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David GartnerThe Race to the Bottom fails to examine any positive aspects of globalization, it is provocative and should lead to further debate about how we should engage the global economy.
— New York Times Book Review
With the end of the 1990s economic boom, The Race to the Bottom deftly explores how the United States has entered a no-win global competition in which the countries with the lowest wages, weakest workplace safety laws, and toughest repression of unions win investment from the U.S. and Europe. Tonelson analyzes how the entry of such population giants as China, India, and Mexico into the global market has accelerated the erosion of wages and labor standards around the world. And he describes how an ever-larger share of this low-wage competition is hitting not just sectors like apparel and toys, but also many of America's highest wage industries like aerospace and software. Tonelson explains why the re-education and retraining programs touted by many political leaders offer little but false hopes to most U.S. workers as he outlines the real decisions Washington needs to make to ensure long-term prosperity for the U.S. and the rest of the world. Updated with a new prologue from the author.
Introduction—A Tale of Two Cities
Way back in the mid-1990s, no two cities symbolized the new global economy and its promises of progress and prosperity like Seattle, Washington, and Bangkok, Thailand.
Hugging the picturesque Puget Sound and looking out at the teeming air and sea routes of the Pacific, Seattle seemed practically cast by Hollywood to provide both the software that runs most of the world's computers and the jetliners that help link its peoples and markets. Better yet, the broad appeal of the city's coffee bars, music, and affluently bohemian ethos, combining latte-tinged self-absorption with a social conscience, suggested that globalization could not only be wildly lucrative but hip and even progressive.
Bangkok, for its part, typified the most spectacular and encouraging success story of the burgeoning economic and information flows comprising globalization—the booming third world metropolis. Barely twenty years ago, Bangkok was best known to Americans as the capital of Anna's tradition-bound King of Siam—or possibly as the home of an almost unimaginably lurid sex industry. By the 1980s, Bangkok was the center of an archetypical "tiger" economy, whose mushrooming automotive and computer parts factories produced so much growth and so much wealth so rapidly that the city's streets became choked with legendary traffic jams.
Today, both cities still symbolize the new global economy, but in very different ways. Now they represent the shortcomings and dangers of this economy.
Just after Thanksgiving 1999, trade ministers from some 130 countries gathered in Seattle to try to break the logjams blocking the launch of a new set of negotiations to free up global trade even further. The talks were organized by the World Trade Organization (WTO), a new international body set up by these national governments to help develop new rules for global commerce and resolve the disputes that heated international economic competition frequently produces.
The ministers attending the meeting and the U.S. officials and American corporate leaders who hosted them were no doubt expecting business-as-usual in the world of trade diplomacy—hardnosed but businesslike bargaining conducted behind closed doors, routine press coverage, and broad public disinterest.
What they got instead were the biggest, messiest street protests in America since anti-Vietnam War demonstrators rocked the 1968 Democratic convention in Chicago. Tens of thousands of protestors converged on Seattle, representing an astonishing variety of citizens' activist groups, including labor unions, environmental organizations, religious groups, and consumer lobbies. Joining them were small but often violent packs of anarchists. Thanks in part to a poorly prepared local police department, the result was four days of not only mass marches, rallies, teach-ins, and guerilla theater, but vandalism, civil disobedience, tear gas, and arrests.
The "battle in Seattle"—as President Clinton called it—left national leaders, economic policymakers, and businessmen around the world in a state of shock. They had all brought ambitious agendas to the World Trade Organization meeting, reflecting the daunting obstacles still blocking their goal of a world where goods, services, money, and technology would be generally free to cross the globe in search of the lowest costs, the loosest regulations, the highest profits, and the loftiest returns on investment. High barriers still impeded trade in agriculture and in many service industries—like finance. Third world countries were pressing for more influence over the economic rule-writing process, and China, with its huge potential market, strange hybrid capitalist-communist economic system and deep-rooted protectionist ways, was knocking on the door, seeking entry into the WTO. Nonetheless, the Seattle negotiators and their supporters expected further progress on most of these fronts.
After Seattle, the global economy's powers-that-be were at a loss on how to proceed. The U.S. government faced especially big challenges. Domestically, globalization cheerleaders and critics disagreed sharply over how to cope with the relationship between protecting workers' rights and the environment on the one hand, and promoting trade on the other. Should future trade agreements contain enforceable labor and environmental provisions, as most of the Seattle protestors demanded? Or as desirable as these objectives were, should they be dealt with in other arenas? Until this dispute was somehow settled, major progress seemed unlikely on globalization issues ranging from China to Latin America to new worldwide investment rules.
