Page 3 of 3 World leaders miss the target
By Henry C K Liu
relations: "We shall have world government, whether or not you like it. The
only question is whether world government will be achieved by conquest or
consent."
National sovereignty has since emerged as the only effective defense on the
part of weak economies against the predatory internationalism of the strong
economies.
Obama's position on trade
Obama's position on free trade is hard to decipher since so far his words
during election campaigns have not been validated by his actions in office.
With North American Free Trade Agreement (NAFTA) partner and Canadian Prime
Minister Stephen Harper at his side, Obama said, "We have to be very careful
about any
signals of protectionism." And to Brazilian President Luiz Inacio Lula da
Silva, he said: "Trade is an important engine for economic growth."
At the 2009 London G-20 summit, the Brazilian president, in a bilateral meeting
with Chinese president Hu Jintao, proposed a bilateral currency swap to
facilitate trade to be entered into during a forthcoming state visit to China
in May.
A first step in this redirection of policy focus on domestic development is for
China to free itself from dollar hegemony. This can be done by legally
requiring payment of all Chinese exports to be denominated in yuan to stop the
unproductive role of exporting for dollars that cannot be spent domestically
without incurring heavy monetary penalty. Such a policy affects only Chinese
exporters and can be implemented unilaterally by Chinese law as a sovereign
nation, without any need for international coordination or foreign or
supranational approval. (See
Breaking free from dollar hegemony, Asia Times Online, July 30, 2008.)
Cross-border exchange of regional currencies is an important way to circumvent
a shortage of dollars and other currencies, as well as reduce exposure to
exchange rate volatility. Developing countries in eastern and central Asia as
well as South America are beginning to recognize the Chinese yuan as an
appropriate currency for bilateral trade settlements. In some case, the yuan is
beginning to serve as a reserve currency for bilateral trade.
Central banks in China and South Korea signed a 180 billion yuan (US$26.4
billion) currency swap framework agreement on December 12, 2008. The People's
Bank of China entered into a 200 billion yuan swap with the Hong Kong Monetary
Authority on January 20, 2009; an 80 billion yuan agreement with Malaysia's
central bank on February 8; a 20 billion yuan deal with the National Bank of
Belarus on March 11, a 100 billion yuan swap with the central bank of Indonesia
on March 24, and an 80 billion yuan swap with the central bank of Argentina.
The swaps will allow the parties to avoid using dollars in trade between them
and China. Other central banks have also indicated a willingness to enter
currency swap agreements with China.
Currency swaps allows a central bank to inject a counter-party's currency into
its own financial system, allowing domestic businesses to borrow the other
country's currency and use it to pay for imports of that country's goods,
thereby easing the pressure on trade caused by an insufficiency of dollar.
Technically, currency swap agreements are simply two-way loans between central
banks. Foreign central banks generally use borrowed yuan to settle trades with
China or as a reserve currency. China, on the other hand, uses foreign currency
holdings as collateral. Consequently, regional circulation of the yuan expands
with bilateral currency swaps.
The system hinges on confidence in the yuan among all swap parties. As
liquidity of the dollar, the generally accepted reserve currency for
international settlement, dries up in the current financial crisis, serious
problems in credit and exchange rate risks have emerged. As a result, regional
demand for trade settlement in local currency has appeared. As the currency of
the largest economy engaged in the production of manufactured goods, the yuan
naturally fills in as the preferred currency to respond to this demand. The
scale of currency swaps is determined by market demand, not by currency
hegemony.
'Buy American' protectionism
Notwithstanding Obama's rhetoric against protectionism, a "Buy American"
provision was left in his $787 billion stimulus bill and in the $410 billion
omnibus spending bill that sets the budget of many government departments. A
NAFTA-created pilot program allowing limited fleets of regulated Mexican trucks
to use US highways was meanwhile cancelled, in response to which Mexico
threatened to retaliate by imposing tariffs on US goods, ranging from Christmas
trees to pet food and toilet paper. "It may be difficult for us to finalize a
whole host of trade deals in the midst of an economic crisis like this one,"
Obama said in apparent appeasement to anti-trade labor leaders who constitute a
central core of his political coalition.
