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Globalization on Steroids

by Gene Rotberg

The restart of trade negotiations between the United States and China will likely prompt a new cycle of tariffs and sanctions against China, particularly in the context of the recent agreement between China and Iran. A word of caution. Negotiations are not likely to produce favorable outcomes if the United States enters negotiations as if it has all the leverage and can push China around. Beating up on China won’t work. A hardline approach and the threat of further tariffs will not result in the return of manufacturing or other jobs and services to the United States and will not encourage China to be helpful in our relationships with Iran – or North Korea.

For starters, the new administration will confront substantial conflicts among constituencies in the United States. Virtually all U.S. government departments will argue their positions, often in conflict with each other. Trade associations, consumer protection agencies, labor unions, agricultural lobbies, and environmental and human rights organizations will also seek to protect the interests of their constituencies or score political points.

Further, although we are distraught over lost jobs and the growing geo-political influence of China throughout the world, we enjoy our smart phones that are assembled in China from components made in scores of plants throughout the world. We are delighted the 65-inch color TVs cost only $500 and we can import  goods and services worth tens of billions of dollars at costs way below what they would have been if they were made in the United States. China knows quite well that we are conflicted. It is not an easy job to negotiate against one’s own best interests.

China will not be reluctant to lay its cards on the table: We will sell the dollars we receive in payment for our exports and not buy U.S. government bonds to finance your deficit but invest instead in Euro or Yen. Don’t expect our help with Iran or North Korea. Kiss goodbye your export of agriculture to us, and, by the way, we are indifferent whether we purchase Caterpillar or Komatsu tractors, or the Airbus or Boeing 777 – whichever builds its plant in Shenzhen. We intend to expand our footprint in the Caribbean just like we did in Africa. If you have any doubts, our recent agreement with Iran makes the point.

That’s leverage and is always on the negotiating table, whether publicly articulated or not. It is not 1845 - or 1945.

Basically, the reality is virtually every country in the world has some comparative advantage and can make something better or cheaper than other countries. Nothing we can say to China will change the reality that a command economy with 800 million workers can assemble smart phones for less than $10. Nothing China says or does can change the fact that India can assemble cell phones for half that cost. The reality is that in five years perhaps Indonesia or Ethiopia may be able to assemble them for even less. We want those products. If truth be told, much of our standard of living is driven by an insatiable desire to consume, based in major part on the backs of very poor people living and working in deplorable conditions, so that we might enjoy goods and services at low cost.

Comparative advantage trumps any trade agreement: low labor costs, few environmental controls, weak (or strong) property rights enforcement, a reliable (or corrupt) legal system, government subsidies, the weather, tax policy, monopolies, poor populations, new and efficient production facilities, engineering expertise, plentiful raw materials, cheap energy, authoritarian rule that can order where tens of millions can live and work and, yes, theft of intellectual property. It is Ricardo on steroids.

Another reality: There is no such thing as a level playing field, a political cliché that has no basis in reality as each country will use its comparative advantage to enhance its own interest. Participants in trade negotiations may proudly announce they are the “winners” because of skillful negotiation or the imposition of tariffs. Nonsense. The agreements simply reflect the comparative advantage, or lack of it, of participating countries. No matter the hoopla and rhetoric, the agreements mostly codify what the participating countries have been importing or exporting or had planned to do all along. The bottom line is no industrialized country or company is prepared to lower its wage rate to $3 an hour, and China, Vietnam and Bangladesh are not likely to raise their minimum wage to $15 an hour.

There is another reality. The negotiators know that tariffs are an ineffective bargaining chip. Tariffs boomerang and adversely affect the country imposing the tariff.  It did not take long for importers of steel in the United States to seek and receive exemptions from tariffs which, although designed to raise the costs to exporters, were in effect a tax borne by the shareholders of U.S. companies, or passed on to U.S. consumers in the form of higher prices. Chinese companies did not pay the tariff. U.S. companies did. And, of course, the U.S. Treasury had to compensate farmers for the loss of their agriculture exports to China when China responded to the imposition of tariffs on their exports. Tariffs are like the little silver balls careening around pinball machines. Erratic and unpredictable. Physicists call it chaos theory.

The negotiators representing the United States face unrelenting competition from countries that have become independent only in the last 70 years. Many have suffered civil war, starvation, cultural revolution and can withstand a great deal of privation and economic pressures. These countries have benefitted from tremendous improvements in their living standards, driven by their exports, over a very short period of time and will not give up their prospect for further advances. Moreover, the participants in globalization – debtors, creditors, consumers, innovators, investors – are vocal constituents in virtually every country of the world. After all, the companies in China that produce or assemble the finished products are owned in significant part by U.S. and other countries’ companies that look to benefit from their overseas investment. These constituents are the not so “invisible hands” at the negotiating table.

As hard as it may be to accept, the U.S. manufacturing base and the jobs created were driven by the great inventions of the late 19th and early 20th centuries: harnessing electricity, the airplane, the combustion engine, the radio, the telegraph, safe water, waste water facilities, tv, the camera, the light bulb, the telephone, the phonograph, air-conditioning, the x-ray, pasteurization – all unrepeatable as is the explosion of jobs that arose from them. These are once in millennia events that created the underpinning of growth and jobs. (See the magnificent work of Robert J. Gordon, The Rise and Fall of American Growth: The U.S Standard of Living since the Civil War.) It is also difficult to accept that neither trade negotiations nor global competition caused the demise of rust belt industries. They were driven out of business primarily by productivity gains, efficiency and modern technology. Trade agreements do not cause a loss of jobs. They simply mirror reality.

What to do? First, remove the counterproductive tariffs imposed by the previous administration. Even unilaterally. Let market forces have their way. Perhaps Joe Biden has listened to Bob Dylan, “the answer, my friend, is blowin’ in the wind, the answer is blowin’ in the wind.” Infrastructure: renewable energy projects, research to mitigate the effects of climate change, new schools, highways, hospitals, dams, high-speed transit, airports, new dock facilities, train stations, railroads, soil and dune erosion projects, low-cost housing, reservoirs, concert and performance halls, sports stadiums, museums, aesthetic improvements, parks, river and bay clean-up, food/grain storage facilities, irrigation systems. That’s a lot of not easily exportable jobs across the entire economic spectrum, financed not insubstantially by the dollars paid to China (which are then invested in U.S. government bonds) in payment for their low-cost exports to us. That is globalization. Irreversible.

Gene Rotberg was formerly Vice President and Treasurer of the World Bank

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