The Next Leg of Globalism

 

In 1993, there was a great debate carried live on national TV between then-Vice President Al Gore and Dallas entrepreneur Ross Perot. The issue was the pros and cons of going global — that is, whether the U.S. should allow foreign-made goods to be sold in the U.S. without tariffs or other barriers if, in turn, barriers were eliminated for U.S.-made goods. And if you can believe it, the decision that required landmark legislation was rendered thanks to a public opinion poll that provided guidance to the politicians.

Even more unusual by today’s political environment, the case for opening trade was presented by the Democrat, Al Gore. His argument was that the elimination of trade barriers would, on balance, be to the U.S.’s advantage because it would unshackle its producers so they could export and outcompete foreign producers (tires made in Tennessee and shipped to Mexico was his example).

Equally unusual in terms of today’s political alignment was the right-leaning Perot (as the Donald Trump of his time) arguing against globalism. His position was that the lower wages abroad would result in a “giant sucking sound” of jobs lost to lower-wage countries.

Well two decades later, there is no doubt who got it right.

Now in 2015, two decades removed from the debate and probably three decades from the general loosening of trade barriers in one form or another, we find ourselves in a world in which the old dichotomy of developed countries vs. less-developed countries is no longer applicable. Those less-developed countries morphed have now emerged, and they have undercut developed nations in the process.

Yes, globalism did open foreign markets to U.S.-made goods and created jobs, but on balance, the “giant sucking sound” was the demand being sucked out of U.S. labor markets.

If the Democrats look at this as a victory, it’s because it created a lot of future Democratic voters who wanted to respond to the sapping of jobs, wages, and income. Simply put, globalism has undercut the real median household income, which is now lower than it was in 1990s, and created the Bernie Sanders Democrats we hear from today.

So it’s been a rough adjustment, not just for the U.S. but also for the other countries that called themselves “developed.” This included Europe and Japan and a few others that had relatively higher wages at the time.

Now in 2015, two decades removed from the debate and probably three decades from the general loosening of trade barriers in one form or another, we find ourselves in a world in which the old dichotomy of developed countries vs. less-developed countries is no longer applicable. Those less-developed countries morphed have now emerged, and they have undercut developed nations in the process.

This a watershed moment in time when a post-Communist country like China has virtually run the table on developed world manufacturing to shift to their economy.

It has been a process of meeting in the middle with most countries now, more or less, equally developed. China has risen from nowhere to be second to the U.S. in GDP and in number of millionaires. This is the logical conclusion of the opening of trade in a two-wage-rate world.

But in the race to economic development, China’s economy was driven by a roughly 50 percent share of GDP spending in the form of plant and equipment, which has now created an oversupply of manufacturing capacity.

And the same applies to commodity producers, whether from emerging markets, Canada, or Australia. During the last decades, their capacity to meet manufacturing and infrastructure demands grew dramatically, but now they find themselves in a state of oversupply while demand moderates.

Thus, we are in a Kondratieff world in which the long cycle of building generated excess supply — in this case, manufacturing and commodity capability. What follows are falling prices and slack future demand, causing plants to close and new ghost towns to pop up. And I’m not describing Muncie, Indiana, or the U.S. Rust Belt but rather Chengdu, China when it recently closed its steel plant.

Globalism has reached its logical conclusion: Over-supply and cheaper goods, but at least it’s an end to the leakage of U.S. manufacturing abroad. It’s been a 30-year uphill battle for the developed world.

At this stage, it takes down the financing of the manufacturing and commodity expansion and all those who financed it. It takes down demand for new plant and equipment substantially, and it takes down the governments’ tax revenues and country credit ratings for those who formerly succeeded.

And there is a strong currency component to this as well: U.S. dollars borrowed during the expansion are being repaid while dollar revenues earned from the export of manufactured goods and commodities are slack.

All in all, this is the dynamic that played out in 1997, known then as the Asian contagion. However in this go-round, the U.S. is not in a tech boom as it was then, so keeping up growth in the developed world will be more difficult.

This leaves the old-time developed world still floundering with continued over-reliance on QEs that don’t do much to stimulate the economy, nor do they produce inflation (no matter how hard their central banks try). But all in all, from here on out at least, the China leakage is over, and there will be benefits from expending a lower proportion of income for the same imported products.

Disclaimer

The views expressed are those of the author and not necessarily The University of Texas at Austin.
 

About The Author

Lew Spellman

Professor, Department of Finance, McCombs School of Business, The University of Texas at Austin

Lewis Spellman received his BBA and MBA from the University of Michigan and his MA and Ph.D. from Stanford University. His research interests include...

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