Facing the challenges of the second global economy

May 10, 2002|By David H. Feldman

WILLIAMSBURG, Va. -- The PBS series Commanding Heights has brought the drama and sweep of the 20th-century economy to the American public in a thoughtful and entertaining package. Yet the most important idea it conveyed slipped in and out of the show within the first 10 minutes.

Viewers were treated to a brief glimpse of life a century ago, enough to show we are not living in the initial globalization but in the sequel. The hammer blows of two world wars, the Depression and rampant protectionism shattered the first global economy so completely that international trade did not regain its former importance until sometime in the Carter or Reagan presidencies.

Despite the headline-grabbing economic crises of the past few years, today's global economy is far less fragile.

In many ways, the first globalization was more profound and transforming than our contemporary experience. The technological forces that altered the American landscape from rural-agricultural to urban-industrial also bound together international markets for raw materials, agricultural products and manufactured goods.

It was a time when Carl Sandburg could describe Chicago as "hog butcher for the world" and Southern Hemisphere ranchers could clothe the world in wool. Lower-priced, higher-quality goods were more broadly available than ever before.

These tectonic shifts in the economic landscape were far from painless. In Europe, increased trade depressed food prices and farm income. This was a boon to the average industrial worker, but in much of Europe outside of Britain, rural interests clamored for protection.

The transportation revolution facilitated the mass movement of people from low-wage regions of Europe to high-wage lands in the Americas and Australia.

In Scandinavia, Italy and Ireland, the labor force was reduced by 20 percent to 45 percent. Read the third-class passenger list of the Titanic for evidence. These migrants were largely unskilled and clustered on the bottom rung of the labor market ladder. Economic and cultural nationalists fought to halt the tide of human migration.

In response to the declining position of the working poor, the United States progressively retreated from open immigration until finally slamming the door after World War I.

Commanding Heights attributes the collapse of the first global economy to the fateful terrorist bullet that triggered the guns of August 1914. But the tinder was dry long before the assassin's bullet set Europe alight.

We face many of the same challenges that undermined the first globalization. Technological change again has exacerbated income inequality. This time the winners are the well-educated, not those with the manual skills so important to our grandparents.

Yet 2014 need not resemble 1914. Governments retain great power to redistribute income. Our approach today reflects a more sophisticated use of markets and incentives -- worker retraining more often than import quotas.

We benefit also from the modern world trading system based on nondiscrimination. This golden rule of trade -- whatever barriers to trade you have should apply to all nations equally -- is enshrined as Article I of the World Trade Organization.

Without a treaty-sanctioned assurance that others won't play fast and loose with the rules, no nation has much incentive not to politicize trade. This simple principle is the basis for the successful opening of global markets since 1945.

Yet keeping trade policy depoliticized is an ongoing challenge for the world's largest economy. With the Weirton Steel Corp. now shielded behind the highest of our new steel tariffs, President Bush seems to agree with Sen. Robert Byrd that what is good for citizens of West Virginia is good for the nation.

More troubling still is the administration's penchant for creating exceptions. Canadian and Mexican steel will face no barriers, although the NAFTA treaty does not require this and our WTO obligations positively forbid it.

Globalization is not some inevitable process dictated by technological change; it's a political choice we have made. Created out of the chaos of World War II and nurtured by 50-plus years of patient U.S. diplomacy, global institutions such as the WTO are a great bulwark against political and economic disintegration.

Every president must wrestle with the temptation to forgo international leadership in pursuit of domestic political advantage. But continued U.S. leadership on trade is essential if the WTO is to retain its vitality.

David H. Feldman is a professor in the department of economics at the College of William & Mary.

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