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     Apr 9, 2008
THE BEAR'S LAIR
The de-flattening of the world
By Martin Hutchinson

"The world is flat" declared New York Times columnist Thomas L Friedman in 2005. His book with that title was full of heart-warming anecdotes about noble Third World businessmen being brought together through the Internet; in terms of hard analytical truth it was something of a stretch even then. However, it is now certain that the world has started de-flattening, becoming bumpier by the day. Much though one likes to diss New York Times columnists, this is economically not entirely a good thing.

Contrary to the views of the globalization extremists, there are some clear benefits to this de-flattening. The "level playing field" so beloved of academic economists who wish for universal free trade and unrestricted immigration resembles in reality not an orderly soccer pitch but something akin to the Russian steppe


 

with winter approaching: bleak, infinite and entirely without tree cover.

Needless to say, some previous versions of competition - say 1950s Detroit - bore more resemblance to the bowling green in a well-kept Oxbridge college, with a high wall round the edge and guard dogs to keep out the unwashed. However, the advent of truly global competition since 1990 has demonstrated to the Western workforce that removing barriers to entirely free competition can be highly detrimental to their living standards and job security.

It is thus unsurprising that a number of free trade shibboleths are being questioned as never before. Unfortunately the new protectionism shows every sign of making no distinction between desirable and undesirable barriers to free movement of goods, capital and persons. Instead it is constructing impenetrable walls whose benefit even to their builder is dubious, and whose cost to the world economy is undoubted and immense.

Of all the new barriers to free trade, the most damaging are probably export restrictions, as on rice in Egypt, India and Vietnam, or export tariffs, as in Argentina. Rice export restrictions have had the effect of doubling the world market price of rice in three months, to the immense suffering of the Third World's urban masses. They are the product of an ideology of scarcity, in which resources are thought to be severely limited and trade is viewed as a negative factor in the welfare of a country's inhabitants.

Not only do they damage the economy of commodity buyers, they are even more damaging to the country that imposes them. Nevertheless, in a world in which corn becomes scarce because of massive US ethanol subsidies, they have made their malign appearance, and they will not be eliminated until food and other commodity prices decline.

Agriculture subsidies were a creation of the last major recession 70 years ago, and they seem fated to remain with us whatever the economic weather. They made a certain amount of sense as an income protection program for small farmers during the Great Depression; they make far less sense now. Nevertheless it was for the sake of agriculture subsidies that the US and the European Union killed the Doha Round of trade talks, which had offered the best hope of putting world trade on a basis of openness and equality between rich and poor countries.

The Doha Round has now apparently been replaced with a network of bilateral arrangements. These make sense politically but not particularly economically; they are also by definition de-flattening since in a bilateral trade agreement both parties give each other benefits and tariff reductions that they do not extend to other countries.

In any case, the AFL/CIO and its cheerleaders among the Democrats in Congress appear to have found a way to kill even bilateral trade agreements, by demanding US levels of union protections, benefits and environmental restrictions in the relatively poor countries with which they are generally negotiated. A world full of bilateral trade agreements is not flat but mildly bumpy; a world in which even these have become impossible requires serious landscaping.

Even more egregious than agriculture subsidies are the newly fashionable environmental subsidies, whether paying farmers to refrain from farming or paying them excessive amounts to plant crops that can inefficiently be converted to ethanol, at an outcome in carbon dioxide emissions significantly worse than regular gasoline.

In the United States these subsidies are the product of the exceptional cynicism and corruption of US politics over the past decade (to be precise, since Newt Gingrich was forced to resign the House speakership in November 1998.) It is thus hardly surprising that their direct costs have been considerable and their indirect costs enormous. They began by sparking off a tortilla subsidy program in Mexico and are now producing food export restrictions in much of the Third World.

Subsidies make comeback
Subsidies to consumption of food, gasoline and other favored commodities, which had been thought moribund in the free trade world of the 1990s, have been making a comeback. No longer restricted to the likes of Cuba and Venezuela, such subsidies now extend across most middle-income countries, allowing consumers, generally middle class, to buy gasoline and food products exceptionally cheaply. Needless to say, these subsidies are hugely expensive for national budgets, damage local wholesalers of the product concerned (or, in the case of oil, exploration companies in such places as India) and represent a sharp move away from the primacy of the price mechanism. There is no sign whatever of their disappearance.

On the intellectual front, the most important barrier to globalization is the increasing tendency of authoritarian regimes to censor the Internet. Countries such as Iran offer almost no access to the world-wide Internet at all, restricting communications speeds and blocking access to the Internet altogether during periods of political tension. China too has largely domesticated its Internet, using its enormous domestic market as leverage to invent Chinese equivalents of such companies as Google (Baidu) and eBay (Alibaba) while heavily restricting its citizens' access to the outside world.

Even in Western Europe, political correctness rules differ from country to country and force international websites to adopt bizarre domestic practices. Globally, the Internet is no longer a "flat" institution as Friedman claimed; it has become thoroughly bumpy, with a number of impenetrable walls.

