David Warsh: We were warned that things would go wrong

Lancaster, Ohio, devastated by the effects of the new forms of corporate financial manipulation that took off in the 1980s.

SOMERVILLE, Mass.

The appearance of a new edition of America: What Went Wrong?, a 1992 best-seller by Donald Barlett and James Steele, prize-winning reporters for The Philadelphia Inquirer, is an opportunity for those of us still in the news business to reflect. I have no problem with the subtitle they have added, The Crisis Deepens. But what was I thinking when the book was published?

What Went Wrong appeared in the spring of 1992, based on a series that had appeared in the newspaper the autumn before.  Already there was plenty of carnage to fill chapters titled “Dismantling the Middle Class,” “Shifting Taxes – from Them to You” and “The Chaos of Health Care.” H. Ross Perot was warning about the “giant sucking sound” that would accompany passage of the North American Free Trade Act, as American manufacturing jobs were shifted to Mexico.  Reagan had made the idea of NAFTA part of his 1980 presidential campaign. George H.W. Bush had signed the Canadian portion of the measure in 1988. Bill Clinton defeated Bush in November, while Perot received 19 percent of the popular vote.  The overall treaty was ratified by the Democratic-led Senate in December the following year.

The U.S. was deep in the political/cultural mood-swing I have come to think of as “the market turn” – away from the propensity to regulate, towards enthusiasm for the promise of technological and financial innovation, with a predisposition toward globalization and reliance on market processes to sort it all out.

My prior beliefs about America’s foreign trade at the time were informed mainly by a little conference volume from 1986, Strategic Trade Policy and the New International Economics, edited by Paul Krugman, of MIT. Twenty-two years later, Krugman would be recognized with a Nobel Prize in economics for the work he had done in those years about competition among what we had recently begun calling “high-tech” products. “Industrial policy” had been a somewhat daring taste, but now it was coming out of the closet.

The fast growth of Japan in the 1970s and ’80s had been a false alarm; you couldn’t conclude that America has “gone wrong” from Toyota’s success; only that it had received a clarion wake-up call.  By 1990 Japan’s economy was mired in recession. But things were definitely changing.

The first leveraged-buyout book I read was When the Machine Stopped (1989), by Max Holland, about a disastrous Kohlberg, Kravis & Roberts buyout 10 years before of toolmaker Houdaille Corp. I reviewed American Steel: The Metal Men and the Resurrection of the Rust Belt (1991), by Richard Preston, about the new scrap mill industry, then read with special care the brilliant Making Steel: Sparrows Point and the Rise and Ruin of American Industrial Might (1988), by Baltimore Sun reporter Mark Reutter.  By then I was reading books about Wall Street, of which Highly Confident: The Crime and Punishment of Michael Milken (1992), by Jesse Kornbluth, seemed the most damning.

But the eyes-wide-open moment for me arrived with IBM’s decision in 1994 to sell its personal-computer business to China’s Lenovo. I had reviewed Big Blues: The Unmaking of IBM (1993), by Paul Carroll, of The Wall Street Journal.  So I knew something about how Bill Gates had snookered IBM out of the far more profitable than hardware personal-computer software industry.  The question was, could a Chinese company continue to make a success of a high-gloss American manufacturing business?

Ten years later, the answer was in: They had, and then some.  By then, Harvard economist Dani Rodrik had published his heretical Has Globalization Gone Too Far? (1997). The 1999 Seattle protests as China prepared to join the World Trade Organization had made it clear there was trouble on the horizon.  William Overholt had been prescient in The Rise of China: How Economic Reform Is Creating a New Superpower  (1993), but not until James Kynge, of the Financial Times, published China Shakes the World: A Titan’s Rise and Troubled Future (2006) were the dimensions clear.

By the time that David Autor, David Dorn and Gordon Hanson published “The China Shock Learning from Labor Market Adjustments to Large Changes in Trade’’ in the Annual Review of Economics, in 2016, Donald Trump has become the Republican Party’s presidential nominee. “The China Shock” and the work that’s come after may warrant another Nobel Prize 20 years hence; and an avalanche of books about American job losses has roared through in recent years, including the best-selling Hillbilly Elegy: A Memoir of Family and Culture in Crisis (2016), by the many-faceted J.D. Vance. My favorite was Glass House: The 1% Economy and the Shattering of an American Town (2017), by Brian Alexander, about Lancaster, Ohio, his hometown.

It was when I read An Extraordinary Time: The End of the Post-war Boom and the Return of the Ordinary Economy (2015), by economic journalist Marc Levinson, that my sense of the overall narrative crystalized. Those first 30 years after World War II had indeed seen a period of remarkable economic growth in the United States and Europe – les trente glorieuse in France; a “golden age” in Britain; the Wirtschaftswunder in West Germany, il Miracolo in Italy.  But those first 30 years were a phenomenon of the Atlantic World. The next miracles of growth occurred around the Pacific.  It was U.S. power and America’s commitment to principles of free trade that facilitated the growth that brought down communism, and created a vastly richer and more equal world – equal, at least, among nations. Does that make it safer, too?  The world certainly has become dangerously warmer.  There is nothing “ordinary” about the global economy of today.