The Seattle protests also vividly showed the cheerleaders just how unpopular their policies were with the American public. Although many media commentators tried to dismiss the demonstrators as a small, unrepresentative coalition of lazy, selfish blue-collar workers, environmental extremists, and other chronic malcontents, many elected leaders and numerous business spokespeople recognized that the opposition was wider and deeper. Supporting this view were five years of consistent poll results showing vigorously growing public unhappiness with the trade and other globalization policies (like wide-open immigration) being pursued by Washington for so long.
Internationally, WTO boosters faced an equally knotty dilemma. Most of the organization's third world members—or at least their governments—opposed including any labor rights and environmental protections in trade agreements. They viewed low wages and lax pollution control laws as major assets they could offer to international investors—prime lures for job-creating factories and the capital they so desperately needed for other development-related purposes. Indeed, they observed, most rich countries ignored the environment and limited workers' power (to put it kindly) early in their economic histories. Why should today's developing countries be held to higher standards? And would reaching these higher standards drive investors to put their resources in other locations that were more familiar and in many ways easier to operate in—like back home, in the developed economies of North America and Europe? So if Washington agreed to domestic critics' demands for new types of trade agreements, third world governments would be deeply antagonized, and third world governments made up the majority of WTO members.
Furthermore, at Seattle, these third world governments made clear their view that the WTO and current trade liberalization strategies had given them a raw deal. They complained about being forced to open domestic markets too quickly to imports—before their own industries could get off the ground. They observed that the new trade talks being pushed by America focused on economic sectors where free trade would mainly benefit the United States, such as agriculture and finance. Because of the WTO's egalitarian setup (unlike the United Nations, for example, where big powers have veto rights), achieving U.S. goals would require progress on at least some of these concerns.
Seattle may have given globalization a big public relations black eye, but Bangkok became its victim. In June 1997, Thailand faced a massive financial crisis. The investors who underwrote its factories, its gleaming new skyscrapers, and its glitzy Western-style shopping malls suddenly began losing faith in the country's ability to repay them. Global financiers, meanwhile, sensing this eroding confidence, quickly began exchanging their holdings of Thailand's currency—the baht—for safer money, like U.S. dollars or Japanese yen.
Currency nowadays is like any other commodity that is bought and sold. When holders sell it, all else being equal (as economists love to say), the supply increases and each unit of the currency falls in value. When investors smell enough blood, the type of relatively limited, orderly currency trading that takes place every day around the world can turn into a genuine panic. Since no one wanted to be left holding the last (particularly worthless) baht, powerful incentives built to cut losses by selling off as quickly as possible. Just as bad, local banks and businesses that had to repay loans they might have received in foreign currencies found that whatever assets they held in baht were dropping rapidly in value, too. And as their ability to repay or service their debts shrank, the loss of confidence in the currency and country as a whole accelerated in a classic vicious cycle.
At first Thai officials thought they could defend their currency on their own. Mainly they thought they had in their treasury large enough holdings of foreign currencies to slow the baht's fall and even stabilize it. Governments and national central banks (like America's Federal Reserve and the Bank of England) can do this by using their foreign exchange holdings to buy up their national currency. If they could soak up enough of the worldwide supply of baht, the Thais understandably reasoned, they could prop up its value and even convince the most aggressive private speculators that Thailand possessed enough foreign currency holdings to frustrate any short selling they might be capable of.
The Thai strategy ran into one fatal problem. The governor of the central bank had been lying to the prime minister about Thailand's foreign currency holdings. Specifically, he had greatly exaggerated them. The Thai government, it turned out, had many fewer defensive weapons than it was counting on. At that point, the government realized it had lost the currency battle. Thailand had no choice but to let the baht "float"—to let the global currency market find a new natural value for it. Of course, at first this announcement greatly sped up private investors' flight to the baht exit doors, as everyone expected the markets to decide on a dramatically lower value for the currency.
Meanwhile, the governments of many of Thailand's neighbors and major trading partners started to grow genuinely alarmed. If the global markets' "run" on the baht continued, Thailand's economy might take a tremendous long-term hit—so tremendous that its huge borrowings from these countries' banks and other creditors might never be repaid. If major banks in East Asia and elsewhere could not count on repayments or at least debt servicing from Thailand, their own ability to repay some of their own borrowings from other creditors would be endangered. Indeed, some countries' banks had lent enough to Thailand—in other words, they were so leveraged—that Thailand's collapse could seriously damage their entire national economy.
