Global Policy Forum

Globalization Hits a Political Speed Bump


By David Leonhardt

New York Times
June 1, 2003

When the leaders of rich countries put on their dark suits and gather, as they are this week in í‰vian, France, barriers to world trade often begin falling. For more than three decades, the United States, Japan and Western Europe have led a dismantling of tariffs, quotas and subsidies that almost all business executives and policy makers credit for lifting economic growth.

The voices of opposition have tended to come from those with far less power. In wealthy countries, the wages of many workers have stagnated in the face of global competition, and old-line manufacturing executives have watched their businesses shrivel. In poorer countries, traditional industries have been overwhelmed by efficient multinational giants. But the politics of globalization are subtly shifting, and the turnabout has helped to slow to a crawl the integration of the world's economies.

Struggling through a third consecutive year of weak growth and having already taken the easiest steps toward trade liberalization, wealthy nations have become unwilling to make the compromises necessary for new pacts. At times, they have even erected new barriers. From the orange groves of Brazil to the rice fields of Southeast Asia, meanwhile, poorer nations have become more insistent that the next round of agreements allow them to benefit equally from globalization. That argument is pushing the politically toxic, multibillion-dollar farm subsidies of Europe and the United States to the center of the debate.

The disagreements have been aggravated by diplomatic conflicts over the war in Iraq and by measures taken to fight SARS and terrorism. And many government officials around the globe have become worried.

"We have been the postwar leader in liberal democratization, globalization and free trade," said Douglas J. Holtz-Eakin, the director of the Congressional Budget Office and a former economic adviser to President Bush. "To the extent that we adopt a different posture," he added, the effects will be "not so hot from an economic point of view."

Sok Siphana, the secretary of state for commerce in Cambodia, which is trying to gain entrance to the World Trade Organization, added, "The world better work harder on trade issues because everything is dividing."

Already, the flow of goods and investments across borders has fallen after a decade of rapid gains. Exports are likely to account for 18.8 percent of the world's economic activity this year, down from 20 percent in 2000, according to Global Insight, a research company based in Waltham, Mass.

The economic summit that begins today in the French Alps — the first meeting since the war in Iraq between Mr. Bush and European leaders who opposed it — is the start of a new effort to revive globalization. It is the annual meeting of the Group of 8, which includes Britain, Canada, France, Germany, Italy, Japan, Russia and the United States. Beyond the disagreements over Iraq, the United States and Europe have had a number of clashes over trade. Europe, for example, opposed genetically modified foods and criticized steel tariffs and tax benefits for exporters like Boeing in the United States. The recent decline in the dollar has also made life difficult for European companies that had become accustomed to the effective price edge on their goods while the dollar was higher.

After the í‰vian meeting, the next step in the trade talks, known as the Doha round, will be in Cancún, Mexico, in September. In Cancún, differences over agricultural subsidies and drug patents will be more clearly on display than they are this week, as negotiators, who have fallen behind schedule, determine whether they can meet their own deadline of signing a new pact by 2005.

In the meantime, officials from the United States and Latin America will continue their fitful discussions about creating a trade zone for the Western Hemisphere similar to one that exists in North America.

"All the trade negotiations are in trouble," said Clyde V. Prestowitz Jr., the president of the Economic Strategy Institute in Washington and a former trade negotiator. The steps taken during the last decade "have been so successful that we've gotten down to the final, difficult issues."

Bush administration officials take a more positive view, saying they remain committed free traders despite their support last year for new steel tariffs and farm subsidies. Officials cite successes in the war on terrorism, which they say are removing a major obstacle to the movement of people and goods, and recent trade pacts with Chile and Singapore. Those pacts are part of a strategy that Robert B. Zoellick, the United States trade representative, calls competitive liberalization, in which the administration seeks to maintain free-trade momentum, even if global talks bog down.

John B. Taylor, the under secretary of the Treasury in charge of international affairs, said: "You take steps forward and move back. That's always the case." Over all, he added, "the trends are good."

But other than the pacts with Chile and Singapore, two countries that already had relatively open markets, little tangible progress can be cited by officials. A big reason for that, economists say, is the unfulfilled promise of globalization so far.

After years of lowering tariffs, ending quotas and removing restrictions on investment, many poorer countries are still struggling. Parts of Asia have not fully recovered from the financial crisis of the late 1990's. Latin America has flirted with similarly deep problems in the last two years. And the global slump has reduced demand for semiconductors, plastic toys and all goods in between that are made in low-wage economies.

