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Manufacturing is still critical to the economy United States. Clyde Prestowitz, says it's time to start realizing the positive spillovers that manufacturing creates... Read more  

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Stephen Olson at Chinese Development Institute Conference

 

 Clyde Prestowitz giving presentation to CDI...

 

Steve Olson teaching trade negotiations at the Mekong Institute...

 

Stephen Olson to speak at upcoming workshop organized by the International Institute for Trade and Development on 

"Economics of GMS Agricultural trade in goods and services towards the world market"

Chiangmai, Thailand Sep 8-12.

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(07/10/05 - Prestowitz) "GLOBALIZATION'S NEXT VICTIM" in the San Francisco Chronicle

Sunday, July 10, 2005 (SF Chronicle)
GLOBALIZATION'S NEXT VICTIM: US/Production, wealth, power, services and technology are slip-sliding away to the East
Clyde Prestowitz

President Bush says the U.S. economy is the envy of the world, and Federal Reserve Chairman Alan Greenspan insists economic growth is solid despite a bit of froth, but the truth is that the global economic scene is now more troubled that at any time since the trade wars with Japan 20 years ago.

The U.S. trade deficit was considered unsustainable at around $25 billion annually by the Reagan administration. It is now nearing $700 billion, an unprecedented 6 percent of our gross domestic product.

As a result, the U.S. economy is on life support. Our lifeline to finance this deficit is huge infusions of foreign lending, much of it from the central banks of China and Japan. Congress is calling for China's scalp, and Treasury Secretary John Snow is demanding that Beijing revalue its currency. The new U. S. Trade representative is promising to get tough with China just as I and other U.S. trade officials promised to do with Japan in the past.

Former Federal Reserve Chairman Paul Volcker is forecasting a 75 percent probability of a major international financial crisis within five years.

How, if the United States is the envy of the world, can we be having all these problems? Easy.

Although the world, as characterized by columnist and author Tom Friedman, is getting flatter as a result of removal of trade and other barriers, it is also being tilted at an increasingly steep angle.

Think of it as a sliding board, very flat and smooth but inclined to speed the move of production, services, technology, wealth and power from West to East and often from open, democratic systems to more opaque, authoritarian regimes.

In short, despite the miracles it has accomplished in the past and may bring in the future, globalization is distorting the world economy in ways that pose increasing risks to the United States and the rest of the international community. This is an issue that didn't make it onto the agenda of the world leaders at the G-8 meeting in Scotland last week, but should make it onto future agendas.

Part of what's wrong is illustrated in recent statements by the chief executive officers of Intel and IBM. In testimony to a presidential advisory panel, Intel's Paul Otellini said his company might build some future factories overseas. After selling his company's personal computer division to China's Lenovo, IBM's Sam Palmisano told the New York Times that he had gotten a blessing on the deal from China's top leaders and added that "IBM wants to be part of China's strategy."

Remember now, we're talking about Intel and IBM, two of the three or four top technology companies in the world, both based in the United States.

According to our elite economists, America's future lies with high tech - - with companies like Intel and IBM. Yet here are two of U.S. high-tech industry's top CEOs saying the future may lie abroad, especially in China.

Add the fact that U.S. trade in high-tech products has swung from a surplus to a deficit, and it is not at all clear that this country's future will be in high tech.

At the heart of the problem is the false assumption that all the countries in the globalization contest are playing the same game. They're not: Some countries have strategies, but others don't have a clue. The United States is in the latter category.

Otellini's concern is not U.S. labor or capital or other costs. In fact, he emphasized that from an operating point of view, a U.S. factory location would be advantageous, as the theories say it should be.

The difference is that countries like Israel, Malaysia, China and Ireland are offering capital grants, tax holidays, free land and infrastructure, as well as other financial incentives for companies to build factories in their countries despite less attractive operating conditions.

Such strategically advanced countries also foster business relationships. They initiate technology sharing arrangements and establish technical standards that give a leg up to producers operating within their borders.

This all creates a painful dilemma for U.S. executives like Intel's Otellini. American companies may prefer to resist the pull of foreign subsidies, but with fiduciary responsibility to maximize returns to their shareholders, doing so may mean committing career suicide.

Or take IBM's Palmisano. Of course he wants to be part of China's strategy. He'd be a fool not to. China is big and going to get a lot bigger, and IBM needs to be part of its development. The missing link for Palmisano is that he can't be part of an American strategy, too, because the United States doesn't have one.

