Friday, December 26, 2008

GLOBALIZATION

I share at at least one common experience with all my friends and colleagues in the Peace Corps Community, we have all had active roles in the global economy, some for just that two year period of service, for others, including myself, it has been a lifetime occupation.

As a US Government official I promoted American trade and investment with the world, negotiated and some times even wrote treaties and agreements to facilitate trade and investment, wrote investment climate statements for several countries that provided guidance for American investors, resolved trade disputes, provided US Government financing and other support for major exports, wrote the documents that allowed US banks and insurance companies to operate in other countries, and organized and conducted trade and investment missions and trade shows. I also wrote, negotiated, and implemented instruments to control exports to and imports from other countries, as well as controls over American investments in other countries and their investments in the USA.

In private business I established a new joint venture between an American and foreign firm. I reorganized and got formal operating permission for a new US company in a foreign country. I ran the US operation of a foreign firm. I reorganized a foreign company to outsource production to another country. I had my own company in the USA importing from abroad. I still sell US real estate to foreign buyers. I advise companies on international trade and investment. I have even been perhaps that quintessential operator in the global economy, a foreign currency trader.

No wonder I am a unabashed proponent of globalization and the global economy. It is in my blood. I cannot imagine a world without it and am certain that it is here to stay. I saw this future when I was 18 and am pleased to see that I was on the right track.

Why do I have such commitment to globalization? Beside being inevitable, I see its positive contribution to mankind's progress.I see the global economy as being a means to prevent strife and conflict between countries, if we work together, we are less inclined to wage war on one another. The prime example here is the European Union. This international economic union has served to pacify the region that produced the worse conflicts in mankind's history.

By working together countries achieve better results for themselves. A fundamental principle of the American economy is free competition. It insures the consumer the best product or service at the best price. The principle works on an international scale as well. Free movement of goods and services between countries insures that the consumer gets the best product or service at the best price. If you doubt this, check the origin of the clothes, shoes, watches, and other items worn by those protesting "globalization."

The global economy allows the transfer of resources from the rich to the poor countries. No better example of this than the monumental strides being made by the Chinese economy that is the direct result of greater participation in the global economy. The largest of the poor has pulled itself up the economic ladder, not through receiving large inputs of foreign aid, but by becoming a key player in the global economy. Ditto for India. One can also see this in the massive transfer of wealth allowed by the global economy from rich countries to the oil producing countries. And now that they are rich they are transferring wealth to the poor as well, e.g. the huge army of workers from less wealthy countries earning their livings in these.

Of course we have always had a global economy to some extent. Marco Polo did not visit China for a vacation. He was an international trader and he went to the source of some major trade goods to gain direct and better access to the supply. The Roman Empire lived on grain produced in Egypt.

No, we have always had a global economy. The difference now is that the fulcrum of our economic well being is no longer our domestic economy, but the global economy. It is no longer the icing on the economic cake, it is the cake. No better example of this is that the first step we took to manage our current financial crisis was to coordinate our actions with those of other countries. We have to, since the most flexible and mobile item in international trade is money. It flows like water sloshing from one shore to another.

Yes, the global economy and "globalization" are here to stay and constitute a major aspect of the "New Economy." No longer can government officials take actions and formulate policies that look inward, they must look outward first.

A classic example here is tariffs on imports. Believe it or not until the late 1800s the major source of revenue for the US Government was tariffs on imported goods. I have been in some countries where they charge tariffs on exports, as well as imports. Raising tariffs imposes a barrier on the free flow of goods and services. It prevents the consumer from getting the best product or service at the best price. Reducing or eliminating tariffs allows the free flow of goods and facilitates the consumer getting the best product or service at the best price.

So why have tariffs? First, to raise government revenue. My old tax teacher said there are two elements of a good tax, first it collects sufficient revenue to pay expenses and second it is easy to collect. Tariffs are probably the easiest tax to collect other than fees for government services such as registration of deeds. So they clearly comply with rule two of my tax teacher's maxim. But it is hard for them to provide sufficient revenue since they are applied to a relatively small part of the economy, i.e. imports. Far more revenue comes from a sales tax that is imposed on all goods and services. Tariffs are also used to protect fledgling industry in developing countries. The idea here is to raise the cost of imports to a level where you can make a price competitive product domestically. Obviously this distorts the most efficient use of resources, but it does allow a country to build an industrial base. The usefulness of this practice has occupied centuries of debate so I will let it stand at this simple statement.

Regardless of how you view tariffs, they do constitute a barrier to international trade. The US has several bilateral and multilateral agreements to reduce tariffs and I have worked closely with these. I remember when I returned from Mexico to Washington one of my Foreign Service colleagues working on the Mexican Desk warned me that the then being negotiated NAFTA Agreement was not a done deal and may not be adopted. I replied, "It doesn't matter if the agreement is adopted or not, since it is simply describing history, not setting a new course." By then 9 of the 10 largest Mexican exporters to the USA were US owned companies. Thus bilateral trade would continue to be dominated by US companies.

Now you can rant against bilateral and multilateral trade agreements but to change them simply frustrates the most efficient utilization of resources. More importantly, you make it harder for the consumer to get the best possible product or service at the best price. I am on the side of the consumer.

Along with tariffs there are a whole host of government actions that impinge on the global economy. But I see all of these being swept away by the irresistible demand to get the best possible product or service at the best price. The proof of this reality is that most of those protesting globalization are wearing attire made in China.

Leo Cecchini

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