I didn’t vote for Ross Perot in 1992.  Nor did I believe America had “gone wrong” then, at least not in a general way, though abuses were beginning to pile up. Barlett and Steel were definitely on to something, along with other center-left journalists, in particular Thomas Edsall, then of The Washington Post, and David Cay Johnson, then of The New York Times. Only in 2016 did America’s elected government decisively break bad, at least for a time.  Thanks to Perot and Barlett and Steele and all the others, including young Paul Krugman, we can’t say we were not warned.

David Warsh, an economic historian and veteran columnist, is proprietor of Somerville-based economicprincipals.com, where this column first appeared.

Gregory N. Hicks: U.S. must stay at the trade table

  The Boston Tea Party remains one of the seminal events in American history, and it continues to resonate among political elites, because most Americans believe that the “Tea Party” was a protest about taxation without representation.

It really wasn’t. It was actually about the setting of rules for international commerce without representation. John Hancock, a signer of the Declaration of Independence, merchant, ship owner and one of wealthiest men in the colonies, along with the Sons of Liberty, instigated the Boston Tea Party because the British government had given the British East India Company a monopoly to transport tea to the colonies and sell it there, effectively excluding American merchants from competing in a trade in which they had been profitably engaged. From the very beginnings of our republic, Americans have demanded the opportunity to compete internationally on a level playing field.

Two thousand years ago, Roman Senator Marcus Tullius Cicero said “the sinews of power are money, money, and more money.” This observation is as true for the 21^st Century as it was in the First Century BCE. National power comes from national prosperity.

Fifteen years into the 21^st Century, it is clear that the international economy has entered a transition period similar to the change that occurred a century ago, when the United States emerged as the world’s leading economic power. When that occurred, the United States did not use its economic power to influence global events, instead adopting a foreign policy of isolationism and international disarmament.

“The business of America is business,”  said President Coolidge, and America’s insistence on repayment of World War I debts contributed to economic instability in Europe. Isolationism led to the Smoot-Hawley Tariff, the Great Depression and World War II.

Fully cognizant of this history as well as the necessity of rebuilding the world’s economy after World War II, the U.S. government  leveraged America’s overwhelming post-war economic superiority to establish the dollar as the dominant currency of international finance and trade and to found the multilateral institutions that are the girders of today’s rules-based international economic system. The relatively level playing field for international commerce that was created has led to 70  years of economic growth and prosperity that has lifted millions from poverty.

Economies rose from the ashes of World War II by adopting key aspects of the American economic model, but in 1990, the United States was still the world’s largest economy. Our nearest competitor, Japan, had a GDP only 40 percent the size of America’s; China’s GDP was less than one-sixth the size of ours.

Today, the United States is no longer the world’s largest economy; that status belongs to the European Union. Most economists project that China will soon overtake the United States as the world’s largest national economy, although some argue that milestone has already been passed. Meanwhile, India’s economy is not too far behind.

Despite the emergence of multiple global economic competitors, the United States remains the acknowledged leader and fulcrum of the international economy. Five major trends in the global economy – the internet impact on international commerce, the emergence of global value chains, the oil exploration technology revolution, the rebound in U.S. manufacturing, and the resilience of the dollar after the 2008 financial crisis – illustrate the centrality of the United States to both the international economy and international relations.

We’re all familiar with the Internet’s impact on our daily lives, and at work, we experience the internet’s effects on productivity, but on a larger scale, it is also transforming international trade opportunities. For instance, E-bay and Amazon are fostering an Internet-based international retail revolution. The first company makes it possible for any individual to engage in an international commercial transaction. Any American who offers a good on E-bay could find that it has been purchased by someone from Ghana or Fiji; and the reverse transaction is equally possible. For its part, Amazon, based on its global warehouse network and relationships with modern logistical companies, has built a virtual mall in which customers can buy almost anything and have it delivered to their doorstep within a few days.

Internet communication has also made cross-border vertical integration of production, or global value chains, possible. Pioneered by Nike and improved by Apple, the process is perhaps epitomized today by Gilead, a San Francisco-based pharmaceutical company that is saving thousands of lives by developing and lowering consumer drug prices through innovative production arrangements with pharmaceutical producers in a number of developing countries.

Global value chains are inducing a reconsideration of the statistical analysis of international trade, which is changing perspectives on international economic policy. Analysts are grasping the importance of trade in intermediate goods, i.e., components or partially finished goods that are moving across borders through vertically integrated production processes. For the United States, one-third of exports and three-fifths of imports are intra-firm trade in intermediate goods.