The United States, which might be said to have more or less invented globalization, has been complacent about its leadership in world trade while other countries have sought innumerable advantages. The United States has also insisted on the validity of theoretical trade models while other countries have been beating us in real-world deals.

Think of the world as divided into two groups: the strategic traders such as Japan and China, and the free traders who maximize consumption and have no real strategy for keeping or attracting new companies.

Joining the United States in this latter group are countries like Canada, the United Kingdom and Chile. They're not totally pure, but they usually play by free trade rules. In principle, they believe in markets, operate under a rule of law, are reasonably transparent and have rising consumer welfare as their primary economic objective.

The other group, the strategic traders, especially many nations in Asia, are characterized by unusually high savings rates, relatively low consumption, lack of transparency, absence of or gaps in the rule of law, extensive formal and informal government intervention in markets, managed exchange rates, programs to promote strategic industries, and explicit policies aimed at accumulating trade surpluses and large dollar reserves in order to gain financial sovereignty and a degree of geopolitical leverage.

In this mix, the United States is unique as the printer of the dollar, the world's primary reserve currency. Because most international goods are priced in dollars, the United States is able to buy simply by printing its own money. All other countries must first produce and sell something in order to earn the dollars necessary to buy abroad.

As long as others will accept dollars in payment and reinvest them in U.S. assets, America is relieved of any need to be fiscally responsible by balancing its budget and trade deficits.

Perversely, the rest of the world also finds fiscal responsibility unnecessary. The Americans can buy and borrow without concern for saving, investment and production.

Perversely, the rest of the world also finds it unnecessary to be fiscally responsible. By managing exchange rates to keep the dollar strong and their export prices low, the rest can over-save and over-invest because excess production can be exported to the U.S. market. Combined with financial incentives, these policies facilitate a steady move of production, technology, and know-how to the countries that have a trading strategy.

The combination of these various globalization games has tilted the Earth and created today's hugely unbalanced global economy.

The United States is the only net consumer. Global growth depends on a steady increase in its already unprecedented trade deficit, which in turn depends on a steady rise in foreign lending, particularly from China and Japan.

Already the United States is absorbing 80 percent of available world savings. The system is unsustainable. This lending can obviously not go beyond the totality of savings. But even if it were sustainable for a long time, the accumulation of debt would be a threat to future U.S. and world growth.

The notion that floating exchange rates will somehow smoothly adjust Earth's tilt is equally flawed. When Federal Reserve Chairman Alan Greenspan speaks soothingly of a soft landing in which revaluation of China's yuan leads to a surge of U.S. exports to rebalance the trade deficit with no slowing of U. S. growth, he ignores the fact that the United States no longer has export production capacity sufficient even to cut the trade deficit in half.

In the real world, plants can't be built instantaneously, and production doesn't expand overnight. And even if floating rates worked in principle, they won't as long as most Asian countries, not just China, are actively managing their exchange rates through so-called dirty floats. It may be that these countries are hurting themselves, but they also hurt their trading partners.

Finally, there is the view that we shouldn't worry too much about how other countries grow because their growth will inevitably result in their buying more from us, increasing our growth as well. But we have now had 50 years of globalization during which a number of countries such as Japan and South Korea have experienced the miracle of going from poor to rich. If the theory were correct, they should have become big buyers by now. But they have not. The United States remains the consumer of last resort.

The fact is that the strategic trading system becomes hard-wired, and these countries do not easily or suddenly shift to consumption from saving, producing and exporting. Nor does the United States show any capability for going in the opposite direction from its role as the world's No. 1 consumer.

Until we all accept economic reality and start to change it, the world economy will continue to head full steam for Niagara Falls. We desperately need to reinvent globalization. For starters, Washington might become as interested in keeping Intel and IBM building factories at home as Beijing is eager to lay down the red carpet for them.

Clyde Prestowitz is the author of "Three Billion New Capitalists: The Great Shift of Wealth and Power to the East" and president of the Economic Strategy Institute, a nonprofit, nonpartisan Washington research organization focused on globalization and competitiveness. He also is an adviser to Intel Corp. E-mail us at This email address is being protected from spambots. You need JavaScript enabled to view it..

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Copyright 2005 SF Chronicle

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