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Remarks to the International Business Forum of the World Trade Club Detroit/Windsor
Date: 10/18/2007
Written By: William A. Reinsch, President, National Foreign Trade Council

 

I’d like to begin with some context on where the global economy is heading and then try to relate that to the challenges you face in Michigan.

The factors that will define the global economic system in the future are the rapid and widespread dissemination of technology, the growth of global supply chains and global capital markets.  Taken together they will mean the narrowing of the gap between the U.S. and others, primarily Asia.

Advances in technology drive globalization. Technology speeds everything up.  Today, communication is virtually instantaneous.  Technology milestones pass by more and more quickly.  Moore’s Law, for example, tells us in essence that semiconductor performance capabilities double every 18 months.  Software is out of date in half that time. 

Second, globalization and advances in technology bring everything -- commerce, people, conflict -- closer together.  In trade, I illustrate this by pointing out that more than half the cut flowers sold in this country every day are imported from overseas, which would have been unthinkable even 30 years ago.  There’s a company in North Carolina that catches flounder off the Atlantic Coast and sells it fresh every day ‑‑ in Tokyo.  There are banks in Manhattan raising capital in London and investing it there because they have concerns about American capital markets.

Third, technology is a great leveler.  As it speeds production and shrinks space, the opportunity for more people – good guys and bad guys -- to operate globally and acquire new technologies grows rapidly.  That makes the world a more dangerous place because the same globalization that is bringing the world together for economic growth and prosperity is also making dangerous technologies more accessible.  If everything is made everywhere, how do we control it?   

Fourth, just as the growth of commerce in the last century brought about the decline of states’ rights versus federal authority, globalization will bring about a decline in nations’ rights and a growth of supranational and transnational entities and transnational problems – environment, health pandemics, financial crises – that will demand multilateral institutional structures to deal with them.  Ironically, as countries become less important, we’re likely to see more of them.

Fifth, technology is enabling new “bottom-up” pressures.  Grassroots advocates have tools and organizing capabilities that dwarf the capacity of 20-30 years ago. Call them hypermobilized, hyperempowered agitators.  They influence policy in ways that are often unexpected – and for which we are often unprepared.  For example, pressure on Darfur that has led to global divestment campaigns, to World Bank policies to doing something about global warming.  If anything ever brings democracy to China it will be the real-time mass communication abilities enabled by cell phones and the internet.

Sixth, post-Cold War, we are still transitioning to a new era, which in economic terms will be “non-polar.”  Some states may be preeminent by virtue of size and military strength, but their influence over others will be increasingly limited.  The gap between the US and everyone else will continue to narrow, not because we are declining, but because others are catching up.  That means that the United States, which for years has been the linchpin of the global economic system for strategic as well as economic reasons, will be less able or willing to make sacrifices for the good of the system because our domestic politics will not permit it.  You certainly see that in today’s trade policy debate.

Looking forward

We can’t turn back the clock.  [Well, we can, but when that happened – end of the Roman Empire, World War I, it has not been an improvement.]  The world is becoming flatter, faster, and closer together.   The winners will be those who run faster.  If we want to maintain the capability gap between ourselves and others, outpacing their development is essential.  Holding them back no longer works very well.

The global supply chain will expand; trade and cross-border investment will continue to grow even if we never sign another trade agreement.  The trend of liberalization over time is clear.  Anyone who looks at the data can see that countries that are globally engaged grow and countries that are not, stagnate.    Continued liberalization will help the new drivers of global growth, particularly China and India, and bring both benefits and challenges to us. 

 

In the short run, the Doha Round is on life support.  Talks will go on because no one wants the responsibility of declaring it brain dead, but a conclusion prior to our next Presidential election is unlikely.  Likewise, don’t look for new bilateral free trade agreements.  The Administration’s authority has expired, and it has its hands full with the ones backed up awaiting Congressional action.  In that regard, I’m optimistic about the first three – Peru, Panama, and Colombia – and uncertain about Korea. 

 

That is because the first three don’t have a lot to do with trade.  Peru and Colombia are about Venezuela, and Panama is about the canal.  All are critical pieces of our Latin American foreign policy, and all will ultimately be approved for that reason. 

