The right eloquence needs no bell to call the people together and no constable to keep them. ~ Emerson

Friday, December 12, 2008

Walking Away from Globalization

Republican and blue-dog Democratic Senators killed a $14 billion bailout package for the U.S. auto industry last night. The lawmakers in question insist the real villain in all this, unsurprisingly, is labor unions. The Senators wanted a guarantee from the United Auto Workers for wage cuts to bring their pay into line with U.S. plants of Japanese carmakers by the end of 2009. The UAW refused to do so before its current contract with automakers expires in 2011.

The collapse of the deal was probably fine with many conservative lawmakers, who believe Detroit’s sole hope is for the Big 3 automakers to declare bankruptcy and bust the unions altogether. They contend only free market forces will allow U.S. companies to be competitive in a free trade global economy.

Both sides lamented the deal’s collapse and each blamed the other for its failure. But, for me, the most insightful quote came from Senator Christopher Dodd of Connecticut, the Banking Committee Chairman.

“In the midst of already deep and troubling economic times, we are about to add to that by walking away.”

Of course we are. It is how the United States government has been dealing with the global economy – in good times or bad – for the past thirty years. The Republicans preach that any government involvement in business is always bad; the market is always smarter, faster, and more efficient when left alone. Anything less than total deregulation and total noninvolvement is a slippery slope to big, costly, ineffective bureaucracy and – gasp! – socialism.

There is truth to that assertion if we are talking about managing day-to-day operations. However, there are broader economic factors within which businesses operate, and this is even truer in the era of globalization, which only government can address. Government may not be the tool to make things right in the long-term but it the only tool that can correct what is wrong in the here and now.

Government’s current non-involvement lies at the root of the problem. Conservative thought insisted that free trade would force the whole world to adopt capitalistic free markets or suffer the consequences. Quite the opposite actually occurred and our failure to recognize and adapt to this reality has brought us to the brink of folding ourselves.

Perhaps the conservatives have a point about government inefficiency because their politicians still adamantly avow the solution is not for us to either fight, reform, or adopt the state-sponsored version of capitalism practiced by most of the rest of the international community. Instead, they insist removing restrictions and directly exposing domestic business to raw market forces is the answer.

The call by Republicans and some Democrats for UAW “wage cuts” is pure crap. Hourly wages for UAW workers at GM factories are about equal to those paid by Toyota at its older U.S. factories, according to the companies. Per GM, the average UAW laborer makes $29.78 per hour. In comparison, Toyota says it pays about $30 per hour.

The real difference between the two groups is benefits, led by healthcare and pensions. (The latter is particularly significant, since foreign-owned U.S. auto plants are newer and have fewer retirees.) This drives total costs up to $69 per hour for UAW workers versus Toyota’s total cost of only $48 per hour.

So Senators do not want union workers to accept a market-competitive “fair wage.” Instead, they want them to gut their health benefits and pensions. These are not luxuries or premiums but rather basic comforts that all workers in a nation with a thriving economy should reasonably expect to earn. Many foreign workers need not win such basics from employers because their governments supply them.

In addition to providing workers with benefits, many foreign governments practice protectionism that our own government decries as anathema. The U.S. has become like the one kid in a class taking an exam fairly while all those around him are cheating. We have the satisfaction of feeling we are doing the right thing but it is not stopping us from flunking. Markets, I am afraid, are graded strictly on a curve.

Chinese exports registered their largest drop in nearly a decade last month. This shocked analysts, who expected a slowdown but not a reversal. Decreased U.S. imports of foreign automobile and auto parts led the decline, spurred by our current recession.

In spite of this, China’s trade surplus increased to $28 billion in the same period. The reason was simple enough. While exports fell 2.2 percent, Chinese imports took an even steeper drop, falling 17.9 percent. This meant weaker sales back home for commodities, such as corn, wheat and meat, and manufactured goods, including aircraft, semiconductors and heavy machinery.

The Chinese government exerted its control over industry and ordered its airlines not to buy new aircraft, as expected, because it anticipated less tourism. Their manipulation of the yuan is legendary, keeping it undervalued in relation to the dollar so that Chinese goods are less expensive for American consumers and U.S. products more expensive in China.

The Chinese government had allowed the yuan to appreciate against the dollar for many consecutive months and U.S. Treasury Secretary Paulson is urging them to maintain a strong currency. In recent weeks, however, the Chinese once again began forcing the value of the yuan to drop.

Analysts had hoped recession and high unemployment would result in less American spending on foreign goods, causing the trade deficit to fall from $56.6 billion in September to $53.5 billion in October. Instead, it rose to $57.2 billion.

Continued pushdowns on U.S. imports by China and other countries “is having a direct impact on top-line revenue growth at multinational corporations,” said Steven Ricchiuto, an economist at Mizuho Securities USA. “That is going to help exacerbate the layoff problem.”

“The trade deficit with China is not a product of market forces,” said Scott Paul, Executive Director of the Alliance for American Manufacturing. “It is the result of Beijing’s mercantilist policies and Washington’s unwillingness to respond.”

The answer here is not Washington politicians using their power to quash U.S. labor unions. Instead, those same individuals need to open their eyes and step up to dealing with the realities underlying the powerful and intricate union that comprises the modern global economy.

Competitive markets are more important than free markets, fair trade is more important than free trade. There was a time when those things were equivalent but this is no longer that time.

We keep walking away from globalization in this country. We need to be driving at full speed to join it.

The U.S. auto industry would be a good place to start.

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