A Liberal Free Trade and Free-Market Philosophy - Essay Example

Critically analyse United s of America's experience of globalisation. Go back to at least 1975 and employ a range of economic theories to analyse the country. Since the Industrial Revolution that helped to develop the economies of the West, first on the back of imperial expansion which colonised the rest of the globe including most of Asia, Africa and Latin America, and later in the form of less than equal trade with countries emerging from the colonial yoke, globalisation has been as inevitable a phenomenon as life and death. The failure of the command economies of the East (Russia and China), now replaced by what appear to be Western liberal capitalistic 'free market' economies, has contributed to the acceleration of globalisation since the 1990s. Most of the institutions (IBRD, IMF, GATT/ITO) that helped project the United States of America as the dominant economic and political force promoting free trade across the world, developed towards the end of the Second World War following the Bretton Woods agreement. At the time, 'USA produced at least half of the world's manufactured goods and held half its reserves' (http://en.wikipedia.org/wiki/Bretton_Woods_sytem ). While the gold standard prevailed, currency exchange rates were more or less fixed, ensuring stability in world trade. Although expounding a liberal free trade and free market philosophy, the USA also is accused of being isolationist. 'America first' is a very powerful slogan. 'The historic insulation of the American economy from the global one stems from the size and physical remoteness of the U.S. market, which relies less on trade than virtually any other in the world. ' even a modest percentage of American GNP constitutes a sizable share of global economic activity. In the early 1950s ' American exports constituted more than a third of industrial exports, yet less than 5 percent of GNP' (http://www.lehigh.edu/'bm05/research/global15.htm ). This kind of hegemony of the US economy began to be eroded in the 1960s and 70s when financial capital in the form of international syndicates of the largest banks of the world undermined the stability of national currencies. There was speculation in currency trading at a time when the currencies of post-war Germany and Japan were becoming stronger vis-a-vis the American dollar. There was also greater manufacturing successes and enhanced export potential evinced by Japan and the EEC as a trading bloc. Since then trans-national or multinational corporations have also complicated capital and currency movements across the world. A cogent reason for the U.S. planners to advance the concept of a liberal, free market international economic system was that, as the then US Secretary of State Cordell Hull (1933 - 1944) argued the perception that the main cause of two world wars of the 20th century were due to economic protectionism. Nazi Germany's exchange controls in the form of bilateral arrangements and the British Empire's Sterling Area, stood in the way of international free flow of capital and foreign investments. The U.S. indulged in the rhetoric that '' free markets (were associated) with material prosperity, stability, justice, democracy, human rights, international peace and more' (Moon, 1998). However, without government intervention vulnerable groups like unskilled labour find themselves outside the benefits accruing to countries in the wake of such liberalisation (vide The Stolper-Samuelson theory). The 'Heckscher-Ohlin trade theory' also predicts that 'inefficient sectors of the economy will suffer losses. ... As American supremacy ' eroded since the 1970s, greater vulnerabilities have produced dislocations in scattered industries, most prominently in textiles, steel and autos'(op. cit.). As a result of this ''vulnerability to trade competitors and its changing pattern of comparative advantage, American policy has become increasingly narrowly self-interested' (op. cit.). Outsourcing or offshoring are terms used to explain the migration of most of American service and technical jobs to other countries with cheap and even more productive labour. 'The global labor force has increased fourfold since the beginning of the 1980s. ' World trade has grown by an average of 7.1 percent yearly since 1980 and therefore has sextupled in less than a generation' (www.globalenvision.org/library/8/1860). The competition for jobs increasingly now occurs on the world stage. Two billion low-wage workers have been added to the international labour pool (Lynch, 2007). According to Alan Blinder, a professor at Princeton University, also a former Federal Reserve Board vice chairman, '...up to 40 million American jobs -- representing twice as many people as are currently working in the US industrial sector today -- could face the threat of outsourcing' During the current US presidential campaign Hillary Clinton (a Democratic presidential candidate) broke with tradition and '... distanced herself from the idea of free trade, a philosophy which has shaped America's worldview since the end of World War II ... Every American president since Harry S. Truman has spent a good deal of his time in office eliminating customs restrictions and barriers to trade' (http://www.spiegel.de/international/world/0,1518,druck-522628,00.html ) . Hillary Clinton voices the concerns of fifty-nine percent of Americans (who) believe free trade costs more jobs than it creates, according to a 2006 poll, as reported by David Lynch (USA Today, 2007). 