The Establishment Rethinks: The church of global free trade

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The Establishment Rethinks: The church of global free trade

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The Nation - Apr 30, 2007 issue

http://www.thenation.com/docprint.mhtml?i=20070430&s=greider

The Establishment Rethinks Globalization

by WILLIAM GREIDER

The church of global free trade, which rules American politics with

infallible pretensions, may have finally met its Martin Luther. An

unlikely dissenter has come forward with a revised understanding of

globalization that argues for thorough reformation. This man knows the

global trading system from the inside because he is a respected veteran

of multinational business. His ideas contain an explosive message: that

what established authorities teach Americans about global trade is

simply wrong--disastrously wrong for the United States.

Martin Luther was a rebellious priest challenging the dictates of a

corrupt church hierarchy. Ralph Gomory, on the other hand, is a

gentle-spoken technologist, trained as a mathematician and largely

apolitical. He does not set out to overthrow the establishment but to

correct its deeper fallacies. For many years Gomory was a senior vice

president at IBM. He helped manage IBM's expanding global presence as

jobs and high-tech production were being dispersed around the world.

The experience still haunts him. He decided, in retirement, that he

would dig deeper into the contradictions. Now president of the Alfred

P. Sloan Foundation, he knew something was missing in the "pure trade

theory" taught by economists. If free trade is a win-win proposition,

Gomory asked himself, then why did America keep losing?

The explanations he has developed sound like pure heresy to devout free

traders. But oddly enough, Gomory's analysis is a good fit with what

many ordinary workers and uncredentialed critics (myself included) have

been arguing for some years. An important difference is that Gomory's

critique is thoroughly grounded in the orthodox terms and logic of

conventional economics. That makes it much harder to dismiss. Given his

career at IBM, nobody is going to call Ralph Gomory a "protectionist."

He did not nail his "theses" to the door of the Harvard economics

department. Instead, he wrote a slender book--Global Trade and

Conflicting National Interests--in collaboration with respected

economist William Baumol, former president of the American Economic

Association. Published seven years ago, the book languished in academic

obscurity and until recently was ignored by Washington policy circles.

I asked Gomory if his former colleagues from the corporate world

quarrel with his provocative message. "Most of them have never heard

it," he said. "It's a pretty new message." He has discussed his reform

ideas with some CEOs, "who said, Well, maybe we could do that. Others

couldn't have disagreed more strongly."

Now Gomory is attempting to re-educate the politicians in Congress. He

has gained greater visibility lately because he has been joined by a

group of similarly concerned corporate executives called the Horizon

Project. Its leader, Leo Hindery, former CEO of the largest US cable

company and a player in Democratic politics, shares Gomory's foreboding

about the destructive impact of globalization on American prosperity.

Huge losses are ahead--10 million jobs or more--and Hindery fears time

is running out on reform.

"We want to be a counter to the Hamilton Project," Hindery explains.

"They have a sense of stasis that is more benign than I have. I don't

think this is all going to work out." The Hamilton policy group was

launched last year by former Treasury Secretary Robert Rubin to make

sure the laissez-faire trade doctrine known as Rubinomics continues to

dominate the Democratic Party. "We're never going to have the status of

Bob Rubin," Hindery concedes. "But we're not chopped liver either. We

have respectable business careers. You can't tell Ralph Gomory that he

is 'smoke and mirrors,' because he wrote the book."

Gomory's critique has great political potential because it provides

what the opponents of corporate-led globalization have generally

lacked: a comprehensive intellectual platform for arguing that the US

approach to globalization must be transformed to defend the national

interest. Still, it will take politicians of courage to embrace his

ideas and act on them. Gomory's political solutions are as heretical as

his economic analysis.

At IBM back in the 1980s, Gomory watched in awe as Japan and other

Asian nations captured high-tech industrial sectors in which US

companies held commanding advantage. IBM invented the disk drive, then

dropped out of the disk-drive business, unable to compete profitably.

