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WOODROW WILSON CENTER

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WOODROW WILSON CENTER ...

    WOODROW WILSON CENTER

    EUROPEAN ALUMNI ASSOCIATION

    Conference

    “Europe Faces Outward”

    Barcelona, Spain

    IV: Responses to Globalization

    U.S. Policies for India and China

     Kent H. Hughes

     and

    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

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    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.

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    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.

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     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

    rising prices.

     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.

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     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

    competition.

     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

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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-

    how.

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     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

    with China.

     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.

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     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

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    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

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from the United States to China. The DSB report has not, however, led to any concerted

    action.

     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:

     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

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