us into that new era of growth.

We know a few basic facts about the global economy. Due to introduction of massive new labor forces into the international marketplace and at the same time due to the technology-fueled revolution in productivity taking place in the U.S. and elsewhere, the costs of labor as a component of enterprises are going to fall. Due to the attractiveness of lower cost labor in emerging markets, they will draw capital away from its traditional destinations and create new options for investors. Global demand for capital will grow. Interest rates and savings rates should consequently rise.

For America, a key question in this environment is whether the features of what could be called American economic exceptionalism will hold and whether we will be able to effectively compete (as we must) for capital with the emerging world due to our ability to remain an engine of global economic innovation, our own economic vitality and security, enhanced productivity due to our willingness to adapt to - and even stimulate - constant change better than other nations. Indeed, to reinvoke Schumpeter, perhaps the greatest comparative advantage of the U.S. is our ability to embrace virtually constant "creative destruction" while other nations resist it. If that is true and remains the case, then it is quite possible that the near future is one in which emerging markets and the U.S. become the magnets for capital and developed countries that are more resistant to change, less able to adapt due to heavy regulatory burdens, will falter.

Such faltering has been the history of much of the recent past in Europe and Japan. It could well be the story of their near futures. It would certainly offer a powerful lesson about what kind of approach to globalization was likely to be most successful. But we will only get to this point if we collectively make the right choices now…and if we translate those choices into the kind of message that energizes and persuades the American electorate.

Better understanding those choices and the corresponding messages is the objective of the discussion that will take place at Carnegie on April 6. We are happy to have you as part of it and look forward to seeing where it may lead. The questions we will focus on fall into three basic areas and we hope you will consider them in advance.