Gomory marveled at Singapore, a tiny city-state, as it lured American

manufacturers with low-wage labor, capital subsidies and tax breaks.

The US companies turned Singapore into a global center for

semiconductor production.

"It was an unforgettable transformation," Gomory remembers. "And it was

pretty frightening.

"The offer that many Asian countries will give to American companies is

essentially this: 'Come over here and enhance our GDP. If you are here

our people will be building disk drives, for example, instead of

something less productive. In return, we'll help you with the

investment, with taxes, maybe even with wages. We'll make sure you make

a profit.' This works for both sides: the American company gets

profits, the host country gets GDP. However, there is another effect

beyond the benefits for those two parties--high-value-added jobs leave

the U.S."

China and India, he observes, are now doing this on a large scale.

Microsoft and Google opened rival research centers in Beijing. Intel

announced a new, $2.5 billion semiconductor plant that will make it one

of China's largest foreign investors. China's industrial transformation

is no longer about making shirts and shoes, as some free-trade

cheerleaders still seem to believe. It is about capturing the most

advanced processes and products.

The multinationals' overseas deployment of capital and technology,

Gomory explains, is the core of how some very poor developing nations

are able to ratchet up their technological prowess, take over advanced

industrial sectors and rapidly expand their share in global trade--all

with the help of US companies and finance, as they roam the world in

search of better returns.

The Gomory-Baumol book describes this as "a divergence of interests"

between multinational firms and their home country. "This overseas

investment decision may then prove to be very good for that

multinational firm," they write. "But there remains the question: Is

the decision good for its own country?" In many cases, yes. If the firm

is locating low-skilled industrial production in a very poor country,

Americans get cheaper goods, trade expands for both sides and the

result is "mutual gain." But the trading partners enter a "zone of

conflict" if the poor nation develops greater capabilities and assumes

the production of more advanced goods. Then, the authors explain, "the

newly developing partner becomes harmful to the more industrialized

country." The firm's self-interested success "can constitute an actual

loss of national income for the company's home country."

American multinationals, as principal actors in this transfer of

wealth-generating productive capacity, are distinctively free to make

the decisions for themselves without interference from government. They

want profit and future consumer markets. Their home country wants to

maintain a highly productive high-wage economy. Without recognizing it,

the two are pulling in opposite directions--the "divergence of

interests" most US politicians ignore, evidently believing church

doctrine over visible reality.

The Gomory-Baumol book explains the dynamics with charts and equations

for economists to study. For the rest of us, it is easier to follow

Gomory's personal explanation of changing fortunes among trading

nations. "What made America much wealthier than the Asian nations in

the first place?" Gomory asks. "We invested alongside our workers. Our

workers dug ditches with backhoes. The workers in underdeveloped

countries dug ditches with shovels. We had great big plants with a few

people in them, which is the same thing. We knew how, through

technology and investment, to make our workers highly productive. It

wasn't that they went to better schools, then or now, and I don't know

how much schooling it takes to run a backhoe.

"The situation today is that the companies have discovered that using

modern technology they can do all that overseas and pay less for labor

and then import product and services back into the United States. So

what we're doing now is competing shovel to shovel. The people in many

countries are being equipped with as good a shovel or backhoe as our

people have. Very often we are helping them make the transition. We're

making it person-to-person competition, which it never was before and

which we cannot win. Because their people will be paid a third, a

quarter of what our people are paid. And it's unreasonable to think you

can educate our people so well that they can produce four times as much

in the United States."

As this shift of productive assets progresses, the downward pressure on

US wages will thus continue and intensify. Free-trade believers insist

US workers can defend themselves by getting better educated, but Gomory

suggests these believers simply don't understand the economics. "Better

education can only help," he explains. "The question is where do you

put your technology and knowledge and investment? These other countries

understand that. They have understood the following divergence: What

countries want and what companies want are different."

The implication is this: If nothing changes in how globalization

currently works, Americans will be increasingly exposed to downward

pressure on incomes and living standards. "Yes," says Gomory. "There

are many ways to look at it, all of which reach the same conclusion."

