The Establishment Rethinks Globalization

The church of global free trade, which rules American politics with infallible pretensions, may have finally met its Martin Luther. An unlikely dissenter has come forward with a revised understanding of globalization that argues for thorough reformation. This man knows the global trading system from the inside because he is a respected veteran of multinational business. His ideas contain an explosive message: that what established authorities teach Americans about global trade is simply wrong--disastrously wrong for the United States.

Martin Luther was a rebellious priest challenging the dictates of a corrupt church hierarchy. Ralph Gomory, on the other hand, is a gentle-spoken technologist, trained as a mathematician and largely apolitical. He does not set out to overthrow the establishment but to correct its deeper fallacies. For many years Gomory was a senior vice president at IBM. He helped manage IBM's expanding global presence as jobs and high-tech production were being dispersed around the world.

The experience still haunts him. He decided, in retirement, that he would dig deeper into the contradictions. Now president of the Alfred P. Sloan Foundation, he knew something was missing in the "pure trade theory" taught by economists. If free trade is a win-win proposition, Gomory asked himself, then why did America keep losing?

The explanations he has developed sound like pure heresy to devout free traders. But oddly enough, Gomory's analysis is a good fit with what many ordinary workers and uncredentialed critics (myself included) have been arguing for some years. An important difference is that Gomory's critique is thoroughly grounded in the orthodox terms and logic of conventional economics. That makes it much harder to dismiss. Given his career at IBM, nobody is going to call Ralph Gomory a "protectionist."

He did not nail his "theses" to the door of the Harvard economics department. Instead, he wrote a slender book--Global Trade and Conflicting National Interests--in collaboration with respected economist William Baumol, former president of the American Economic Association.

Gomory's critique has great political potential because it provides what the opponents of corporate-led globalization have generally lacked: a comprehensive intellectual platform for arguing that the US approach to globalization must be transformed to defend the national interest. Still, it will take politicians of courage to embrace his ideas and act on them. Gomory's political solutions are as heretical as his economic analysis.

At IBM back in the 1980s, Gomory watched in awe as Japan and other Asian nations captured high-tech industrial sectors in which US companies held commanding advantage. IBM invented the disk drive, then dropped out of the disk-drive business, unable to compete profitably. Gomory marveled at Singapore, a tiny city-state, as it lured American manufacturers with low-wage labor, capital subsidies and tax breaks. The US companies turned Singapore into a global center for semiconductor production.

"The offer that many Asian countries will give to American companies is essentially this: 'Come over here and enhance our GDP. If you are here our people will be building disk drives, for example, instead of something less productive. In return, we'll help you with the investment, with taxes, maybe even with wages. We'll make sure you make a profit.' This works for both sides: the American company gets profits, the host country gets GDP. However, there is another effect beyond the benefits for those two parties--high-value-added jobs leave the U.S."

China and India, he observes, are now doing this on a large scale. Microsoft and Google opened rival research centers in Beijing. Intel announced a new, $2.5 billion semiconductor plant that will make it one of China's largest foreign investors. China's industrial transformation is no longer about making shirts and shoes, as some free-trade cheerleaders still seem to believe. It is about capturing the most advanced processes and products.

The multinationals' overseas deployment of capital and technology, Gomory explains, is the core of how some very poor developing nations are able to ratchet up their technological prowess, take over advanced industrial sectors and rapidly expand their share in global trade--all with the help of US companies and finance, as they roam the world in search of better returns.

The Gomory-Baumol book describes this as "a divergence of interests" between multinational firms and their home country. "This overseas investment decision may then prove to be very good for that multinational firm," they write. "But there remains the question: Is the decision good for its own country?" In many cases, yes. If the firm is locating low-skilled industrial production in a very poor country, Americans get cheaper goods, trade expands for both sides and the result is "mutual gain." But the trading partners enter a "zone of conflict" if the poor nation develops greater capabilities and assumes the production of more advanced goods. Then, the authors explain, "the newly developing partner becomes harmful to the more industrialized country." The firm's self-interested success "can constitute an actual loss of national income for the company's home country."