As a result, these countries decided to throw Thailand a lifeline, in the form of a $16 billion loan. The loan was administered by an international agency called the International Monetary Fund, but it was no ordinary loan. It came with conditions—mainly that Thailand put in place reforms to enable it to start repaying its debts and to ensure that it never ran into this kind of trouble again.
Unfortunately, some of these conditions seemed to cause more problems than they solved. All of them combined seemed to doom Thailand to years of either recessionary conditions or sluggish growth. In order to repay its debts, the country had to go on an economic crash diet. Thailand had borrowed and spent too much; now its people would have to tighten their belts and use most of whatever new wealth they could generate not on the necessities of life but on paying off the nation's creditors.
Clearly, some kind of austerity was in order for Thailand. Unless it could reestablish its creditworthiness by strengthening its international balance sheet, it would never (or at least, not for many years) regain its access to foreign capital, and its dreams of becoming a modern, truly industrialized country would be put on hold. Nonetheless, the short-term impact was devastating—especially for a country that had become accustomed to record-setting progress. Thailand's economy shrank by 1.8 percent in 1997, and a whopping 10 percent in 1998, before rebounding by an estimated 3-4 percent in 1999. Real wages stagnated. Unemployment soared (although the official 1998 peak of 4 percent was, of course, low by global standards). Many Thais left the cities—like Bangkok—they had recently flooded into for the best jobs and greatest economic opportunities and went back to the farm.
As Thailand's financial crisis helped touch off similar crises throughout the region, Bangkok became a monument to Asian hubris and folly. Office towers stood unfinished or largely vacant. Once thriving banks were shuttered. The shopping malls became miniature ghost towns. Even the city's traffic moderated. As the twenty-first century dawned, Bangkok, the rest of Thailand, and much of the rest of East Asia, were still digging out.
Seattle and Bangkok, however, symbolized more than just the new global economy's perils. They also symbolized how little our leaders in the public and private sectors (as well as citizens) actually know about this system, and when it comes to the leaders, the two cities symbolized how little they seemed to want to know.
This ignorance, whether willful or not, could not be more dangerous for America's future, or for the world's future. In his 2000 State of the Union Address—the last of his presidency—Bill Clinton called globalization "the central reality of our time." He was right. Some of the signs are clear to everyone—the investments millions of us put into (and take out of) foreign stocks and bonds; the millions of us who work for foreign-owned companies, or companies that export or import or facilitate trade; the millions who have been displaced (temporarily or permanently) by foreign competition; and the low-cost, high-quality foreign-made goods we all see in our stores.
However, some of the signs are harder to see. For example, education recently has become such a hot-button political issue largely because American parents fear that public schools are not preparing their children well enough for the new global economy. The U.S. government has relaxed antitrust enforcement largely because U.S. companies claim they need to be big enough to compete against the giant conglomerates fostered for so long in Europe and Asia. Similar reasoning lay behind the major overhaul of Depression-era banking laws in 1999. Perhaps most important, over the long run, the international financial position of the United States—its status as either a net worldwide lender or borrower—greatly influences interest rates.
As will be seen, however, the U.S. government is rushing into the new global economy knowing too little about that system and the nations and business cultures comprising it; understanding too little about the effects of swirling, swelling global flows of goods and services and investment and knowledge; and hiding too much about what is known about globalization from the American people—specifically, about how many jobs multinational corporations have transferred from America to overseas factories, what kinds of products are made abroad, where they are sold, and what the workers in these plants are paid.
Those outside government—chiefly in academia and journalism—who discuss and debate the new global economy bear considerable blame for obscuring the effects of globalization as well. Their misdeeds go far beyond the dissembling and distortions that mark so much of our policy debates in general—though there is plenty of that. They also often demonstrate a remarkable lack of curiosity about their subject. They just as often prefer to spin out and manipulate theories rather than dig out and analyze facts. They turn logical and rhetorical cartwheels to defend ideologies that clash with reality. And they even make different arguments to different audiences.
One result of this often willful ignorance was the battle in Seattle—and the resulting astonishment expressed by the global economy powers-that-be. The Clinton administration and the World Trade Organization, as well as the corporate interests who actually paid for much of the meeting, clearly thought that in this high-tech Pacific port they had found the perfect site for a watershed event in global trade diplomacy.