I ask Gomory what he would say to those who believe this is a just

outcome: Americans become less rich, others in the world become less

poor. That might be "a reasonable personal choice," he agrees. "But

that isn't what the people in this country are being told. No one has

said to us: 'You're probably a little too rich and these other folks

are a little too poor. Why don't we even it out?' Instead, what we

usually hear is: 'It's going to be good for everyone. In the long run

we're going to get richer with globalization.'"

Gomory and Baumol are elaborating a fundamental point sure to make many

economists (and political leaders) sputter and choke. Contrary to

dogma, the losses from trade are not confined to the "localized pain"

felt by displaced workers who lose jobs and wages. In time, the

accumulating loss of a country's productive base can injure the broader

national interest--that is, everyone's economic well-being.

"Our objective," Baumol told a policy conference last summer, "is to

show how outsourcing can indeed reduce the share of benefits of trade,

not only for those who lose their jobs and suffer a direct reduction in

wages but can wind up making the average American worse off than he or

she would have been."

The conventional win-win assurances, they explain, are facile

generalizations that ignore the complexity of the trading system--the

myriad differences in country-to-country relationships and the vast

realm of government actions and policy interventions designed to shape

the outcomes. "Many of our 'dismal science' colleagues speak

unguardedly as though they believe free trade cannot fail, no matter

what," Baumol said.

Some nations, in other words, do indeed become "losers." Gomory fears

the United States is now one of them--starting to go downhill. When he

and Baumol wrote their book, they figured US trade relations with China

and India produced "mutual gain" for both ends. The United States got

cheaper goods, China and India got jobs and a start at

industrialization. But the rapid improvements in those two nations

during the past decade, Gomory thinks, are putting the United States in

the bind where their gain becomes our loss.

Essentially, the terms of trade have changed as more and more

value-added production has shifted from the United States to its poorer

trading partners. America, he explains, becomes increasingly dependent,

buying from abroad more and more of what its citizens consume and

producing relatively less at home. US incomes stagnate as the high-wage

jobs disappear and US exports become a smaller share of the world total.

The persistent offshoring of domestic production is leading to a

perverse consequence: The United States finds itself paying more for

imports. The production that originally moved offshore to get low-wage

labor and cheaper goods is now claiming a larger and larger share of

national income, as the growing trade deficits literally subtract from

US domestic growth. "All the stuff you were already importing from them

becomes more expensive," Gomory explains. "That's why you can start

going downhill--because you pay more for what you were previously

getting." Put another way, one hour of US work no longer buys as many

hours of Chinese work as it once did. China can suppress its domestic

wages to keep selling more of its stuff, but that does not alter the

fundamental imbalance in productive strength.

The US predicament is vividly reflected in the nation's swollen trade

deficits, now running at nearly 7 percent of GDP every year. The

country consumes more than it produces. It borrows heavily from trading

partners, led by China, to pay for its "excess" consumption. This

allows America to dodge--temporarily--a reckoning with its weakened

condition, that is, falling living standards. But that will eventually

occur, when Americans are compelled to reduce their consumption and pay

off the overdue bills. Postponement will deepen the ultimate injury

because, meanwhile, the trading partners will gain greater industrial

capabilities, while US productive strength weakens further.

Americans can choose to blame China or disloyal multinationals, but the

problem is grounded in US politics. The solution can be found only in

Washington. China and other developing nations are pursuing national

self-interest and doing what the system allows. In a way, so are the US

multinationals. "I want to stress it's a system problem," Gomory says.

"The directors are doing the job they're sworn to do. It's a system

that says the companies have to have a sole focus on maximizing profit."

Gomory's proposed solution would change two big things (and many lesser

ones). First, the US government must intervene unilaterally to cap the

nation's swollen trade deficit and force it to shrink until balanced

trade is achieved with our trading partners. The mechanics for doing

this are allowed under WTO rules, though the emergency action has never

been invoked by a wealthy nation, much less the global system's

putative leader. Capping US trade deficits would have wrenching

consequences at home and abroad but could force other nations to

consider reforms in how the trading system now functions. That could

include international rights for workers, which Gomory favors.