At the same time, China, a country that has kept its borders largely closed until recently, has prospered, offering a counterexample to the sheltered economies of the old Soviet bloc that crumbled.

"Everyone is questioning globalization," said Javier González Fraga, the former head of Argentina's central bank and now a professor at Catholic University of Argentina at Buenos Aires. "The virtuous circle — we were to import capital goods from the industrialized nations and they were to buy our agricultural produce — never happened." Instead, people like Marcelo Lima say they have seethed as wealthy countries have built their own protections against the economic slump, like the new American farm subsidies. Mr. Lima, a former investment banker who owns a cattle ranch near Campina Verde, in southern Brazil, argues that recent trade developments have hurt Brazil's otherwise prosperous agricultural industry.

"Whenever we invest in research and technology and become more competitive than American farmers," Mr. Lima, 41, said, "the United States always slaps new tariffs on our goods or grants fresh subsidies to their farmers."

Argentina and Brazil are eager to bolster economic growth by exporting more beef, corn, orange juice, soybeans and sugar.

American officials note that government support for farmers in this country remains smaller than in many places, especially Europe. But they agree that farm protections will be at the center of the current round of both regional and global trade talks and that answers are not easy.

"I really find it very difficult to see how we'll make significant progress, unless we can move towards a substantial reform of agriculture in the Doha agenda," Mr. Zoellick, the trade representative, said on Wednesday, after meeting with Brazilian officials in Brasí­lia.

The other major issue in the global talks is intellectual property. Nations that have been ravaged by AIDS and that lack big pharmaceutical industries are seeking exemptions to patent protections that would allow them to afford drugs. Drug companies in the United States — and, to a lesser extent, other rich countries — want to ensure that the billions of dollars they invested in research will be repaid in profits. The pause in globalization has frustrated even some people who are working in parts of the American economy that have been hurt the most by the integration of world markets. Since 1980, the manufacturing sector has lost 20 percent of its jobs, as much of its production has moved to other countries.

Last year, when the high value of the dollar was giving foreign companies an advantage, the continuing struggles of the American steel industry led the Bush administration to impose a new set of tariffs on imports. Steel executives and workers cheered, but many other manufacturers began wondering if they were getting the worst of both worlds: greater competition as a result of freer trade but higher costs from a new form of protectionism.

In its tan and blue factory building in Clarksville, Tenn., rebuilt after a tornado in 1999, Smithfield Manufacturing has reduced its employment to 32, from 40 a year ago, partly because steel costs have risen 8 percent. Shortly after a recent $8,000 shipment of parts containing steel arrived from Switzerland, the company received a bill saying that the $150 it had paid in import duties was no longer enough. It owed an additional $2,500. "It's pretty tough," said Ron Smithfield, president of the company, which makes metal parts for cars, printing presses and other machines. "We're seeing some extreme stress for companies that are trying to do the right thing and manufacture in the United States."

Smithfield's case is almost literally a textbook example of how tariffs can make an economy less productive by giving companies an incentive to act in ways that are not the most economically efficient. During a slump, however, those benefits are often obscured by the many people suffering from the economic destruction that free markets create. "Hard times mean protectionism," said Adam S. Posen, a senior fellow at the Institute for International Economics in Washington. "You look for scapegoats. You cut things off." In part, the slowing of globalization seems to stem from the lack of political solutions to the problems of its own making. In the United States, the withering of manufacturing has created a pool of people who have been out of work for months or who have had to take deep pay cuts. Farmers from Western Europe to Southeast Asia face similar troubles. In that way, critics say, the pause has been positive. "We were getting ahead of ourselves," said Thomas I. Palley, a director at the Open Society Institute, which was founded by George Soros, the investor who has often criticized the path of globalization. "A lot of this stuff is very hard to reverse, so you want to be very careful."

Those issues are likely to linger. Even if current trade talks deteriorate further, most economists expect the pace of globalization to pick up when the world's economy finally emerges from its slowdown.

"When companies start losing business because politicians won't talk to each other," Mr. Siphana, the Cambodia trade minister, said, "they'll say, `O.K., I think it's time to mend fences.' "

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FAIR USE NOTICE: This page contains copyrighted material the use of which has not been specifically authorized by the copyright owner. Global Policy Forum distributes this material without profit to those who have expressed a prior interest in receiving the included information for research and educational purposes. We believe this constitutes a fair use of any such copyrighted material as provided for in 17 U.S.C § 107. If you wish to use copyrighted material from this site for purposes of your own that go beyond fair use, you must obtain permission from the copyright owner.