 

Ironically, the one most in trouble, Korea, is the one most about trade.  Its implementation would make a significant difference – about $10 billion in increased exports and increased GDP according to the International Trade Commission – as well as significantly improved market access in areas like financial services – but it has also engendered serious opposition, primarily on beef and autos, which have the good fortune of having able representatives in Congress.  Frankly, if Max Baucus represented Massachusetts and Sandy Levin Orlando, this agreement would have an easier ride. 

 

It will take through next year to work all these out.  In the meantime, the trade debate will become part of the Presidential campaign.  That poses political dilemmas for both parties.  The Republicans will have to decide how pure free traders they want to be in the face of public opinion polls showing growing skepticism about that in their own party.  The Democrats, as is obvious, have long been divided on trade and wrestle with a debate driven by labor, which is declining in numbers but remains strong in money and organizational support.  They must contend with the reality that a Democratic President will seek new trade negotiating authority – all Presidents do – and so must be careful not to shut that door too tightly next year lest they have to make an embarrassing 180 degree turn in 2009.

 

Having spent many years trying to make trade an issue in Presidential campaigns, my experience is that it can’t be done.  Unemployment, jobs moving offshore, declining manufacturing, a crisis in competitiveness, can be campaign issues, and some candidates may blame them on trade, but the solutions always lie elsewhere, which is my main point today.

 

Let’s begin with the bigger picture.  The key economic dilemma in the future will be dealing with globalization as a force for both stability and instability as it simultaneously pushes countries to conform to market principles and to Western norms of rule of law yet at the same time rides roughshod over deeply ingrained cultural values, exacerbates growing problems of income inequality, exploitation of workers, women, and children, and contributes to environmental degradation and resource depletion.

 

These are not really trade problems, but they end up being treated that way for two reasons.  First, it’s always easier to blame the foreigners than yourself for your problems.  Second, the WTO is the only multilateral organization that has an effective dispute resolution mechanism, so nations have an incentive to define their problems as trade grievances, so they can take them there.  [post hoc ergo propter hoc fallacy.]

 

Negotiating better rules to deal with these problems, though, is beyond the WTO’s capacity.  Don’t look for its death – old organizations, like soldiers, never die – but look instead for growing interest in a “dual-speed” system, where countries prepared to take more globalization risks in the interest of more rapid growth will get together and liberalize faster on their own terms.  Others will be left behind in the expectation that when they see their neighbors growing faster, they’ll climb aboard the train. 

 

Even so, there are constraints that all countries will face:

 

1)      Growing demand for resources, particularly energy, will lead to sustained price increases and periodic shortages, which in turn could slow growth, contribute to price pressures in the economy, and become the source of future conflicts.

 

2)      Continued sparring over environmental degradation.  The rich countries show signs of getting religion on the subject; many of the poor ones will continue to view it as a plot to hold back their industrial growth.  All of us continue to cling to the fantasy that we can clean up the environment and solve global warming without compromising economic growth or significantly changing our lifestyles.  Learning to live with limits promises to be one of the important but painful lessons of the 21st century.

 

3)      Global capital markets will grow in size and volatility.  When money moves around the world at the click of a mouse, financial panics in one country will spread quickly, and current institutions are ill-equipped to prevent them.  As a result, more than ever before the Golden Rule will apply – he who has the gold makes the rules. On the plus side, Western financial institutions will focus on rule of law, transparency, and anti-corruption, all essential elements of a global trading system.  On the minus side, the rules will do little for income inequality and the other social issues I mentioned. 

 

As you all know, the United States is not immune from these problems.   

 

·        We should face our increasingly precarious global financial position.  We are deeply in debt to the Chinese, which increases their potential leverage over us, even though they could not exercise it without taking an enormous financial hit. For all of our economic might, I doubt that the United States can ignore Tom Freidman’s “Golden Straightjacket” forever, and there is always the possibility that markets will decide one day that a declining dollar, massive debts and deficits, and low returns on T-bills are reason enough to flee the U.S. economy.  The issue will be hard landing or soft landing, and the longer we do nothing, the more likely it will be the former.

