Alan Tonelson responds to Dean Baker

Dean Baker considerably improves upon America’s loud and often intellectually sloppy—even dishonest—globalization debate. His arguments are important and provocative. At the same time, Baker’s analysis significantly underestimates the actual and potential challenges of integrating third-world workforces into the global economy. As a result, he proposes too little trade restriction. More will be needed to ensure sustainable prosperity for the United States and its trade partners, rich and poor.

Baker is hardly alone in his contention that the current version of globalization did not come from the mountaintop but instead results largely from deliberate policy decisions. Still, the point can’t be emphasized enough, given the still-pervasive insistence that contemporary patterns of international trade, investment, and other forms of commerce stem solely from market forces.

An especially revealing example of politics at work, as Baker stresses, is the set of immigration and licensing policies that expose industrial workers to foreign competition while shielding professionals in fields such as medicine. To this one might add innumerable measures by governments all over the world—with the notable exception of the United States—to interfere with trade and investment flows in order to attract production and jobs. Subsidies, performance standards for inbound foreign investment, and currency manipulation are all sources of blue-collar casualties amid globalization.

Just as valuable is Baker’s argument that recent American trade deals sought by Democrats and Republicans alike have helped “U.S. corporations to manufacture goods in developing countries and return the output to the United States with minimal restrictions.” This arrangement places “U.S. manufacturing workers in direct competition with low-paid workers in the developing world.” Policymakers sold us a different line, claiming that huge, rapidly growing foreign markets from China to Mexico to the Caribbean would be opened to U.S.-based producers and their employees. But the real prize was the immense U.S. market, which was opened to output from factories in countries with super-low wages and little regulation.

Baker also spotlights gaps between textbook economic and trade theory and the globalization policies it unfailingly justifies. This is an intriguing argument, but the problem is not the gap. The issue is that the theory is wrong; it does a poor job describing today’s economic realities.

Consider the Asian financial crisis. Focusing on the macroeconomics of trade flows and balances between high- and low-income countries leaves out a great deal. The standard numbers conceal the degree to which this trade consists of intermediate goods circulating in international production chains and therefore the extent to which these parts and components and materials wind up in final products consumed largely in high-income countries, not in the third world. Those numbers also hide the unnaturally high savings and low consumer spending promoted by East Asian governments and the preeminent role of the United States as the final market for this gigantic system’s output.

Combine these factors with low incomes in most of the region, and it is easy to understand why balanced American trade with East Asian countries was impossible in the 1990s. Baker argues that achieving balance would raise worker incomes in the United States and in low-wage countries. But unless Washington does much more to manage trade relations, that balance will remain out of reach.

The reasons are deeply structural. Because their levels of domestic consumption remain weak even in periods of fast growth, low-income countries in Asia and elsewhere have no choice but to rely on net exports to wealthier foreign customers in order to grow at rates their leaders consider adequate. Achieving these high net exports—that is, trade surpluses—is possible thanks in large part to multinational companies. Their investments have enabled low-income countries to build production capabilities necessary to supply the developed world with advanced goods. But their governments are fundamentally mercantile. When incomes rise in export-driven economies, governments institute policies that foster the purchase of domestic goods, not imports.

Creating a system that benefits American workers and companies that manufacture, employ, and innovate mainly in the United States therefore requires curbing imports from mercantilists—low-income and high, in Asia and elsewhere. This will slow third-world development unless low-income mercantilists can find markets beyond the United States—for example, in Japan and Europe.

This prescription is especially daunting for the most impoverished parts of the world. Current debate over trade stems from stresses created in high-income countries by the absorption into the global economy of the more advanced parts of the developing world: primarily manufacturing hubs in East and Southeast Asia. But sub-Saharan Africa, rural India, and much of the Chinese countryside have barely begun to integrate into the international system. How can these billions and their aspirations for better lives be accommodated if the United States doesn’t continue playing the loser in the mercantilist game?

As suggested above, one way would be to encourage Japan and Western Europe to step up their developing-world imports. They show no interest in such burden sharing. In fairness, though, U.S. leaders have made only feeble, indirect entreaties in this regard. Threatening tariffs may bring these powers to the bargaining table, but even if a deal were reached, there would be major questions about Japanese and European compliance over time.

Another option is to redirect NAFTA toward its original purpose. Today NAFTA operates as a trade zone largely open even to non-signatory countries. But it was supposed to create something more like a trade bloc: open trade within, barriers without. Through higher tariffs on non–North American—or non–Western Hemisphere—imports, a new NAFTA could lure and keep more output and jobs within its covered territory and foster economic progress in our closest neighbors.

There is also a strong case for global tariffs, especially a border-adjustment tax on imports. These measures would offset the discriminatory impact of foreign value-added taxes (VAT), which act as hidden levies on incoming U.S. goods and hidden subsidies for exporters selling to the U.S. market. Virtually all U.S. trade partners employ VATs; some estimates judge that the VAT discrepancy is responsible for up to half of the American merchandise trade deficit. Republican leaders in Congress are considering a proposal to tax imports in a way that reduces the unfair burdens imposed by VATs. The current proposal would also relieve American exporters of domestic tax liabilities.

Alongside a border-adjustment tax and other trade curbs, the United States can institute punitive tariffs against predatory foreign traders. The government could also do a better job of enforcing buy-American regulations that apply to its own procurement. But, as in many cases, this strategy faces the obstacle of insufficient political will. U.S. trade law already enables punitive tariffs that have gone unused, and procurement regulations don’t mean much if they aren’t followed. Moreover, World Trade Organization rules constrain U.S. action. The WTO regime was created at the behest of the mercantile majority of world trade powers and offshoring multinationals to prevent the United States from unilaterally safeguarding its legitimate economic interests. A U.S. exit from the WTO is long overdue.

Washington could also follow China in imposing performance requirements on inbound foreign direct investment. The Chinese and others routinely require corporations operating in their territory to transfer their best technology to domestic partners, use specified levels of local materials in their products, and export more than they import. If these countries have the leverage to extract such concessions, surely America does.

These proposals are not good for everyone, in the United States or the rest of the world. But they would nurture prosperity for the American working class. When it comes to public policy, however, genuine win-wins are rare, while trade-offs among desirable goals are the norm. Trade and globalization reform are not exceptional.