Economic slowdown is increasing pressure for protectionism and insularism in
domestic politics in all countries. The US is not exempt from such pressure,
notwithstanding US exceptionalism. For an economy that has been benefiting most
from international trade, even as some sectors of economy, such as
manufacturing, have been forced into painful restructuring, such domestic
political pressure grows at an particularly dangerous time, as collapsing
global trade can force the economic downturn into a much deeper and
long-lasting depression. Yet the predatory terms of trade constructed under
neo-liberalism have generated strong antitrade sentiments in all countries.
Neo-liberal international trade has become a class struggle issue between the
financial elite and the working poor in all countries, rich and poor.
Unlike the US, the EU and Japan, the BRIC economies (Brazil, Russia, India and
China) are in a position to take advantage of the fall in international trade
to abandon excessive trade dependence to refocus on domestic economic
development, if domestic political pressure manages to reject the free traders
that have been running their economies to the ground for the past three
decades.
China adopts new development strategy
In the case of China, a general consensus is emerging that excessive dependence
on foreign trade up to over 70% of its gross domestic product (GDP) is neither
sustainable nor desirable. Much of China's developmental ills, such as wage
stagnation, income disparity, regional imbalance, environmental degradation,
are direct results of excessive dependence of foreign trade under current
predatory terms of international trade under dollar hegemony.
International trade must be reformed to conform to new terms of trade so that
trade will augment rather than obstruct domestic economic development. Under
such new, equitable terms of trade, China can raise the domestic segment of its
GDP to 65% and lower the foreign trade segment to 35% without reducing current
trade volume. Unfortunately, trade denominated in a hegemonic dollar prevents
China from utilizing sovereign credit in lieu of foreign capital to raise the
domestic segment of its GDP without first allowing its foreign trade segment to
shrink from the current global financial crisis.
The economic case for defending free trade in a global market economy is not
universally shared while it is politically increasingly difficult to make to
injured domestic groups that are unevenly bearing the pain while not sharing
equitably in the benefits of trade. Global labor has been the prime victim of
globalized international trade.
The state of the world's trading system is of prime concern to the Obama
administration. Yet, there is little sign that the Obama administration is
focusing on producing a truly salutary global trade regime that promotes
balance and sustainable economic development for all. Ironically, to
internationalists in the Obama administration, one frustrating feature of the
current financial crisis is that it is so international in scope, leaving many
elements and control points out of reach for US policymakers and even
transnational financial institutions.
In a globalized interdependent economy operating still under the Westphalia
order of independent sovereign nation states, national economies are falling
into depression as connected units of a global economy without the benefit of
world government. A revival of global trade without reforming the predatory
terms of trade will remain an empty dream.
G-20 leaders need to understand that only economic development can pull the
world out of this neo-liberal financial morass of debt. Trade needs to be
restructured to augment domestic development not to retard it. Protectionism
against predatory trade is merely economic nationalism in a world order of
sovereign nation states. Going forward, economic nationalism will continue to
be the base, interdependence will only be the context.
US populist opposition to world trade
In the US, Federal Reserve chairman Ben Bernanke, appearing before the House
Financial Services Committee, was warned by chairman Barney Frank
(D-Massachusetts) that it will be difficult to stop a rise in protectionist
sentiment without more help for threatened workers. Congressman Frank noted a
pattern of "people at the top of the economic pyramid being very critical of
protectionists. We have had lectures that we should not give in to the instinct
to try to favor American-made products and American jobs."
Frank said free-trade arguments will remain unconvincing "as long as the
American people feel that they do not fairly participate on the whole in the
benefits of trade" and until there is a "broader social safety net" to help
workers who lose jobs and health benefits to global wage arbitrage. This US
protectionist sentiment is shared by the people of all other nations.
