Citizens in Granite, Ill noticed a flatbed train, loaded with steel pipes labeled “Made in India.” All might have been well if not for the fact that Granite’s 140-year-old steel mill had closed in December for lack of orders. Cries of unfair foreign subsidies both in developing countries such as India and China filled the air. (See here for one study.)
Foreign subsidies are only part of the problem. Equally important are cheap overseas labor and weak environmental regulations. In 2005, for example, the Attorney General brought suit against the Granite mill for air pollution. Developing countries have used weak environmental standards and weak labor laws to leverage rapidly their own industrial base.
Whenever I complain about tax, labor, or environmental arbitrage in developing countries and subsidies–direct or indirect–for cheap imported goods, someone will usually remind me that cheap, imported goods, however or wherever they originate are really a boon to someone in the U.S. economy.
This is quite true, undeniably so. Someone in the U.S. or Canada has purchased those pipes, saving money.
The problem is: We have a dog chasing its tail problem, an ever-downward spiral of wages, living conditions, and standard of living. The downward spiral of wages affects everyone, here and abroad, collecting everyone in its vortex.
When developing nations run out of cash—or credit–, everyone everywhere suffers.
Developing nations, anxious to have their share of the pie, will resort to more extreme measures: More subsidies, greater downward pressure on their own meager pay scales, a tighter grip on currency exchanges. Citizens in mature economies must compete with impossibly cheap labor abroad while living in an expensive environment. The middle class, once touted as the crowning jewel of mature economies, is now seriously in peril.
Escaping this downward spiral is very difficult. Rich individuals at the top, of course, have benefited handsomely. Whether these individuals will continue to benefit should give them second thoughts. Deeper levels of poverty and the thickening stench of a decaying environment will surround them, not exactly a recipe for raising shiny, bright-eyed pampered children ready to learn at prestigious private schools either here or in Asia.
Sometimes, I wonder if a vast scam has been played. At first, economists and global leaders told us that globalization as structured was a win-win game.
Here is Treasury Secretary Summers in 2000 on the brink of China’s entry into the WTO:
The agreement with China is a one-way street,” Summers said.
“China opens its markets to an unprecedented degree, while in return the United States simply maintains its current market access policies,” he said.
It is difficult, Summers added, “to discern any disadvantage to the United States in passing this legislation.”
Here is Summers in 2006. (Note: He makes no mention of the impending credit crash.)
it has been a golden age for those who already own valuable assets. Owners of scarce commodities have seen their returns rise prodigiously. People running businesses that can take advantage of globalisation to source labour less expensively and sell to larger markets have seen their incomes rise far faster than incomes generally. Certainly those in the financial sector in a position to benefit from the asset revaluations associated with globalisation have prospered.
Everyone else has not fared nearly as well.
As the great corporate engines of efficiency succeed by using cutting-edge technology with low-cost labour, ordinary, middle-class workers and their employers – whether they live in the American midwest, the Ruhr valley, Latin America or eastern Europe – are left out. This is the essential reason why median family incomes lag far behind productivity growth in the US, why average family incomes in Mexico have barely grown in the 13 years since the North American Free Trade Agreement passed, and why middle-income countries without natural resources struggle to define an area of comparative advantage.
In 2006, he started to pull back the curtain on this sorry drama, a bit late, alas.
I do not mean to pick on Summers; he has certainly not been alone in promoting the present structure of globalization. Many economists have been part of the celebratory chorus. He just happens to be leading our economic recovery team.
Escaping from this downward spiral will be, as I said, very, very difficult. I have listened closely to remarks in the present administration. I have not heard a real answer. Most are simply Clinton hangovers or hand-me-downs. The Bush administration was all too eager push the game even further.
The Nature of the Problem
This kind of dangerous spiral is avoided when economies are closely matched, when nations are at a relatively equal level of development. Currency exchange rates, along with carefully monitored rules, often solve the problem, a bumpy arrangement, but it works.
The problem is similarly manageable if a small, impoverished nation tries to play industrial catch-up among a cluster of more mature economies. The cost of its rapid industrialization can be absorbed.
But now we have two huge underdeveloped nations (one democratic, the other repressively autocratic)—along with an ever-growing flotilla of smaller impoverished nations—suddenly and energetically entering global commerce. Among the leading economists in the Clinton and Bush administration, I never heard any cautionary mention of this kind of problem. Free trade was the mantra; fast tracked trade agreements were the candles to light the way.
The latest pitch is that the mature economies must now invest in and create new technologies.
That is easier said then done.
What, for example, is to stop nascent industries in mature economies from chasing cheaper labor abroad? What is to stop them from seeking benefits from currency exchanges or better subsidies? Already, many multinationals are setting up Research and Development centers third world countries—cheaper labor, cheaper hidden costs such as environmental and energy.
For these reasons, I have to grimace at this latest bromide. To many, it seems such a marvelous answer is simple, direct, and understandable. Politicians and economists who tout it are praised for their insight and acumen. The public buys it; the press celebrates it. All those who utter it are clearly wise beyond their years. Some of us in the balcony sits know it for what it is.
The fact is: Given the way commerce has been structured, developing nations offer inducements that are simply irresistible. If energy can be made cheaper at cost to the environment, what factory in China does not benefit? Granite, Ill, had to pay those costs. Granite, Ill, had no hope of ever being competitive given the rules governing globalization. It’s fate was sealed a decade ago.
Going forward, I can see only one path. And, honestly, I do not think it will happen.
First, labor rights to bargain collectively must be enforced globally. Doing so will of course raise the price of all those cheap imports. But, it will also more rapidly diminish the vast pay scale differences between impoverished and mature economies. Additionally, it will force rich corporations to release a greater share of the pie to all the have-nots.
If a country refuses to enforce labor standards or it refuses to allow grass roots bargaining, then it should be a pariah among nations.
Second, environmental standards must be global. Cap and trade will not do it. Cap and trade is designed to placate environmental concerns and climate change within a free market context. It does not address the kind of problem I have outlined: The downward spiral of wages and standard of living. Simply put, we must accept the full cost of all production everywhere–here and abroad.
In the West, we have air standards that significantly raise the cost of production of such items as steel. (Those standards have been under increasing pressure.)
Additionally, those air and other environmental standards affect the cost of energy. Simply passing off these kinds of concerns as extraneous variables does not past muster. Environmental standards affect the cost of every good that is produced. Those countries that leverage environmental costs for commercial advantage should be considered pariahs. Environmental standards have to be global.
As I said, I have few hopes that any of these changes will happen until our collective backs are truly against the wall.
Nothing focuses the mind better than looking over the precipice. We are not there yet. The present system will be band aided, patched, and protected until the very last minute. Too many scholarly careers are at stake; too much wealth and power is at risk; too many countries—in the East and the West—have placed their bets on the present global arrangement. The old bugaboo, protectionism, will be trotted forth to scare those without the sophistication to know that protectionism was never the issue. Rules of the road were the issues.
We will hear more and more disclosures similar to the one Summers made in 2006. Well, NAFTA did not turn out so well. Hmmm…cheap labor is a problem with no easy solution…and on it will go. But remember: These are the same people that said the road to the now looming precipice was strewn with flowers and quick wealth, a “one-way” street to global prosperity. There will be no winners. This has been a lose-lose proposition.