 

·        U.S. manufacturing will continue to lose jobs while improving productivity.  Manufacturing jobs have declined from 35% of our economy in 1950 to less than 13% today, while output has more than doubled in the past 25 years alone.  There are many reasons for the job loss, the largest probably technology.

 

·        We will increasingly have to deal with the psychological and economic consequences of lost jobs, devastated communities and growing income inequality. The gap between the top and bottom in our society is getting worse.  The Wall Street Journal  reported last Friday (October 12) that the richest Americans’ share of national income hit record levels.  The top 1% of Americans made 21.2% of all income in 2005, up from 19% in 2004, highest since the 1920s.  The bottom 50% made 12.8%, down from 13.4%.  In 1980, people with college degrees made on average 30% more than those who graduated from high school.  Today it’s 70%.  The disparity for those with advanced degrees has widened during the same period from 50% to over 100%.  Obviously, that means education is critical to success in the 21st century economy, but it also means that it is more important than ever to help those who are being left farther and farther behind.

 

That leads me to the American competitiveness tripod – the three things we have to do to address these challenges.

1) Fix the wounded.

Trade accelerates change.  While it produces more jobs and growth, the new jobs trade creates are rarely taken by the same people who have lost theirs as a result of trade.  Government policies should address the needs of two groups:

  • Those who have lost their jobs and have limited opportunities for reemployment because their relevant skills are limited and/or their communities provide few opportunities.

 

  • The next generation of workers – our children – who will confront a working environment that will require more sophisticated skills and more agility and flexibility than any preceding generation has confronted. This requires us to take a hard look at our education system.

 

2) Create incentives to stay here.

 

The reasons companies move offshore are largely economic.  The creation of a more business-friendly climate through tax incentives here in the Untied States could alter the calculations companies make and lead to decisions to maintain facilities here.

3) Run faster.

America’s strength has always been innovation – our originality coupled with our ability to run faster and stay ahead of our competition.  Many of the innovations that have made America the world’s technology leader began with government support, often coming from the Department of Defense.  We need policies that encourage innovation, including expanded government support for R&D that will create new, job-providing industries in biotechnology, nanotechnology, and other sectors we have not even contemplated.  

 

Michigan should take the tripod to heart, but it should also look at North Carolina.  Since 1996 it has lost 32% of its manufacturing jobs – more than 250,000 – most of them in the past six years.  North Carolina leads the country in trade-related layoffs.  Last year, nearly one-third of the workers eligible for trade adjustment assistance benefits nationally were in North Carolina.  At the same time, the state has actually added more jobs than it lost, but most of them are in the service sector and pay lower wages. 

 

But the state has reacted.  It has developed a rapid response team that addresses major economic dislocations by quickly providing temporary replacement wages, help in getting health insurance, as well as education and retraining, and setting up a simplified clearinghouse of job information that pulls together resources from multiple state agencies and programs.  In the most famous case, the Pillowtex bankruptcy that in one blow laid off 4800 workers, three years later 60% of them had found new jobs in North Carolina, one-third of them in manufacturing.  About half of the total went back to school to get high school diplomas or the equivalent, associate degrees in community college, or occupational training.  This is not a perfect outcome, but it does suggest that smart state policies and quick, coordinated action, can make a difference in people’s lives.

 

In addition, while the unemployment rate is only a bit above the national average and it has numerous pockets of disaster, North Carolina also has four of the nation’s best job markets.  Thanks to Research Triangle Park, which includes the area around Duke, UNC, and NC State, and other initiatives, North Carolina ranks second only to California as a place where corporations are considering new facilities.  States that have first class high education institutions – and Michigan does – have a huge advantage in their ability to attract smart people to the state, and intelligent government policies can help keep them there.

 

Make no mistake, states like yours face serious challenges, and even the smartest policies provide only partial relief, but they also provide hope and confidence of better days ahead.  The good news of the tripod is that doing something about these problems is under our control, not anyone else’s.  States and the federal government can choose the right tax, trade and education policies that will keep the United States a good place to live and work.  We can choose to improve our educational system and can create a 21st Century workforce.  We can choose to address the massive imbalances in our trade and current accounts.

 

The one thing we know for sure is that the rest of the world, particularly China and India, will continue to run faster, so it falls to us to pick up the pace if we want to retain our global position.