A Radical Plan to Manage Globalization

(page 2 of 3)

As far as free trade is concerned, economics is not a science. True, it is a consistent theory, but it is relevant only in some utopian world, rather than under real-life conditions. This fact is carefully concealed from the public.

But even if all utopian conditions are met, and even under full employment, it has been rigorously proved (by three independent teams of preeminent economists, founders of the contemporary international trade theory) that wages in all free-trading countries would be equalized at a sufficiently low level. Under persistent unemployment, and under the conditions of the new industrial revolution, it will be much worse: In every category of labor, excessive supply will overwhelm any possible growth of demand. (The average American wage is about $135 per day. The average Chinese wage is around $135 per month, for 14 to 16 hours of work a day, seven days a week, under very harsh sweatshop conditions; some factories pay $50 to $80 per month. For political stability, China needs 15 million to 20 million new jobs per year, with about 700 million standing in wait just in China, and about 2,300 million in other countries. Again, the U.S. has only about 140 million jobs, about 50 million of them transferable.)

Unsustainable

Economists keep mum about all these results, which would make free trade unacceptable to Americans. An enormous, relentless, and shameless propaganda machine brainwashes the country into believing that free trade and uncontrolled globalization are theoretically sound, remain the only rational or even unavoidable options, and are good for the U.S. This is wrong. Free trade and globalization are not good even for Big Business; they are good only for its top executives and investors.

The judgment about the desirable, acceptable, and affordable forms of trade and globalization has to be made by American society, considering the totality of economic and noneconomic factors. It should be made after learning the truth about the falsity of free-traders' claims and about the cost of globalization in jobs and money.

What can be done to improve the situation? Slow and indirect approaches, such as attempts to increase the U.S. savings rate, will be insufficient: In a few years, just the annual returns on foreign holdings of U.S. securities will reach half a trillion dollars. The currency reserves of China alone, predominantly held in U.S. debt securities, now exceed $1 trillion and are expected to double in four years. This is an ever-growing mortgage on our country. Even President George W. Bush, a devotee of free trade, considers this situation unsustainable. We have to take the bull by the horns, and we have to do it immediately.

Compensated Free Trade

Free trade has to be saved; the U.S. cannot and should not completely back out of it. But the rules of trade must be modified: It is sufficient merely to remove some bad side effects of trade, such as excessive deficits. For that purpose, I propose a policy of "compensated free trade." (Click here for an in-depth explanation.) Here's how that policy would work:

• Congress sets annual limits (upper bounds) on the overall U.S. trade deficit in consumer goods and undesirable capital goods (oil and gas excluded).

• The President of the U.S. allocates the allowed deficit for each of our trading counterparts—countries or groups of countries.

• A country may exceed the limit if its government pays the U.S. Treasury a stipulated percentage (up to the full amount) of the excess deficit, also approved for each country by the President of the U.S. These payments may be capped.

• To raise the money for excess deficit payments, our trading counterparts may either use export taxes and export certificate auctions or pay from their currency reserves.

The proposed policy promises to become a powerful and versatile economic tool. Among many other accomplishments, it would control globalization, save American jobs, prevent trade wars, stop predatory trading, and impose financial discipline on our Micawberish country.