A recent International Monetary Fund study looked at the major economic powers from the standpoint of domestic value-added (DVA) and foreign value-added (FVA) in their national output. The study found that China’s economy is the most dependent on foreign value-added content of any of the major economies, while the United States is the least dependent. The study also suggested that if China let its currency, the Yuan, appreciate, it would both move up the value chain and reduce the dependence of its economy on foreign inputs. Perhaps tellingly, China’s leaders have been allowing the Yuan to appreciate steadily over the past decade.

“Fracking,” that uniquely American technological innovation, is also changing the international policy landscape, and if the U.S. resumes exporting oil and natural gas, could have an even greater impact. The current policies of Arab oil-producing states clearly reflect their unease with growing American energy independence, while Europe, through employing fracking to develop its own energy resources or importing American oil and gas, has the potential to reduce its energy dependence on Russia by substantial amounts.

The manufacturing sector provides the tools of national power, and a newly released Congressional Research Service study suggests that all the talk of the demise of U.S. manufacturing is premature. While China became the world’s top manufacturing country in 2010, the United States remains second by a wide margin. In addition, U.S. manufacturing output grew between 2005 and 2013 by 5 percent, despite the Great Recession. Much of this growth was powered by inward foreign direct investment, 39 percent of which has been landing in the manufacturing sector.

Despite setbacks to the dollar’s reputation arising from the international financial crisis, the dollar continues to symbolize American economic strength and prowess. The dollar’s central role in international finance and trade provides unique avenues for the United States to use economic power in lieu of military intervention or other forms of pressure to resolve international problems. Yet that unique role is under competitive pressure as China, the European Union, Japan, Russia, India and Brazil all seek to put their currencies on an equal footing with the dollar.

International economic policy offers the U.S. government a range of tools to advance U.S. foreign policy and commercial interests in an increasingly competitive, multipolar environment. Among those tools, preferential trade and investment agreements positively affect more aspects of economies than any other. Not only do trade agreements lock-in existing trading and investment patterns, they create new links by eliminating trade barriers through reducing taxes and writing new trade and investment rules that go beyond those found in the 1994 World Trade Organization agreement.

In  national power, trade agreements not only generate economic growth, jobs, and tax revenue, but they also create economic interdependence among agreement parties. The voluntary acceptance of that interdependence is an unambiguous symbolic foreign-policy statement. In a multipolar world, such agreements are essential to economic competitiveness and peaceful coexistence.

Our competitors understand these characteristics very well, including the axiom, illustrated by the 1773 Tea Act that sparked the Boston Tea Party: “He who writes the rules, wins.” They are aggressively negotiating trade pacts around the world, changing the terms and rules of trade in their favor. Currently, the European Union, formed itself by a trade agreement, has 32 preferential trade agreements in place with 88 countries, and it is currently negotiating 12 agreements covering an additional 36 countries. India’s existing preferential trade network includes 26 countries via 14 agreements, and it is negotiating four new agreements covering 37 additional nations. Japan has implemented 14 agreements with 16 countries, and is negotiating three trade agreements covering 35 nations. China has 12 preferential trade pacts in force with 21 countries, and is negotiating three more agreements that would cover 14 additional states.

Completing both the Trans-Pacific Partnership (TPP) and the Transatlantic Trade and Investment Partnership (TTIP) negotiations would expand the U.S. preferential trade network consisting of 14 agreements covering 20 countries to an additional 33 nations. TPP and TTIP involve three of the world’s top four economies and cover a majority of the world’s existing trade.

Moreover, they seek to write new trade rules that facilitate the growth of 21^st Century international trading patterns such as e-commerce, global value chains, and foreign investment, among others. As importantly, they revitalize longstanding strategic relationships with our Asian and European allies, an important signal to both China and Russia that the United States intends to remain a competitive actor in Asia and Europe. Conversely, failure to complete these agreements would be an act of unilateral economic-policy disarmament with long term consequences for U.S. economic growth and national power.

In a 21^st Century world that is more multipolar, more complex, more integrated and more competitive than the United States has ever experienced in its history, U.S. competitors and strategic allies alike – Brazil, China, the European Union, Japan, India, and Russia – are seeking to amass economic power and to deploy it as a leading element of their foreign policies. In many cases, they seek  strategic advantages through these efforts, often at the expense of U.S. interests.

International economic-policy tools such as trade negotiations provide an effective, peaceful means to compete with these challenges.   If we do not participate in making the rules for international trade, others will write our companies out of the competition, many jobs will be lost and many more never created, and our national prosperity and national power will decline. If they were alive today, John Hancock and the Sons of Liberty would support the negotiation of TPP and TTIP. We should too.

Gregory N. Hicks is State Department Visiting Fellow at the Center for Strategic and International Studies, in Washington; an economist and a veteran U.S. diplomat. The views expressed in this article are those of the author and do not necessarily represent the views of the U.S. Department of State or the U.S. government.  This piece stems from Mr. Hicks's remarks at the June 9 meeting of the Providence Committee on Foreign Relations (thepcfr.org)