Tuesday, March 27, 2007

Globalization issues

Stanley Weintraub of the Center for Strategic and International Studies has some thought-provoking comments on The U.S. Midterm Elections and Globalization 11/15/06. He writes:

There are losers in this process, such as the workers who are dismissed from their jobs in the United States, and there are winners, such as those who get good-paying jobs in export industries. The workers in countries who get the jobs also benefit. Creating winners and losers from economic change is nothing new; technology changes create winners and losers, and the “progress” inherent in this comes from creating more winners than losers and generating higher productivity-permitting wage increases for the winners. This was true when the cotton harvester replaced manual harvesting, when automobiles took over from horse-and-buggy transportation, and when personal computers became ubiquitous.

The main shortcoming of this process is that many countries, including the United States, do little to compensate the losers. Low-wage and low-skilled workers in the United States were the first to suffer from the combination of job loss and little to no compensation.
This is also a chronic problem whose eventual solution is uncertain:

The United States has accepted the role of debtor to the world—as the ultimate destination of goods and services that has led to the large U.S. deficits on the current account. Many countries, predominantly in Asia, seek to have trade surpluses by keeping their exchange rates undervalued, certainly with respect to the U.S. dollar. The United States has bilateral trade deficits with many countries, but the two largest deficits in 2005 were with China ($201 billion) and Japan ($82 billion).

A trading system under which different countries play by different rules on such a crucial issue as exchange-rate practices does not merit the word “system.” There must be a limit to how much longer the United States can maintain such high trade and current account deficits and how much more foreign debt the United States can tolerate. There could be a soft landing, under which gradual realignment of exchange rates could lead to a large reduction of the U.S. balance-of-payments deficit, but there is no evidence that this is happening. It is unlikely that any one country, China for example, will allow a major appreciation of its exchange rate as long as other countries with perennially undervalued rates do not act simultaneously. What is needed, in my view, is a collective negotiation on exchange rates. Failing this, the United States may suffer a hard landing and this would affect welfare throughout the world.
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