As Friedman pointed out, foreign investment had been for many years an important "flattening" element in the world economy. Multinational companies not only import goods and services into countries in which they invest, they import know-how and labor practices, so that salaries for similar jobs become more equal worldwide, and working conditions in poor countries improve (even though child labor may be common in say Indonesia, a US or EU multinational cannot afford to be seen condoning it.)

However, in the past few years some countries have begun to conduct their foreign investment in the spirit of Cecil Rhodes rather than Adam Smith, seeking to monopolize natural resources, use trade as a political weapon and gain political power through leverage in foreign country economies.

Blocking the Chinese investment in Unocal appeared paranoid in 2005, it seems less so now, while the Dubai Ports fiasco (the purchase of British-based ferries group P&O), in which a minor (US) subsidiary investment turned into a major political battle also seems to have been a harbinger of things to come.

When Russia's Gazprom regularly disrupts gas supplies to its neighbors, while seeking to acquire new supplies (entirely unnecessary for its existing business, given Russia's enormous gas reserves) in Libya, Algeria and Nigeria, it is clearly motivated not by simple economic goals but by the desire to acquire a monopoly or near-monopoly of gas supplies to Western Europe. Chinese investments in Africa and Venezuela are somewhat more benign in their motivation, seeking to tie up the supplies of energy and commodities that China will need in the decades ahead by doing business with regimes that the West will not deal with, or by turning a blind eye to local corruption, torture and other misdeeds.

Gazprom's appears likely to be a successful political strategy against the limp push-back of the EU. China's strategy also appears more than likely to be successful commercially, since rogue regimes know that any attempts to damage Chinese interests will result in several divisions of the Red Army arriving, rather than a mere diplomatic protest or lawsuit. Nevertheless, neither strategy is working towards a level playing field or a flat world; both are seeking to construct Great Walls behind which their own national interests can flourish.

World-flattening immigration
Finally there is mass immigration, to Friedman the most world-flattening innovation of all. He's right; unlike trade, mass immigration has the potential to equalize wage rates between rich and poor countries within no more than a generation. The huge area of local services, which provides a haven for the low-skilled and is immune to international competition, quickly succumbs to mass immigration.

Of course, any such rapid equalization of wages across the globe would involve a catastrophic decline in the living standards of the less able populations of rich countries. There is every sign that these oppressed helots are waking up to this. In the United States, not only was last year's immigration amnesty legislation defeated easily, but there is now noticeable pushback against expansion of the H1B visa program, under which skilled young people from the Third World get the chance to practice their trades in the US market, competing against local folk.

As Dean Baker of the Center for Economic and Policy Research has pointed out, the H1B program extends only to a limited range of occupations and does not for example affect lawyers. It is thus little surprise that the remuneration for a newly minted computer scientist with a PhD from a good college is less than half that of a less credentialed junior commercial lawyer. Immigration globalists will point out that the lawyer may deal with Wall Street, but the computer scientist deals with Silicon Valley, equally a source of unimaginable riches and innovation in the last decade. Little wonder therefore that there is a shortage of US engineers; they are all studying to be commercial or trial lawyers, even if they are somewhat less fitted for this role. The free market works!

The recommendations for policymakers from all this naturally bear little resemblance to what policymakers are currently doing. On trade, a return to the Doha Round seems highly desirable, and if agriculture subsidies have to be sacrificed to achieve this, that would be another reason to cheer. The autarkic policies of Russia and China are most effectively battled by low energy and commodity prices, which can best be produced by a sharp increase in US interest rates, naturally accompanied by corresponding moves elsewhere.

Higher global real interest rates will also increase the relative as well as absolute cost of capital for emerging markets, restoring some of the United States' historic overall cost advantage (emerging markets will then have cheaper labor but more expensive capital.) Of course in this area the high-saving nations of the richer parts of East Asia (Japan, Taiwan, South Korea and Singapore) will benefit even more than the United States, but there should in this world be some reward for the thrifty over the profligate.

On immigration, since US politicians are paid to represent the interests of their constituents and not those of foreigners, however impoverished and photogenic, they should strengthen enforcement against illegal immigration and reduce rather than increase the H1B visa quota - or alternatively keep the quota as it is but extend its applicability to those professions such as lawyers that have better lobbyists than the unfortunate research scientists. That will ensure that US university entrants can choose their field of study based on their abilities and interests, and not on whether or not graduation will plunge them into competition with the teeming millions of India and elsewhere.

The world is not flat; it was flattening but has now got lumpier again. On the whole, that makes the scenery more interesting and gives better protection against storms.

Martin Hutchinson is the author of Great Conservatives (Academica Press, 2005) - details can be found at www.greatconservatives.com.

(Republished with permission from
PrudentBear.com
. Copyright 2005-07 David W Tice & Associates.)


Unglobalized at the edges (Feb 16, '08)

Toxic globalization (Feb 8, '08) 

Globalization in retreat (Jan 5, '07)


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