FDR's monetary reform
In the 1933 G-66 London Conference, conservative central bankers in Britain and
France wanted to return to the gold standard to preserve the value of their
currencies even at the cost of lower wages and price deflation. Most
pre-Keynesian conservative economists argued that this approach, while
temporarily painful, was the fastest possible way to end an economic
depression.
FDR's New Deal chose to devalue the dollar to reduce the excessive debt burden
and stimulate economic expansion with government injected liquidity through
deficit financing. New Dealers had lost faith in president Herbert Hoover's
approach of financial orthodoxy. Conservative historians have since argued that
Hoover, in hoping to win a second term, had in fact abandoned financial
orthodoxy by intervening in the collapsing financial sector to ease the panic,
thus robbing the market any chance of self-correction. Still, massive financial
pain showered on the masses is never acceptable in politics and particularly in
an election year in a democracy. Further, Hoover was forced to compromise on
financial orthodoxy in order to ward off the rise of communism in the US.
Unfortunately, Hoover began his monetary compromise to save capitalism too late
and lost the election to Roosevelt. After the election, Hoover bitterly charged
Benjamin Strong, president of the New York Federal Reserve Bank, a job held
seven decades later by Geithner, now Obama's Treasury secretary, with reckless
placement of the interests of the international financial system ahead of US
national interest and domestic concerns. Strong sincerely believed his support
for European currency stabilization also promoted the best interests of the US,
as post-Cold War neo-liberal market fundamentalists also sincerely believe its
promotion enhances US national interests. Unfortunately, sincerity is not a
vaccine against falsehood.
The nature of and constraints on US internationalism after World War I had
parallels in the rise of US internationalism after World War II and in US
globalization after the Cold War. (See
BANKING BUNKUM - Part 3b: More on the US experience, Asia Times Online,
November 27, 2002.)
Roosevelt expanded the interventionist cure that Hoover had begun. On January
31, 1934, FDR by permission of Congress, devalued the dollar, reducing its gold
content by 40%. It was a "beggar thy neighbor" devaluation policy antithetical
to the free-trade ideas of Adam Smith. The first New Deal (1933-35), aiming at
short-term relief programs for all groups, promoted economic planning in
industry and agriculture in the Soviet style (some say the Italian Fascist
style), and ran up against a reactionary Supreme Court. The second New Dealers
(1935-38), including Justice Brandeis, whose fear of the stifling of free
competition by big business was greater than his embrace of laissez faire,
needed a respectable economic theory to support their spending program in an
era of declining government revenue. They found him in John Maynard Keynes,
through future Supreme Court Justice Felix Frankfurter, who introduced Keynes
to FDR.
The New Deal legalized labor unions, established the Work Progress
Administration relief program, the Social Security Act, and programs to aid the
agricultural sector, including tenant farmers and migrant workers. The Supreme
Court ruled several programs unconstitutional. Most of the New Deal's relief
programs were shut down during World War II by the Conservative Coalition. Many
regulations were ended during the wave of deregulation in the late 1970s and
early 1980s. Several New Deal programs remain active, with some still operating
under the original names, including the Federal Deposit Insurance Corporation,
the Federal Housing Administration, and the Tennessee Valley Authority.
The largest programs still in existence today are the Social Security System,
the Securities and Exchange Commission, and Fannie Mae, albeit most of these
program have been modified to reflect the rise of neo-liberalism in US
ideology.
Neo-liberal market fundamentalist trade globalization has proved itself to be
the mother of economic inequality. Bill Moyers, a key participant in President
Johnson's Great Society that was tragically aborted by the Vietnam War, said in
a June 3, 2004, speech, The Fight of Our Lives, given at the Inequality Matters
Forum at New York University:
Astonishing as it seems, no one in
official Washington seems embarrassed by the fact that the gap between rich and
poor is greater than it's been in 50 years - the worst inequality among all
western nations. Or that we are experiencing a shift in poverty. For years it
was said those people down there at the bottom were single, jobless mothers.