"The situation today is that the companies have discovered that using modern technology they can do all that overseas and pay less for labor and then import product and services back into the United States. So what we're doing now is competing shovel to shovel. The people in many countries are being equipped with as good a shovel or backhoe as our people have. Very often we are helping them make the transition. We're making it person-to-person competition, which it never was before and which we cannot win. Because their people will be paid a third, a quarter of what our people are paid. And it's unreasonable to think you can educate our people so well that they can produce four times as much in the United States."

As this shift of productive assets progresses, the downward pressure on US wages will thus continue and intensify. Free-trade believers insist US workers can defend themselves by getting better educated, but Gomory suggests these believers simply don't understand the economics. "Better education can only help," he explains. "The question is where do you put your technology and knowledge and investment? These other countries understand that. They have understood the following divergence: What countries want and what companies want are different."

The implication is this: If nothing changes in how globalization currently works, Americans will be increasingly exposed to downward pressure on incomes and living standards. "Yes," says Gomory. "There are many ways to look at it, all of which reach the same conclusion."

I ask Gomory what he would say to those who believe this is a just outcome: Americans become less rich, others in the world become less poor. That might be "a reasonable personal choice," he agrees. "But that isn't what the people in this country are being told. No one has said to us: 'You're probably a little too rich and these other folks are a little too poor. Why don't we even it out?' Instead, what we usually hear is: 'It's going to be good for everyone. In the long run we're going to get richer with globalization.'"

Gomory and Baumol are elaborating a fundamental point sure to make many economists (and political leaders) sputter and choke. Contrary to dogma, the losses from trade are not confined to the "localized pain" felt by displaced workers who lose jobs and wages. In time, the accumulating loss of a country's productive base can injure the broader national interest--that is, everyone's economic well-being.

The conventional win-win assurances, they explain, are facile generalizations that ignore the complexity of the trading system--the myriad differences in country-to-country relationships and the vast realm of government actions and policy interventions designed to shape the outcomes. "Many of our 'dismal science' colleagues speak unguardedly as though they believe free trade cannot fail, no matter what," Baumol said.

Some nations, in other words, do indeed become "losers." Gomory fears the United States is now one of them--starting to go downhill. When he and Baumol wrote their book, they figured US trade relations with China and India produced "mutual gain" for both ends. The United States got cheaper goods, China and India got jobs and a start at industrialization. But the rapid improvements in those two nations during the past decade, Gomory thinks, are putting the United States in the bind where their gain becomes our loss.

Essentially, the terms of trade have changed as more and more value-added production has shifted from the United States to its poorer trading partners. America, he explains, becomes increasingly dependent, buying from abroad more and more of what its citizens consume and producing relatively less at home. US incomes stagnate as the high-wage jobs disappear and US exports become a smaller share of the world total.

The persistent offshoring of domestic production is leading to a perverse consequence: The United States finds itself paying more for imports. The production that originally moved offshore to get low-wage labor and cheaper goods is now claiming a larger and larger share of national income, as the growing trade deficits literally subtract from US domestic growth. "All the stuff you were already importing from them becomes more expensive," Gomory explains. "That's why you can start going downhill--because you pay more for what you were previously getting." Put another way, one hour of US work no longer buys as many hours of Chinese work as it once did. China can suppress its domestic wages to keep selling more of its stuff, but that does not alter the fundamental imbalance in productive strength.

Gomory's proposed solution would change two big things (and many lesser ones). First, the US government must intervene unilaterally to cap the nation's swollen trade deficit and force it to shrink until balanced trade is achieved with our trading partners. The mechanics for doing this are allowed under WTO rules, though the emergency action has never been invoked by a wealthy nation, much less the global system's putative leader. Capping US trade deficits would have wrenching consequences at home and abroad but could force other nations to consider reforms in how the trading system now functions. That could include international rights for workers, which Gomory favors.

Second, government must impose national policy direction on the behavior of US multinationals, directly influencing their investment decisions. Gomory thinks this can be done most effectively through the tax code. A reformed corporate income tax would penalize those firms that keep moving high-wage jobs and value-added production offshore while rewarding those that are investing in redeveloping the home country's economy.

US companies are not only free of national supervision but actively encouraged to offshore production by government policy and tax breaks. Other advanced economies have sophisticated national industrial policies, plus political and cultural pressures, that guide and discipline their multinationals, forcing them to adhere more closely to the national interest.

