WOODROW WILSON CENTER
EUROPEAN ALUMNI ASSOCIATION
“Europe Faces Outward”
IV: Responses to Globalization
U.S. Policies for India and China
Kent H. Hughes
Samuel F. Wells, Jr.
Saturday, September 13, 2008
Globalization Past and Present:
Herman van der Wee noted the similarities and the differences between today‟s
ththglobalization and that of the late 19 into the early 20 centuries.
Both globalizations were driven by new opportunities, new forms in
transportation, and a revolution in communications. Growth in Europe and the opening
of the Americas, steam ships, the spread of rail transport, and the development of
telegraph (now referred to as the Victorian Internet) and Trans-Atlantic cable combined
to draw peoples, technology, and investment to new parts of the world.
th In the mid-19 century, Great Britain was in the dominant position later occupied
thby Europe and then the United States. By the end of the 19 century, Britain faced the challenge of a rising Germany and the growing United States. With the construction of
new rail lines, Czarist Russia was compounding the challenge by moving ever closer to India, then the jewel in the British crown.
Yet, it was a very different world. Much of the world was a colonial possession of the European powers, universal education was still largely an American invention, class divisions were sharp, and the fruits of industrial development had not spread to whole populations.
Today‟s globalization started in what was often billed as „the American Century.‟
In the early post-world war II period, the victorious powers built a series of international institutions designed to avoid the mistakes of the Inter-War period and secure a more peaceful and prosperous world.
Starting with Ghanaian independence in 1957, one colonial possession after another gained its independence. Lingering colonial ties have loosened over the years as many former possessions have forged their own economic and political alliances.
Welfare states emerged in most industrial countries with the degree of societal protection being most developed in European countries. America, alone in the industrial world, developed a hybrid system in which private business carried a major share of the responsibility for funding retirement and health care.
th century, the Cold War split Europe, divided much of In the second half of the 20
the world into rival camps, and slowed the development of a second globalization.
During the Cold War period, however, quiet revolutions in transportation and
communications were developing that would bring the twentieth century world together
thways unimagined by the 19 century globalizers. Super tankers and containerization
took the lead in transportation while first satellites, then proliferating undersea cables,
and then the Internet made a major auto accident in Nairobi evening news in New York.
The Samurai Surprise: The Challenge to the United States and Europe
By the late 1970s, Japan had fully recovered from the devastation of World War
II and was emerging as a major industrial force.
Shielded from international competition in the early post-World War II years, the
Japanese challenge was a particular shock to the United States. Not only did Japan seem
on a steady march to overwhelming one American industry after another but they were
doing it all with a distinctly different economic model.
Europe had its own champion as an economically resurgent Germany also
regained traditional markets in the United States and alternated with the United States as
the world‟s largest exporter.
But Europe was far from immune to Japanese economic pressure. Expressing his
frustration with the combination of a mounting European deficit with Japan coupled with
hard to penetrate Japanese markets, Sir Roy Denman, then a key figure in Brussels,
became famous for describing Japan as “a nation of workaholics living in rabbit hutches.”
In December of 1982, Time reported on the second battle of Poitiers – a French demand that all Japanese Video Cassette Recorders (VCRs) be inspected by the small customs
house in Poitiers.
In the United States, the rise of Japan coincided with domestic economic turmoil
driven by two oil shocks and failed macro-economic policies. By the end of the decade,
Americans were talking about stagflation – the dreaded combination of no growth and
Multiple economic challenges forced American business and the U.S. government
to change practice and policy. By the end of the 1980s, American manufacturers and a
growing number of major service providers had adopted or adapted Toyota‟s fabled lean-
production approach. The U.S. Government took a series of steps to help speed the
translation of new ideas into new competitive products: universities were allowed to
commercialize federally funded research; government laboratories were opened to
potential collaboration with business, government agencies set aside part of their budgets
to fund small business innovations, pension funds were allowed to invest in venture funds
while still meeting the „prudent man‟ rule, and businesses themselves were given partial
immunity from the anti-trust laws to encourage cooperation on research ventures.
Japan, in particular, triggered what became known as the competitiveness
movement in the United States. National and state-level commissions formed to study
competitiveness and their efforts were matched by a series of legislative initiatives by the
U.S. Congress to define a long-term productivity growth strategy that was adapted to
realities of global competition and rapid technological change.
Europe and the Organization for Economic Cooperation and Development also
turned their focus to developing a competitiveness strategy that would respond to global
The Rise of China and India
There is only occasionally a single turning point in the affairs of nations. There
thwere some in the 20 century – the descent of Europe into World War I, the onset of the
Great Depression, and the allied victory in World War II.