For years they were told work, education, and marriage is how they move up the
economic ladder. But poverty is showing up where we didn't expect it - among
families that include two parents, a worker, and a head of the household with
more than a high school education. These are the newly poor. Our political,
financial and business class expects them to climb out of poverty on an
escalator moving downward.
The inequality that Moyers rightly
protests about did not start with the Republican second Bush administration. It
started with the Democrat Jimmy Carter administration's deregulation policies
and the neo-liberal free-trade policies of the two-term Clinton administration
and Clinton's adoption of the "Third Way" radical centralism approach promoted
by British sociologist Anthony Giddens.
The overall aim of the Third Way is, in Giddens' own words: "To help citizens
pilot their way through the major revolutions of our time: globalization,
transformations in personal life and our relationship to nature."
Unfortunately, the Third Way proved to be of little help to the victims of
globalization or to protect nature from wholesale damage.
All through the New Deal, FDR protected the threatened sectors of the economy,
particularly agriculture, that had been hardest hit by the depression. Aware of
the history of the struggle by the agricultural populists against the gold
standard in favor of silver, FDR sent a devastating telegram to the 1933 London
G-66 conference accusing it of bad faith and repudiating any attempt to get a
deal to fix the value of currencies. "I would regard it as a catastrophe
mounting on a world tragedy," FDR said, "if the conference should allow itself
to be diverted by a purely artificial and temporary experiment ... the focus on
[currency] stabilization shows a singular lack of proportion and failure to
remember the larger purposes for which the conference was called."
He added that "the old fetishes of so-called international bankers are being
replaced by efforts to plan national currencies" around domestic needs. FDR's
telegram, popularly received in the US, caused the collapse of attempts to
reach a coordinated international approach to the crisis.
For the organizers of the 2009 London G-20 summit, the lesson of 1933 is that
boosting market confidence by maintaining a united front in the face of the
global recession has to be a key objective, independent of concrete policies
that may well fail to reach agreement. Critics of summitry warn that the risk
of failure, and its negative effect on confidence, is greater than the
potential gain from a soothing image of international cooperation.
History has shown that international cooperation is achievable only through the
strong leadership of a dominant power with the economic and political strength
to enforce a new world order. The international politics of US hegemony was
behind the success of the Bretton Woods regime of 1944, which imposed the
dollar as the world reserve currency for trade and created the IMF as the
international lender of last resort and the World Bank as the financing
institution for the development of poor economies. Similarly, hegemonic
leadership in the 1950s successfully initiated world trade negotiations that
led eventually to the creation of the World Trade Organization.
But in the current financial crisis, as it was during the Great Depression, a
weakened US has neither the economic strength, the financial resources, the
political will not the moral righteousness to be the lead organizer of a new
world economic order.
"By any measure, the London summit was historic," President Obama declared
grandiosely after the one-day summit. The Wall Street Journal headline on the
day before the summit read: "Global Slump Seen Deepening." And on the day of
the summit, the WSJ headline read: "Obama Hits Resistance at G-20" The need for
broad consensus is not a new US policy epiphany; it is merely the US response
to reality. Unipolarity is finally being replaced by multipolarity in global
geopolitics. In that sense, the 2009 G-20 London summit was indeed historic.
In defense, Obama admits: "We won't solve the problem of the world in one
summit." Yet even a clear definition of the problem has escaped two summits
thus far. The next summit is reported to be held in New York in September. No
one expects the world economy to be in better shape by then and the prospect of
protests by angry citizens more violent than those in London is very real. By
then Obama will have worn off the excitement of being a new leader on his
maiden diplomatic excursion and all world leaders may well be suffering from
summit fatigue, while the world economy sink deeper in crisis from its own
structural contradictions.
Henry C K Liu is chairman of a New York-based private investment group.
His website is at http://www.henryckliu.com.
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