Wallach’s Congressional Testimony on the Economic Global Crisis

By Stormy

Lori Wallach’s written testimony before the Subcommittee on Terrorism, Nonproliferation and Trade House Committee on Foreign Affairs on the subject of “U.S. Foreign Economic Policy in the Global Crisis” is worth noting.

The devastation being caused by the global economic crisis to the lives and livelihoods of hundreds of millions of people around the world is not merely the result of bad practices by certain mega financial service firms, but the foreseeable outcome of one system of global economic governance – or more accurately anti-governance – that has been put into place and now must be replaced.

Over the last several decades, the U.S. foreign economic policy has been the implementation worldwide of a package of deregulation, liberalization, privatization, new property rights and new limits on government policy space, often dubbed the Washington Consensus or the neoliberal agenda. “Trade” agreements, such as those enforced by the World Trade Organization (WTO), and international agencies, such as the International Monetary Fund and the World Bank, have been the delivery mechanism for this radical global experiment.

[Italics and underline mine.]

Anti-governance became the norm. As is customary, few blogs have actually looked at the latest round of Doha talks. Instead, we have had continued Pavlovian responses to anything that smattered of further liberalization. Here is Wallach’s characterization of those talks:

Yet, even as national legislatures, the G-20 and other international configurations struggled to create new financial service regulation, many of the same people and governments are currently pushing for expansion of the current WTO financial services deregulatory agenda. For instance, President Bush’s November 15, 2008 G-20 Summit was supposedly convened to lay out a coordinated regulatory response to the crisis. Instead, the November G-20 summit’s communiqué called for completion of an on-going WTO Doha Round negotiation which has as one of its three main planks further financial service deregulation.

It is refreshing to this reader to see such frank talk, talk that rarely enters the general media. Given trade representative nominee Ron Kirk’s recent statements, we can safely surmise that the Obama administration is listening. Paul Volcker, former Fed Chairman and now chairman of Obama’s “Economic Recovery Advisory Board” has also echoed deep concerns for the present account and trade deficits.

Wallach goes further:

Few policymakers at home or abroad are aware of the myriad ways in which today’s “trade” pacts constrain their policy space on various non-trade matters. In part, this is because of the relative “newness” of this backdoor channel for domestic deregulation. Prior to the establishment of North American Free Trade Agreement (NAFTA) and the WTO in 1994 and WTO in 1995, the scope of trade agreements was limited to setting the terms of exchange of goods across borders, namely cutting tariffs and lifting quotas. Proponents of the new expansive model of international commercial agreements branded WTO and NAFTA as “trade agreements” and attacked as protectionist all those criticizing these pacts’ overreach into non-trade matters. This rhetorical sleight of hand obscured the fact that these pacts were delivery mechanisms for a much broader economic package, of which trade liberalization per se is only one limited aspect.

And now we are living with the consequences of leaving our nation’s economic well being to be determined by private interests, who legally must focus on quarterly profit statements while operating under a system they helped devise that removes all obligations and responsibilities to the rest of us.

Remedying the current crisis, avoiding future such crises and achieving economic justice and stability at home and abroad will require a new system of global economic governance that harnesses the benefits of trade while removing the many non-trade policy constraints that are obstacles to ensuring markets operate in a stable and productive manner.

This is a practical matter, not an ideological assertion.

rules. For instance, firms operating in 39 countries, including all of Europe, that signed the highly controversial WTO procurement agreement and firms in the additional 13 countries who are signatories to U.S FTAs must be treated as if they were U.S. firms for certain aspects of even the covered spending. While there are some important exceptions listed in the U.S. schedule of commitments in these agreements that safeguard the right to use domestic preferences for some categories of goods, the United States altogether gave up its rights to provide preferences to U.S. firms regarding the construction and other service procurement contracts.

The United States has foolishly allowed a double standard–a higher bar for itself; a lower bar for other signatories to the procurement agreement:

This sorry reality provides a different perspective on the hollering by Canada and the European Union (EU) against the stimulus bill’s Buy American provisions. Both the EU and Canada wisely excluded considerably broader swaths of their procurement activity from WTO rules and, in the case of Canada, also from NAFTA. Because of this, the EU and Canada have no obligation to provide U.S. firms with access to a wide array of their government contracts. For instance, while the United States safeguards its preferences (only) for domestic iron and steel used in federally funded state transportation projects, Canada carved out steel, motor vehicles and coal altogether (for all provinces, for all sectors), and also carved out all construction contracts issued by the Departments of Transport. The EU carved out of its WTO procurement obligations contracts awarded by federal governments and sub-federal governments in connection with activities in the areas of drinking water, energy, transport or telecommunications.

Rarely are these details noted in many economic blogs or in the general media. Certainly, you will not hear Kudlow or Kramer discuss these issues.

And what is Wallach’s take on U.S. mainstream economists?

For years, a brave few economists have reviewed the massive persistent U.S. trade deficits that have reached six percent of GDP, warned that such imbalances were not sustainable and called for an array of urgent policy actions before a foreseeably devastating “market correction” occurred. Over the past 15 years of WTO and NAFTA, as 4.3 million U.S. manufacturing jobs were lost – 1 in 4 of the entire sector – and U.S. real median wages sat at scarcely above 1973 levels, and income inequality rose to levels not seen since the Robber Baron era, a those same economists and a growing number of policymakers warned about the hollowing out of the U.S. economy and the need for new policies. As the United States became a net importer of food and saw its total agriculture trade surplus plummet and overall our major exports shifted to raw materials rather than value-added goods, a growing number have come to question the global economic system that could result in such outcomes.

For a more complete discussion of GDP v net trade deficit, see my post here

How the world extricates itself from the liberalization model the U.S. itself blindly promoted is the question. Wallach’s entire testimony is worth consideration. I leave the reader with Wallach’s conclusion:

Over the past century, U.S. financial regulation has shifted from strict financial controls over banking and capital markets following the Great Depression to periods of deregulation in the 1980s and 1990s. The WTO GATS locks in the U.S. status quo at a time of unprecedented financial liberalization, and exports this model worldwide. Whether this extreme deregulatory model is beneficial to most people – or sustainable – is no longer a contested question. Yet, absent changes to these international commercial agreements, governments worldwide could face daunting difficulties if they seek to reverse the trend toward financial service deregulation.

The Regan revolution has run its predictable course. Ideology has been substituted for practicality and wisdom. They stumble who run fast. The fall now includes every country, including China.

Where the rules have been beneficial to some, do not expect them to surrender their advantage easily. In the long run, however, we all should reconsider how globalization has been fashioned. The means do determine the ends. Ends no matter how laudatory can never be achieved without proper regard to means.