Global Growing Pains

Open markets are reality. Now, can public fears be allayed?

Stroll through the duty-free shop in the Seattle-Tacoma International Airport, and the success of the World Trade Organization and its predecessors becomes readily apparent. Import duties on most goods have been reduced so much during 50 years of trade liberalization that the discounts at the duty-free shop are almost insignificant. Tariffs on manufactured goods entering industrialized countries are down 90%, to an average of just 4%--thanks to eight previous trade pacts. The result: International trade has mushroomed, becoming a daily part of life for nearly all the world's consumers and workers.

Beyond a doubt, there is a consensus among the vast majority of economists, policymakers, and executives that open markets are a boon for growth, and that no country can thrive in the long run unless it is a full part of the global economy. Over the past two decades, global trade has soared to more than 20% of the output of the industrialized world (chart) and to about a quarter of total global economic activity. That has led to unprecedented prosperity in the U.S. and other industrialized nations and a 50% jump in output per person in developing countries over 20 years.

Even Asia's financial crisis serves as a startling example of how the same global economic system that arguably helped cause the problem is helping it go away faster and with less pain. After a disastrous 1998, Asia has staged an export-led rebound in 1999. Merrill Lynch & Co. economists, for example, are forecasting that the Asia-Pacific region, outside of Japan, is going to grow 5.6% in 1999, rising to 6% in 2000.

But free trade has also left many workers, industries, and nations feeling victimized. And the next phases of globalization could be even more unsettling as the demands of free trade bump up against cultural and political beliefs in rich nations and poor. The battles that broke out in Seattle on Nov. 30, delaying the opening of the WTO summit, are just the most extreme sign of anxiety. "Globalization isn't delivering good jobs across the board," notes Thea Lee, an AFL-CIO economist, who joined the Seattle protest.

The protesters decry a panoply of global ills: deforestation, child labor, overfishing, pollution, and loss of jobs to low-wage competition. It made for colorful television: Red-jacketed steelworkers marched alongside environmentalists dressed as endangered green sea turtles and monarch butterflies. But the scene turned ugly when protesters determined to close down the summit clashed with police.

HOT POTATO. Conflict over how globalization should proceed is not restricted to the protesters, however. There are major splits among the WTO delegates from 135 nations, who pledged allegiance to free trade--while lobbying furiously for rules most favorable to their parochial needs.

If nothing else, Seattle proves that even as globalization spreads, keeping the world's trade machinery well-oiled and free from the sand of protectionism is an increasingly difficult task. "It is no longer an esoteric international economic issue involving only an elite few," said Deputy Treasury Secretary Stuart E. Eizenstat in a lecture to business leaders in a downtown Seattle hotel. Previous rounds of trade negotiations have focused on removing government impediments to trade, such as quotas and tariffs. Now, the issues involve everything from Internet sales taxes to diverging child labor and endangered-species laws--making trade a hot potato everywhere from Vermont to Vanuatu.

But no matter how many demonstrators take to the streets--or how many bureaucrats maneuver for a national edge in the official negotiations--there are powerful pressures pushing globalization forward. With corporations looking for a global edge, cross-border mergers and acquisitions have exploded in 1999. In the U.S. alone, the inflow of foreign direct investment has totaled $287 billion over the past year, almost triple the pace from a year earlier.

At the same time, the rise of the Internet is making national borders increasingly permeable. As a result, protected industries such as financial services, the subject of fruitless trade talks for years, have found themselves quickly and conclusively exposed to global competition in many countries. And with the Internet increasingly viewed as the key to economic growth in the coming years, no country will be able to isolate itself from the global network.

DISPARITIES. Even countries with reservations about bending to the dictates of global policymakers still want to join the free-trade bandwagon--China being the most recent outstanding example. With one-fifth of the world's population, China's expected entry into the WTO "is a geopolitical trade event of equal importance to the fall of the Berlin Wall and NAFTA," says Michael Hartnett, senior international economist at Merrill Lynch & Co.

Nevertheless, there is a growing appreciation that trade and open markets present their own set of problems. The most troubling: "The benefits of trade have not been shared equally across countries and within countries," says Charles Bean, an economist at the London School of Economics. Even in the U.S., where trade and technology have produced an unprecedented boom, 400,000 manufacturing jobs disappeared in the last two years. Agriculture, which was supposed to be one of the big beneficiaries from trade, languishes in a depression, with exports down sharply.

In East Asia, the economic collapse there has left policymakers wary. Many leaders have soured on the idea of open and free capital markets, even though market openings produced their boom years and the global financial markets eventually infused the capital necessary to get economies growing again, albeit slowly. In these countries and in other developing nations, there is also growing suspicion about cultural and economic neocolonialism. "Globalization is often feared to be equivalent to Westernization," says Dru Gladney, dean of academics at the Asia-Pacific Center for Security Studies in Honolulu, an institute funded by the Defense Dept.

The leading Western economies also have issues about globalization. They're constantly wrestling with how to adopt the free-trade principles they preach without offending important domestic constituencies. That's why Europe, for instance, has dragged its feet on opening up its agricultural markets--and why the U.S. still tries to protect its textile, steel, peanut, and dairy industries.

In Seattle there was no consensus even among the critics--much less the negotiators--about how to address these conflicts. Unions want to prohibit forced child labor and favor strong WTO enforcement of such worker rights as the ability to join unions and bargain with employers. Similarly, some environmentalists want a tougher WTO to use trade sanctions to enforce environmental agreements, such as those protecting endangered species. Many developing nations, however, argue that this would slow their growth, making things worse for all workers (box).

Even the seemingly easy decisions are bogged down, thanks to the complexity of the new global economy and the challenge of managing it. For example, the U.S. is pushing hard to eliminate trade barriers on environmental technology and services. But the effort has become entangled with a dispute with Japan over U.S. efforts to eliminate $20 billion in subsidies to the world's fishing fleets.

But despite the street theater in Seattle, few policymakers see pressure for a major retreat from free trade. The world economy is just too strong, they say. "Trade restrictions are more likely when trade is creating unemployment," says Hartnett of Merrill Lynch. "You would need a deep and prolonged recession to get government to change their trade policies." Before that happens, the advocates of free trade might put another item on their agenda: Reminding the public that they, and not some faceless trade bureaucracy, still control of their destinies.