We’re losing the war. Not that war — the other war, the one where we’re supposed to turn the nations of the earth into productive, interconnected, democratic economies that lift millions out of poverty and create the highest standard of living ever seen. With the last round of proposed tariffs on everything from Harley-Davidsons to Chinese steel to Canadian timber, it seems we’re poised for a renewed trade war. What happened to the unstoppable globalization of the 1990s?
For all the talk of U.S. multinational corporations fleeing, they’re still here. They’re just bigger. More than three-fourths of their production took place in the United States in 1999 (the last year for which data is available), unchanged since 1989. Over 70 percent of their employees still work in the US, down only 3 percent from 1990. And 70 percent of their investment in 1999 was in the United States, more than in 1994.
Though our economy accounts for one-third of world Gross Domestic Product at market exchange rates, in 2003 we will use only one-tenth of one percent of it on foreign economic aid — even after President George W. Bush’s 50% increase — the second lowest level since the end of World War II and far below the developed world’s average.
If not trade, corporate presence, or aid, then what globalized? Finance.
Since 1980, foreign activity in U.S. securities and U.S. activity in foreign securities both grew more than 100-fold, with three-fourths of the growth occurring in the 1990s. Foreigners now trade $20 trillion worth of U.S. securities annually, while we trade $5.7 trillion worth of foreign securities. That is part of why our trade deficit has been irrelevant recently, and why our interest rates are so low and our dollar so strong: we buy foreign products, and foreigners invest the money we spent (and more) back in the United States. As the recent spate of tariffs proves, “free trade” often means little more than improved capital flows to the United States.
Is this good for the United States? In some respects, yes, because there is nowhere else for the money to go right now. Europe will be stuck in the painful process of converting to a single market for at least another five years while at the same time Japan, structurally trapped in the 1980s, will either meltdown or still be in the midst of reform. As long as the rest of the world looks worse, our markets will be fine, if volatile.
But finance is not production. Free trade promises not a perpetually bullish stock market but rather an enhanced industrial output and the standard of living increases that accompany it. The flow of the world’s wealth into speculation and bubbles is not a sign of vigor but a gross misappropriation of resources. Indeed, “Tobin’s Q,” or the market value of all publicly traded companies in the United States divided by their replacement costs, is still almost double its historical average and as high as it was in 1929. In 2000, the stock market could have replaced the real assets of all the companies it owned — twice.
The real economy, where goods and services are exchanged, is becoming secondary to the finance economy. Our last recession underscored this: the stock market and GDP rebounded in the spring of 1991, while Main Street suffered as white-collar unemployment continued to rise into 1993. Our current recession, whether we have recovered or will lapse into a double-dip, may prove similar.
Choking off world trade while unleashing international capital flows is both dangerous and inefficient. Progress is grinding to a halt as world financiers become swept up in vicious cycles of increasingly complex speculation. Unless something is done to ensure that financial wealth produces real wealth, speculative crises like the Asian currency crisis and the Long Term Captial Management implosion will continue to haunt us, draining resources and time and undermining the world’s economic and political bridges.
America’s economic power is even greater than its military power. Rather than undermining its diplomatic credibility with protectionism, America needs to renew its commitment to free trade and the creation of real wealth. It is a tough choice, and not one without some short-term pain. But that’s what being a leader is all about.
Max Kennerly is a junior in Ezra Stiles College.