'Providing more help for workers hurt by trade will be a central focus for Democrats in the new Congress. ' Sen. Max Baucus, D-Mont., chairman of the Senate Finance Committee, has proposed ' "globalization adjustment assistance" that would for the first time provide benefits to service industry workers who lose their jobs because of foreign competition' (op. cit.). Why this sudden turnaround when clearly today's globalization is a product of much trumpeted past US free trade' policies' Professor Paul A. Samuelson of the Massachusetts Institute of Technology (MIT) provides a reason. Given America's current enormous trade and budget deficit '... the consequences of globalization for the United States have been negative for some time now. Compared with Asia's rising economies, the country is now in a "win-lose" situation. Asia, says Samuelson, is gaining economic strength while America is losing its assets' (op. cit.). Another aspect of the progress of globalisation has been the unequal distribution of income in America. Over the last three decades 'the rich have gotten a lot richer, the poor have languished, and the middle class has shrunk. ... The federal minimum wage, in terms of purchasing power, is now at its lowest point in half a century. From 1972 to 2001, the bottom 20 percent of wage and salary earners got only 1.6 percent of the increase in their income over the three decades. The majority got less than 11 percent. But the richest one percent received 18.4 percent of the increased income - vastly more than went to the majority of Americans. ... the real wages for most workers in the USA has barely grown over the last 30 years - about 9 percent - while productivity, or the amount that is produced by an hour of labour, has grown more than 80 percent' (http://www.thepanamanews.com/pn/v_12/issue_18/opinion_09.html ). It is, however, simply not possible to reverse the global division of labour that globalisation entails. Economists use what is called a Gini coefficient to determine economic inequality. A Gini coefficient of 0 stands for perfect equality while 1 means absolute inequality. 'The average Gini coefficient for private households' net income for the Organization for Economic Cooperation and Development (OECD)countries climbed from 0.29 in 1985 to 0.31 in 2000. This means that income inequality has gone up by 6 percent ... the trend continues. Above average inequality can be found in the UK, Italy, Spain, and especially the US, with (the Gini coefficient at) 0.37' (www.globalenvision.org/library/8/1860). Some still argue that the costs of globalisation reflected in increasing social injustice are not the result of globalisation per se. They think that it is 'more to do with evolving technology than with global connectedness' (i.e.Micropchip, IT etc.)(op. cit.). Even considering the exponential increase in the speed of technological change, this appears to be a rather lame argument without much evidence to support it. One of the ways by which the negative effects of increased globalisation such as income inequality can be ameliorated is 'by increasing personal capital formation, especially by broader shares ownership. For example, in Germany, only 7 percent of households own shares compared to more than 25 percent of households in the US' (op.cit.). The following quote is even more sanguine about American share ownership. (T)he interests of multinational capital have seldom been explicitly challenged. Initiatives favourable to capital have also been aided by the breathtaking speed of further class transformation in American society, driven by the decline of manufacturing, the rise of the white-collar service sector and high technology, and, especially the widespread distribution of equity issues through 401-K and mutual funds. The capitalist class has expanded - more than a third of American households now own stock (http://www.lehigh.edu/'bm05/research/global15.htm). This, however, may not be the answer when with advanced knowledge and technology available to more and more countries, and production and trade becoming more international and competitive, financial markets have become so volatile that share ownership has never been more fraught with uncertainty and danger. Reflect on the world's current recessionary tendencies and the near collapse of the international banking system. In the USA globalisation has meant exponential growth of trade in the last four decades. In 1975 the US Import/Export balanced at just below an estimated 200,000, whereas in 2004, while exports were around the 1 million mark, imports had risen to 1,500,000. Exports from the USA lag behind imports in spite of the fact that the US has erected barriers against agricultural and other imports from poorer countries. For example, Europe imposes lower levels of customs duty than USA and Canada, who are 'more protectionist than Europe with regard to textile imports (their rates of duty being 9.4% and 10.8% respectively compared with Europe's 5.7%). (http://www.adieurope.org/Economic-patriotism-and-globalization-comparative-study). American agricultural subsidies are a sore point for advocates of free trade and globalisation. 