Alas, GATT won't give nations the tools they really need for economic management. Whether it be to help a weak dollar or a recovering industry, a little national autonomy is not a bad thing
What to do about the dollar? If the Federal Reserve raises interest rates to support the dollar, we undermine economic recovery. But a policy of benign neglect only invites the speculation against the dollar to feed on itself.
The dollar dilemma is part of a deeper confusion. How can we reconcile increased global economic integration with coherent rules for the system? When a California manufacturer "exports" product to New York, there is no exchange-rate risk. When a Massachusetts high-tech company manufactures in Vermont, there is no worry that weaker patent laws invite piracy. But foreign trade remains a game played by inconsistent rules. Many nations consider piracy a normal tool of technology transfer. Currency swings wreak havoc with investment plans. Thus, the ambiguous blessing of globalism.
The latest attempt at coherent rules, the General Agreement on Tariffs & Trade (GATT) now awaiting ratification, envisions a global economy largely under laissez-faire terms. The accord cuts tariffs, discourages subsidies for economic development, and prohibits national retaliation against the mercantilism of others. It makes modest headway on a framework of intellectual-property protection. But it does nothing to bring about a more predictable monetary or macroeconomic environment, let alone labor or environmental standards.
We have backed into a brand of global integration dramatically different from the kind imagined 40 years ago this summer, when the Bretton Woods system was launched. The architects of the postwar system believed in a mixed economy. They believed stable and managed exchange rates would allow nations to maximize macroeconomic management and economic growth. They were committed to full employment. They wanted to restore normal flows of private commerce, but with the laissez-faire of the 1920s and the ensuing havoc of the 1930s fresh in their minds.
DANGER ZONE. The present design of the global economy increasingly denies individual nations the tools of economic management without offering a substitute set of global tools. It thus portends a dangerous interregnum. And in some respects, policies are marching in opposite directions.
The Clinton Administration wants to subsidize development of a domestic flat-panel display industry. With the cold war over, this is a civilian technology initiative. But ironically, under the GATT accord, sponsored by the same Administration, such technology subsidies are permissible only for national security.
Mary Ellen Kelley, visiting professor of technology policy at the Massachusetts Institute of Technology, observes that tightening global patent protection but giving up domestic technology subsidies is a de facto industrial policy. It favors some industries--chemicals, pharmaceuticals, software--at the expense of others. In the 1980s, the U.S. used domestic trade law to protect such industries as semiconductors against Japanese mercantilism and used temporary import restraints to give other industries, such as autos, a respite in which to reinvest and recover. These measures will soon be GATT-illegal.
NO NETS. By laissez-faire lights, such government intervention always backfires. But as Alan Tonelson of the Economic Strategy Institute notes in the July-August issue of Foreign Affairs, the auto, steel, semiconductor, machine-tool, and textile industries all used temporary protection in the 1980s to invest and restructure to become more efficient and competitive in 1990s. These are the tools of national economic development we are giving up in the new global trading order.
Moreover, with freer commerce in goods, services, technology, and finance, but without global labor standards, we invite a system of development built on cheap wages. Yet despite the cheaper labor, the primacy of the money markets denies us full employment.
In principle, we should just let the dollar go, trusting that markets will eventually get its value right. But currency markets often overshoot. Just as the dollar was disastrously overvalued in the early 1980s, it could become dangerously undervalued in the 1990s. A falling dollar makes foreigners reluctant to hold U.S. debt. It means cheaper U.S. exports--but also cheaper U.S. assets and lower real U.S. wages. It is bearish news for domestic stock and bond markets, which suspect the Fed must raise rates sooner or later.
The solution to the Hobson's choice of a plummeting currency vs. an aborted recovery is a different global monetary system, one that restores some national autonomy. We need to go back, at least partway, to the Bretton Woods model: adjustable target zones for currencies, concerted management of exchange rates, discouragement of purely speculative currency trades.
More broadly, a different monetary system implies revision of first principles. We need to temper our faith in pure markets and to reclaim a realm for policy. This century's history shows that the sustainable brand of capitalism is built on mixed economies, not utopian ones viable only in textbooks.