Second, government must impose national policy direction on the

behavior of US multinationals, directly influencing their investment

decisions. Gomory thinks this can be done most effectively through the

tax code. A reformed corporate income tax would penalize those firms

that keep moving high-wage jobs and value-added production offshore

while rewarding those that are investing in redeveloping the home

country's economy.

US companies are not only free of national supervision but actively

encouraged to offshore production by government policy and tax breaks.

Other advanced economies have sophisticated national industrial

policies, plus political and cultural pressures, that guide and

discipline their multinationals, forcing them to adhere more closely to

the national interest.

Neither of Gomory's fundamental policy reforms--balancing trade or

imposing discipline on US multinationals--can work without the other.

Both have to be done more or less at once. If the government taxed US

multinational behavior without also capping imports, the firms would

just head out the door. "That won't work," Gomory explains, "because

you will say to the companies, 'This is how we're going to measure

you.' And the corporations will say, 'Oh, no, you're not. I'm going

overseas. I'm going to make my product over there and I'll send it back

into the United States.' But if you insist on balanced trade, then the

amount that's shipped in has to equal the amount that's shipped out by

companies. If no companies do that, then nothing can be shipped in

either. If you balance trade, you are going to develop internal

companies that work the way you want." Public investment in new

technologies and industries, I would add, may not achieve much either,

if there is no guarantee that the companies will locate their new

production in the United States.

Essentially, Gomory proposes to alter the profit incentives of US

multinationals. If the government adds rules of behavior and enforces

them through the tax code, companies will be compelled to seek profit

in a different way--by adhering to the national interest and terms set

by the US government. Other nations do this in various ways. Only the

United States imagines the national interest doesn't require it.

In recent months Gomory and Leo Hindery of the Horizon Project have

been calling on Congress with these big ideas and getting respectful

audiences. The two met with some thirty Democratic senators and

Congressional staffers from both parties. Senator Byron Dorgan, with

co-sponsors like Sherrod Brown, Russell Feingold and even Hillary

Clinton, has introduced several bills to confront the trade deficits.

Gomory's concept for multinational taxation is a tougher sell amid

Washington lobbyists because it goes right to the bottom line of major

US corporations. On the other hand, this proposal has stronger

intuitive appeal for citizens, who reasonably ask why multinationals

are allowed to undercut the national interest when they enjoy all the

benefits of being "American" companies.

Hindery's group is advocating Congressional action to arrange a

"national summit" on trade, where all these questions can be thrashed

out. The political system has never really had an honest, open debate

on globalization in the past thirty years. The dogmatic church of free

trade--"free trade good, no trade bad"--wouldn't allow it. As more

politicians grasp the meaning of Gomory's analysis, they should start

demanding equal time for the heretics.

Gomory's vision of reformation actually goes beyond the trading system

and America's economic deterioration. He wants to re-create an

understanding of the corporation's obligations to society, the social

perspective that flourished for a time in the last century but is now

nearly extinct. The old idea was that the corporation is a trust, not

only for shareholders but for the benefit of the country, the employees

and the people who use the product. "That attitude was the attitude I

grew up on in IBM," Gomory explains. "That's the way we thought--good

for the country, good for the people, good for the shareholders--and I

hope we will get back to it.... We should measure corporations by their

impact on all their constituencies.

"So in my utopian dream, we decide what we want from the corporations

and that's how they make a profit--by doing those things. Failing that,

I would settle for the general realization of this divergence and let

people argue it out."

Some older CEOs and board members at least listen to him

sympathetically. "They have grandchildren," he says. "They wonder too

what's going to happen to our grandchildren. You can't get a vote

around the corporate board table about, Is this good for the

grandchildren? But you can talk to them and they'll worry about it and

say, Well, maybe we need to do something."

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