'According to OXFAM, American cotton producers received more than USD 18 billion in subsidies between 1999 and 2005, representing an 86% rate of subsidisation' (Beaudouin 2008). Research has shown that the rich countries' agricultural subsidies of about $300 billion a year reduce world prices, which consequently undermines developing countries' exports. The subsidies are roughly six times the total amount of aid destined for development. Estimates suggest that full elimination of agricultural protection and production subsidies would increase global trade in agriculture by 17% and would allow around 150 million people to be rescued from poverty. United States subsidies to domestic cotton growers alone will have been about $4 billion in fiscal year 2003, or around three times U.S. foreign aid to all of Africa. The subsidies hurt poor farmers in North and West Africa, for whom cotton is the main cash crop. 'According to research by the International Monetary Fund (IMF), protected textile markets in high-income countries cost developing markets an estimated 27 million jobs. (Elortondo, van Blokland, & White, 2005). The subsidies are not aimed to help the poor. Only three percent of the US population live on farms. It is the larger, highly capitalised, corporate farms that benefit from the subsidies. 'The top 10% received ' 73% of all farm subsidies in 2001, while the share of the bottom 80% was reduced from 16% to 12% (op.cit.). The US has not had it all its own way. For example, Brazil 'filed suit on U.S. cotton subsidies with the World Trade Organization (WTO).' The WTO 'ruled in favour of Brazil saying that the subsidies paid to U.S. cotton growers violate global trade rules' (op. cit.). The European Union's Common Agricultural Policy (CAP) also came in for criticism, and the hope is that eventually the differences will be ironed out in favour of the poorer countries (op. cit.). There is another weapon in the arsenal of industrially advanced countries like the USA in preventing their markets being flooded by cheap imports from the least advanced countries (LACs). These are environmental protection measures. 'Environmental measures are potentially applicable to 88% of products internationally traded. Countries may be tempted to use them in a protectionist way to safeguard local producers. The number of products affected by such measures in Europe ... is one third that of the corresponding figure in the USA or Japan)' (http://www.adieurope.org/Economic-patriotism-and-globalization-comparative-study). In spite of its free trade claims, the US government has made it a policy to support ailing industries within its borders, pace Chapter 11 of the US Bankruptcy Code. Under the provisions of this Code 'loss-making American companies ' can continue trading while restructuring: they can keep all their assets, contest their creditors' demands, delay repaying debt and even unilaterally reduce the volume of their debt. The following have 'benefited' from these provisions. airlines including Continental Airlines, America West, United Airlines (UAL), US Airways, and at the end of 2005, Delta Airlines, (a partner of Air France) and Northwest Airlines, ranked third and fourth among US air carriers, Energy broker Enron (!), The WorldCom telecommunications group (in the biggest bankruptcy in US history), Retail group Kmart, 31 steel companies including most recently National Steel (op. cit.). Two other notable legislative instruments that have come to the aid of USA's struggling companies are the Trade Act of 1974 and the Omnibus Trade and Competitiveness Act of 1988. 'Under these Acts, American industries in competition with cheaper foreign products can relatively easily initiate procedures to have tariffs or quotas imposed at the border or to subsidise domestic production' (op. cit.). Sections 203 and 301 have been invoked to protect domestic businesses from foreign competition. Section 301 was extended by the '1988 Trade Act dubbed "Super 301" because it is designed to target particular countries found to be engaging in "unjustifiable, unreasonable or discriminatory" trading practices. '(such) actions can be squared with the idea of "fair trade" even if their consistency with "free trade" is more dubious' (http://www.lehigh.edu/'bm05/research/global15.htm) . In 2002 the US President imposed 'tariffs ranging from 8% to 30% on steel' and also imposed a steel-import licensing system. .. Europe retaliated by additional duties on imported US products (textiles, fruit and vegetables and shoes, worth a total of USD 2.2 billion). In July 2003 the WTO found that the American additional tariffs were in breach of its rules' (op. cit.). There is another more recent piece of legislation imposing heavy financial burdens on foreign companies with American shareholders. This is the Sarbanes-Oxley Act of 2003. All companies listed on the American Stock Exchange (Wall Street) have to submit accounts to the stock exchange watchdog, the Securities and Exchange Commission (SEC). The accounts have to be signed by the directors who must conduct regular