A Radical Plan to Manage Globalization

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Chinese Century

Moreover, it also will be a geopolitical tool, a weapon of diplomatic persuasion. It will allow us to reward our friends and penalize our enemies. But, above all and best of all, it will be perhaps the least confrontational means of geopolitical containment of potential rivals and adversaries, such as China. We need such a capability badly, much more than we did 60 years ago, because we are simultaneously attacked on many geopolitical and economic fronts. (Both the Dorgan/Feingold bill and the Horizon Project also recommend capping the trade deficits. Time has come for that action. But compensated free trade is probably more flexible and suitable to be used as a tool of geopolitical containment and diplomacy. We hope that the additional beneficial features of our policy will be included in the revised versions of these excellent proposals.)

Both free trade and globalization have to be controlled. If we do not replace both of them with a better policy, the U.S. could either become strongly protectionist or a number of dire consequences will follow: We will lose our middle class and a substantial part of our wealth and our economy, the U.S. will become polarized and may turn sharply left (perhaps together with some other countries), and the 21st century will be a Chinese century.

The proposed compensated free trade is a good candidate to be such a better policy. True, it involves a radical change, which is always risky. We might have to implement that policy slowly and carefully, all the time thoroughly analyzing both the newly emerging and the potential long-term consequences. The inherent flexibility of the policy, however, makes it a superb risk-management tool.

"Macroeconomic Agony?"

Philip Levy, of the American Enterprise Institute, offers a rebuttal to the compensated-free-trade proposal in a companion piece (see BusinessWeek.com, 2/14/07, "Trade Truths for Turbulent Times"). But the rebuttal has no solid counterarguments. Even more important, the rebuttal (and free trade, in general) has no alternative proposals. It does not repudiate the serious charge that the trade theory does not take adjustment costs into account and compares benefits only.

Statements about "winners sharing with losers" are just empty talk: There will be almost no winners in this country. Also, note a delicate nuance: "The winners could compensate losers if they chose to." Would you trust the winners? Moreover, by the 1940s it was already proved that even theoretical work in that direction leads to difficulties that are insurmountable in principle.

Two rejoinders are presented in the rebuttal's last paragraph; both are wrong. First, if a country enters a trade war against us, it would shoot itself in the foot. Second, the rejoinder about "macroeconomic agony" would apply only to a small country, not to the U.S. with its enormous internal market, where the connections between foreign trade and growth are incomparably weaker.

As to the disaster to come from compensated free trade, predicted in the same paragraph, it looks like an enormous improvement in comparison with the national catastrophe that awaits us if we "stay the course" of unbridled free trade. Besides, as discussed, our proposal would be phased in gradually and cautiously to avoid any disasters.

Join the debate here.

Author's Note: This article presents results obtained in joint work with the late Mark Perlman, the University Professor of Economics (Emeritus) at the University of Pittsburgh. Copyright 2005–2007, Dr. Vladimir A. Masch

Vladimir Masch, a Doctor of Science in Economics, has been working since 1960 in mathematical economics and scenario planning. He worked in the Academy of Sciences of the U.S.S.R. Since 1974, he has been working on the same problems, plus strategic risk management, in the U.S., initially at Bell Laboratories and later as a consultant.