Neither of Gomory's fundamental policy reforms--balancing trade or imposing discipline on US multinationals--can work without the other. Both have to be done more or less at once. If the government taxed US multinational behavior without also capping imports, the firms would just head out the door. "That won't work," Gomory explains, "because you will say to the companies, 'This is how we're going to measure you.' And the corporations will say, 'Oh, no, you're not. I'm going overseas. I'm going to make my product over there and I'll send it back into the United States.' But if you insist on balanced trade, then the amount that's shipped in has to equal the amount that's shipped out by companies. If no companies do that, then nothing can be shipped in either. If you balance trade, you are going to develop internal companies that work the way you want." Public investment in new technologies and industries, I would add, may not achieve much either, if there is no guarantee that the companies will locate their new production in the United States.

Essentially, Gomory proposes to alter the profit incentives of US multinationals. If the government adds rules of behavior and enforces them through the tax code, companies will be compelled to seek profit in a different way--by adhering to the national interest and terms set by the US government. Other nations do this in various ways. Only the United States imagines the national interest doesn't require it.

Your comment reminded me of this, you'll find the phrase "So much for the rising tide that lifts all boats. Clearly it lifts only yachts." near the end, which I've bolded.

From:

A REPORT OF THE INTERNATIONAL FORUM ON GLOBALIZATION

A Critique of Corporate Globalization

(pp.28 - 32, from the 2002 report)

Beneficiaries of Economic Globalization

One might give the benefit of the doubt to the architects of this global experiment. Perhaps they actually believed that the system would produce the kind of rapid growth that would truly benefit the poor and the environment. We have certainly heard them repeat the homily over and over: “A rising tide will lift all boats”. We continue to hear it from the heads of the WTO, the World Bank, and most countries’ leaders, including President George W. Bush. But is it true?

The problems begin with the assumption that hypergrowth can continue forever. How can exponential growth possibly be sustained, given the limits of a finite planet? Where will the resources–the minerals, the wood, the water, the land–come from to feed hyperexpansion without killing the planet and ourselves? The world’s limits are already in view. How many cars and refrigerators can be built and bought? How many roads can cover the land? How many fish can be vacuumed from the sea before species disappear and ecosystems fail? How much pollution can the world survive? What about global warming, toxic dumping, ozone depletion?

There’s another important question: Who actually benefits from this system? It’s not the farmers who are driven from their own lands and made into homeless, jobless refugees in both the South and the North. It’s not the urban dwellers who must deal with masses of displaced people jamming into cities looking for jobs. It’s not the workers caught in downward wage spirals in both the North and the South. It’s not the indigenous peoples facing hordes of corporate invaders seeking the last resources. And it’s surely not nature.

The actual beneficiaries are obvious. They are the exact opposite of those whom the advocates claim. In the United States, for example, during the period of most rapid globalization–the 1990s–the top executives of the largest global companies made salaries and gained options in the many millions of dollars (often hundreds of millions), while real wages of ordinary workers barely rose. Sara Anderson and John Cavanagh of the institute for Policy Studies report that the American CEOs were paid on average 458 times more than production workers in 2000, up from 104 times in 1991. The Economic Policy Institute’s 1991 report by Lawrence Mishel and others says that the median hourly wages are actually down by 10 percent in real terms over the previous twenty-five years. And in the industry that led our recent boom–the computer industry–where some people famously made fortunes, 80 percent of assembly and production workers are temporary workers, earning $8 an hour with no benefits and no unions.

As for lifting the global poor, the U.N. Development Program’s 1991 Human Development Report revealed that the gap between the wealthy and the poor within and among countries of the world is growing steadily larger. It blamed inherent inequities in the global trade system for this situation. Even the U.S. Central Intelligence Agency concurred. In its Global Trends, 2015 report, the CIA maintained that globalization will create “an even wider gap between regional winners and loser than exists today. [Globalization’s] evolution will be rocky, marked by chronic volatility and a widening economic divide...deepening economic stagnation, political instability, and cultural alienation. [It] will foster political, ethnic, ideological, and religious extremism, along with the violence that often accompanies it.” Such is already the degree of wealth concentrated that the world’s 475 billionaires are now worth the combined income of the bottom half of humanity.