In terms of today‟s economic challenges, 1989 and the fall of the Berlin Wall is a
useful marker for the emergence of a truly global economy. The freeing of Eastern
Europe was followed, in 1991 by the collapse of the Soviet Union itself. At much the
same time, India responded to an economic crisis by reversing decades of closed, Soviet
style development policies and started the process of gradually joining the world
economy. China had started down a path toward global engagement and a more market
oriented economy in 1978 with the advent of the Deng Xiao Ping reforms. By the early
1990s, China was well on its way to becoming the new „workshop of the world.‟
China and India were not alone. The former Soviet sphere of influence because
part of the world economy and Brazil emerged as a major force in agriculture with a
growing commitment to manufacturing, energy and services. Two books caught the new
economic reality in their titles:
st Tom Friedman‟s The World is Flat: A Brief History of the 21 Century
Clyde Prestowitz‟s Three Billion New Capitalists: The Great Shift of Wealth and
Power to the East
China: The Dragon’s Strategy for Greatness
China started down the path to rapid growth with agricultural reforms. The
communes were dissolved and agricultural productivity soared.
In terms of industry, China has adopted a variant of the export-led growth strategy
that has worked so well in other countries of East Asia. Like Japan, they focused on
manufactured exports, manipulated their currency to achieve a competitive advantage,
and “borrowed” intellectual property. Unlike Japan, however, China has sought foreign investment as a way of accelerating growth and adding to stock of technological know-
In a short period of time, China has had enormous success. It has moved from
toys and textiles to manufacturing autos and moving into ever more sophisticated
electronics. American stores are filled with „made in China‟ products and more and more
American manufacturers are struggling to match what they refer to as „the China price.‟
Even in agriculture, China is becoming an export force creating competition for
strawberry growers in Europe and apple growers in Pennsylvania.
The U.S. Response:
The U.S. Government, industry, and universities have all become deeply involved
The U.S. Government: The Clinton Administration (1993 to 2000) adopted a
strategy of engagement to bring China more fully into the global economy and the
international community. As part of this strategy, the Clinton Administration succeeded
in securing permanent normal trader relations (previously known as most favored nation
treatment) as part of China joining the World Trade Organization. As part of its
accession process, China actually took on ambitious commitments in terms of opening its
economy and subjecting state run enterprises to international competition.
During the George W. Bush Administration, U.S. policy has continued to seek
engagement, avoided pressing China on its international commitments, and been
supportive of U.S. companies seeking to invest and do business in China.
Currency Manipulation: The growing bi-lateral trade deficit with China
is part of twin imbalance with the United States experiencing record trade and current
account deficits while China has registered record trade and current account surpluses.
The Omnibus Trade and Competitiveness Act of 1988 required the U.S. Treasury
to submit an annual report to the House and Senate Banking Committee. A finding of
currency manipulation in specific circumstances would require the Secretary to open
negotiations with the manipulating country.
The U.S. Treasury has not found China to be manipulating its currency. In
response to mounting pressure from the Congress and some segments of industry,
Secretary Paulson has launched a Strategic Economic Dialogue and has made repeated
pleas for China to allow market forces to determine the value of the currency. In
response, China has allowed its currency to fluctuate within specific bounds and, over
time, permitted only a very gradual appreciation.
Intellectual Property: China has been aggressive in borrowing intellectual
property without bothering to pay for patents, copyrights, or know-how. Before joining
the World Trade Organization, China expected foreign investors to „share‟ their intellectual property as a price of doing business in China.
American companies, fearing an unfavorable response by the Chinese government, have been reluctant to ring official complaints and have, generally, not pressured the Office of the United States Trade Representative (USTR) to bring a complaint under the WTO. Only recently has USTR brought a case.
To limit intellectual property theft, U.S. business is now more likely to have wholly owned subsidiaries. Labor, of course, is mobile and companies have taken added precautions by keeping key pieces of a new technology in their labs and plants where intellectual property protection is reliable.
Import Dependence: Although the United States has become increasingly
dependent on imports for key electronic devices, it has not taken major steps to stimulate domestic production or consciously diverse supply. In the first Clinton term, there was an attempt to foster a competitive, domestic, flat panel display industry. For the most part, the administration found itself caught between the limitation imposed by world trade rules and congressional objections to what some saw as an industrial policy.
About three years ago, the Defense Science Board (DSB) issued a report
expressing concern about the degree to which the semiconductor industry was shifting
from the United States to China. The DSB report has not, however, led to any concerted
Congress Proposes but does not Act: China has triggered considerable
debate in the Congress and led to a variety of legislative proposals to offset what many
legislators see as China‟s manipulation of its currency to gain a competitive advantage in the U.S. and world markets. In the last Congress, Senator Charles Schumer (D-NY) and
Senator Lindsey Graham (R-SC) garnered considerable attention over a legislative
proposal to impose a high tariff on Chinese goods to offset the currency advantage. More recently, senators have proposed adopting a Warren Buffet proposal to balance trade by
requiring imports to be accompanied by certificates that would be issued to exporters.
None of the proposals is likely to be adopted in the current climate.
The one concrete step the Congress has taken is to establish the U.S.-China
Economic and Security Review Commission. Established in 2000, the Commission
holds hearings on economic and security related topics and issues an annual report that
includes recommendations for action.
U.S. Business has three reactions to the challenge and opportunity posed by China.
Large manufacturing enterprises have invested heavily in China and, increasingly, are
establishing R&D facilities there as well. Faced with Chinese competition, many other