However, at planning sessions for the protests that I attended starting in the spring of 1999, the main organizers could barely contain their glee that the WTO crowd had chosen a major U.S. city. The event was bound to attract mass coverage from the world's greatest national concentration of news media. The media factor was vital, because the critics understood something about the domestic politics of globalization that the WTO crowd had completely missed—that despite the so-called Goldilocks American Economy, the prevailing U.S. approach to globalization was deeply unpopular with the American people. As previously discussed, whether because they felt more economically pressed than the economic headlines suggested or because they disliked certain features of current globalization policies (e.g., the alleged neglect of human rights and environmental protection, the inevitable weakening of American national sovereignty), the public's unhappiness with today's globalization policies had been growing for more than five years, since Mexico's economy imploded right after the controversial North American Free Trade Agreement went into effect. Although the protestors were hardly a cross section of the public, poll after poll showed that they spoke for most Americans on international economic issues.
Bangkok had come to stand for another dimension of this widespread ignorance about globalization—the utterly misleading picture of rapidly developing third world countries painted by most supporters of the globalization status quo. U.S. policy toward globalization took a significant turn around 1990. Political leaders, industrialists, and financiers began focusing many of their policy initiatives and business planning on the developing world. Although U.S. trade and investment with the wealthy industrialized countries still represented the vast bulk of America's global commerce, the globalization crowd observed that business with the developing countries was steadily catching up. Indeed, Japan's continuing refusal to import goods or capital, Europe's growth-choking monetary policies and red tape, and the last American recession on the one hand, and the impressive economic advances being made in Mexico to China, on the other, all helped create a new conventional wisdom—that most of the world's best future-growth opportunities were in developing countries.
Consequently, the highest profile U.S. trade policy efforts involved bringing Mexico into America's new Free Trade Agreement with Canada and expanding trade with China. The Clinton administration greatly encouraged this shift in focus. The President himself stated in 1995 that the United States:
has hard limits on its growth; we have a mature economy and slow population growth. We have four percent of the world's population. To grow and prosper at home we must open the most lucrative markets in the rest of the world to U.S. exports—both in our historic trading partners in Europe and Japan, as well as the dynamic emerging countries in Asia and Latin America.
Not surprisingly, his Commerce Department launched a major campaign to intensify public and business interest in 10 third world countries officially designated as Big Emerging Markets. The American financial community seemed to have already gotten the message. Wall Street was reaping in emerging market stock holdings and other investments, and awarding solid credit ratings awarded to many developing economies.
So money from the industrialized countries and their savvy, no-nonsense financiers kept flooding into countries like Thailand—until it stopped in the middle of 1997. Within days, the conventional wisdom did an about-face. Emerging markets such as Thailand—and Indonesia and South Korea and Brazil and Russia—were not El Dorados in the making after all. They were hype. Their governments were not models of Confucian bureaucratic efficiency and their leaders' Ivy League economic degrees proved nothing about their honesty. Rather, these countries were sinkholes of crony capitalism. Their new factories and office towers and shopping malls were not can't-miss cash cows but white elephants, built not by strategic thinkers following rigorously engineered plans for national economic development but by crooked politicians extending favors to friends and family.
Worse, as the embarrassed and infuriated globalization cheerleaders suddenly pointed out, the emerging market countries lacked even something so basic as legal and regulatory systems that businesspeople could rely on for swift, speedy justice. Nor were these systems the slightest bit "transparent," a fancy way of saying that outsiders had no way of knowing why decisions were made, or even what these decisions were.
Countless investment professionals had made billions of dollars in the 1980s and early 1990s channeling vast sums into developing countries, and numerous scholars and political leaders had made sterling reputations by endorsing and encouraging such investments. However, as made clear by the Asian financial crisis, these experts were not describing emerging markets as they were, but as they wished them to be.
Excerpted from The Race to the Bottom by ALAN TONELSON. Copyright © 2000 by Westview Press, A Member of the Perseus Books Group. Excerpted by permission. All rights reserved. No part of this excerpt may be reproduced or reprinted without permission in writing from the publisher.
|Prologue to the Paperback Edition|
|Ch. 1||Introduction - A Tale of Two Cities||1|
|Ch. 2||Some Boom||19|
|Ch. 3||What's Globalization Got to Do with It?||35|
|Ch. 4||The Global Workforce Explosion||53|
|Ch. 5||A New Kind of Trade||81|
|Ch. 6||High-Tech Job Flight||99|
|Ch. 7||False Hopes||137|
|Ch. 8||Toward a New Race||153|