The economic clout of global firms is equally staggering. As Sara Anderson and John Cavanagh of the Institute for Policy Studies report, the combined sales of the top two hundred firms grew faster than overall global economic activity between 1983 and 1999, reaching the equivalent of close to 30 percent of world GDP. Yet these firms employ only three-quarters of 1 percent of the global workforce. As they continue to grow larger and more globalized, they continue to replace workers with machines or to buy up competitors and eliminate duplicate jobs. Such economies of scale are intrinsic to the free trade, globalized design, just as environmental pollution is intrinsic to export-oriented trade. Large-scale mergers and consolidations–bigness–produce fewer jobs, not more jobs. Indeed, the ideologies and rules of economic globalization have destroyed the livelihoods of millions of people while eliminating basic public services.

It is true that there are isolated instances where some improvement has been achieved in Third World countries. The Bretton Woods institutions often trumpet these examples. But it is also true that the benefits of this growth have usually been short-lived. Furthermore, nearly all of it goes to the elites in these countries and to the chief executives of the global corporations at the hub of the process.

Let’s look at the so-called poster children of free trade, the Asian Tigers: Taiwan, South Korea, Singapore, and Malaysia. In these countries, improvement has come not by assiduously following the dictates of the Bretton Woods institutions but often by doing the opposite of what they prescribe. Asian countries that have had some brief success in developing their own economies did not cut all their tariffs as demanded by globalizing institutions, permit foreign entry without controls, or eliminate existing support for domestic businesses, local economies, and local agriculture. Instead, those countries first developed the ability to take care of their basic needs internally, rather than totally converting to an export-based production system.

By at first resisting the economic model pushed by Bretton Woods, some countries managed to stay free of the volatility of export markets. But when they finally succumbed to pressure from the IMF and the World Bank, they found their glory days quickly ending.

Indeed, most poor countries have never enjoyed much benefit from globalization. After three decades of strong doses of IMF and World Bank medicine and less than a decade of WTO policies, many have seen that globalization is a false promise. The policies are not designed to benefit them but to benefit rich industrial countries and their global corporations. For this reason, many of the poor nations of the world–notably from the Caribbean and Asia–held firmly together in opposition to the WTO in Seattle in 1999 and only reluctantly agreed to further trade talks in Doha, Qatar, in 2001.

So much for the rising tide that lifts all boats. Clearly it lifts only yachts.

Hundreds of thousands of people are now convinced that it doesn’t need to be this way; there is nothing inevitable about it. Globalization is driven by a set of rules and self-interested institutions that can be changed–if we have a democracy.

At its root, economic globalization is really an experiment, an economic model promoted by people who most benefit from it. As for the charge that we are utopian, obviously the globalizers have got it backwards. To keep arguing as they do–that a system that homogenizes global economic activity and culture to benefit corporations, removes power from communities and puts it into global bureaucracies, marginalizes and makes homeless millions of farmers and workers, and devastates nature can survive for very long–that is utopianism. It’s not going to work. It’s far better that we seek other solutions.

"The problems begin with the assumption that hypergrowth can continue forever. How can exponential growth possibly be sustained, given the limits of a finite planet? Where will the resources–the minerals, the wood, the water, the land–come from to feed hyperexpansion without killing the planet and ourselves? The world’s limits are already in view."

The only limits on an economy are the limits of the human imagination. Real goods are only part of an economy. What of the service sector? I know it sounds all too trite and so 90's, but information is a commodity in the information age.

As for multinationals outsourcing, we need to remember that even in the present mania of private equity buyouts, the shareholders are driving the bus. The quest for higher returns is a very democratic process even if it takes a few steps to get to Dennis Hopper's peers.

One has to remain optimistic if we( American Experiment ) are to remain sovereign. Look at where China was materialistically 20 years ago. If they can adapt,we can adapt. They are behind us and we always be trailing us if we continue to lead. It is time to reinvent the rules of the game. This includes identifying the weaknesses and needs of our competitors and then savagely taking advantage of those needs. Supply them what they most desperately need. And it is not manufactured crap. They are after all humans in a most barbaric and inhumane environment slaving for meager wages which although promised to rise will do no such thing.

Let's stop acting like victims. That is unless we intend to have Al and Jessee lead us.

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