audits. The annual cost to BP amounted to about $1 million that they decided to shed their American shareholders. Foreign insurance companies are required to deposit large sums in a fund to compensate US investors or partners in case the companies fail, again encouraging reinsurance firms to be wary of the American market. The terrorist attack on 11th September 2001, is being used as another argument for American protectionism. It has been used to halt any foreign acquisitions of US firms, especially from countries like China and from the Middle East. For example, in June 2005 the US government prevented the Chinese oil firm CNOOC from acquiring America's 7th largest oil company UNOCAL. There was also the problem of the investment company Dubai Port (DP) World of the United Arab Emirates attempting to acquire control over the seven biggest ports in America. A compromise was arrived at where DPWorld would delegate authority and control to an 'American entity' in the day to day running of the ports (op. cit.). An ongoing problem between Canada and the United States is that of the timber trade. While the U.S. accuses Canada of dumping their timber, Canadians accuse the U.S. of protectionism. Even the North American Fair Trade Agreement (NAFTA) of which both Canada and USA along with Mexico are members has been powerless to mediate between the two countries to forge a conclusive settlement. Returning to the overall theme of globalization, it appears from the above examples cited that the USA appears no longer to be the unwavering proponent of free-trade expansionism. This is especially so when the U.S. feels its interests are at stake. The following quote expresses real concerns with arguments against unrestricted and unregulated globalization. Over the longer term, however, the unencumbered capital mobility of contemporary globalization affords an exit option to capital owners that gives them unprecedented bargaining leverage over nation-bound actors. Workers face declines in wages, benefits, and working conditions and suffer the costs of increasing insecurity. Meanwhile, the difficulty of taxing footloose capital severely undermines the capacity of governments to provide social insurance or, indeed, to raise the revenues required to address any of the problems exacerbated by globalization. Further, regulation to advance environmental or other social goals becomes increasingly infeasible. (http://www.lehigh.edu/'bm05/research/global15.htm ). Where does the USA stand in the globalization stakes today' Historically the USA reaped the greatest benefits when the dollar was the world's reserve currency. It is overvalued today by about 15 - 25 %, according to some analysts. This has resulted in a massive trade deficit, year on year, about 4.5% of GDP, attracting a greater than sustainable share of the world's exports with a reciprocal incapacity of US companies to export. Foreign countries no longer resort to buying US Treasury bills as currency reserves. The dollar is now shunned by most countries which instead are banking on the euro which is fast becoming the world's reserve currency. The Federal Reserve has fixed the interest rate as low as 1.25% (the lowest in 40 years) with American savings at a minimum. The much vaunted US productivity is seen as a mirage. US capital productivity is fast becoming negative with sub-prime lending and trillions wasted on the 1990s dot-com bubble that burst. (http://www.hazelanderson.com/editorials/globalization'ssurprises12092.html ) In the end it all comes down to a balancing of the needs of the individual global citizen and his/her welfare as against the mega corporations with no other objective than to maximise profits. Agencies like the International Forum of globalization believe that organizations like the IMF and the WTO are no longer the appropriate institutions that can lay down the rules of commerce of the free market to create conditions for economic growth among the nations of the world. '"The idea of globalization and continued societal embrace of openness seems to be in a very deep sense of crisis" says Rawi Abdelal, a professor at Harvard Business School' (Lynch, David, J., USA Today, 2007). *** References Beaudouin, C. 'Economic Patriotism and Globalization: comparative study EU - USA - China'. Alliance des D'mocrates Independantes en Europe 02 Avril 2008 Elotrondo, L., van Blokland, P.J. & While, J.K. 'Globalization, Agriculture and the USA' University of Florida, IFAS. December 2005 Lynch, David J. 'Enthusiasm for globalization ebbs'. USA Today, 1/15 2007 Moon, B.E. 'The United States and Globalization' in Political Economy and the Changing Global Order (eds.) Stubbs, R. & Underhill G.R.D., Oxford University Press, 1998 < http://en.wikipedia.org/wiki/Bretton_Woods_system > 03/04/2008 < http://www.lehigh.edu/'bm05/research/global15.htm > 02/04/2008 < www.globalenvision.org/library/8/1860 > 31/03/2008 < http://spiegel.de/international/world/0,1518,druck-522628,00.html > 31/03/2008 < http://www.thepanamanews.com/pn/v_12/issue_18/opinion_09.html > 31/03/2008 < http://www.adieurope.org/Economic-patriotism-and-globalization-comparative-study > 02/04/2008 < http://www.hazelanderson.com/editorials/globalization'sSurprises12-02.html > 31/03/2008 Read More