Capitalism, Protectionism and Globalization

Disoriented by the quickened pace of today’s competition, some in our society are looking back with nostalgia to the seemingly more tranquil years of the early post-World War II period.

That was the time when tariff walls were perceived as providing job security from imports.

Were we to yield to such selective nostalgia and shut out a large part — or all — of imports of manufactured goods and produce them ourselves, our overall standards of living would fall.

In today’s flexible markets, our large — but finite — capital and labor resources are generally employed most effectively. Any diversion of resources from the market-guided activities would, of necessity, engender a less productive mix.

For the most part, we as a nation have not engaged in significant and widespread protectionism for more than five decades. The consequences of moving in that direction in today’s far more globalized financial world could be unexpectedly destabilizing.

A likely fall in wage incomes and profits could lead — ironically — to a fall in jobs and job security in the shorter term. So yes, we can shut out part or all foreign competition, but we would pay a price for doing so — perhaps a rather large price.

I do not doubt that the vast majority of us would prefer to work in a less stressful, less competitive environment.

Yet, in our roles as consumers, we seem to relentlessly seek the low product prices and high quality that are prominent features of our current frenetic economic structure.

In particular, America’s discount retailers have responded by learning to profit as intermediaries between consumers and low-cost producers — whether located in Guangdong province in China or Peoria, Illinois.

Retailers who do not choose their suppliers with price and quality uppermost in mind risk finding themselves in liquidation.

If a producer can offer quality at a lower price than the competition, retailers are pressed to respond because the consumer will otherwise shop at the retailer who does. Retailers are afforded little leeway in product sourcing.

If consumers are stern taskmasters of their marketplace, business purchasers of capital equipment and production materials inputs have taken the competitive paradigm a step further and applied it on a global scale.

Understandably, as a consequence, trade discussions under the aegis of the World Trade Organization have become increasingly contentious.

After four decades of more or less successful negotiations, the “low-hanging trade agreement fruit,” so to speak, has already been picked.

Current trade negotiators, accordingly, now must grapple with the remaining, more difficult issues — such as intellectual property rights and agricultural subsidies.

Debates over trade restrictions have understandably become far more confrontational than in earlier years.

For example, a strain of so-called conventional wisdom has attributed the weak labor market in the United States to the widening trade deficit.

Since the beginning of the recession of 2001, the loss of jobs to low-priced competition from abroad (often deemed “unfair”) — and increased foreign outsourcing — has been blamed on corporate America.

U.S. “job losses are more closely related to declines in domestic investment and weak exports than to import competition.”

Or that is what Council of Economic Advisers Chairman Greg Mankiw recently pointed out. In addition, of course, increased productivity has enabled ongoing demand to be met with fewer workers.

Noteworthy is the singling out of a particular exchange rate, the Chinese renminbi, as a significant cause of American job loss.

The renminbi is widely believed to be markedly undervalued.

It is claimed that a rise in the renminbi will slow exports from China to the United States, which according to some, will create increased job opportunities for Americans at home.

The story on trade and jobs, in my judgment, is a bit more complex — especially with respect to China — than this strain of conventional wisdom would lead one to believe.

If the renminbi were to rise, presumably U.S. imports from China would fall as China loses competitive position to other low-wage economies.

But would, for example, reduced imports of textiles from China induce increased output in American factories? Far more likely is that our imports from other low-wage countries would replace Chinese textiles.

A rise in the value of the renminbi would be unlikely to have much, if any, effect on aggregate employment in the United States.

But a misaligned Chinese currency, if that is indeed the case, could have adverse effects on the global financial market — and, hence, indirectly on U.S. output and jobs.

No one truly knows whether the easing or ending of capital controls would lessen pressure on the currency without central bank intervention.

In the process, would it also eliminate inflows from speculation on a revaluation?

Many in China fear that an immediate ending of controls could induce capital outflows large enough to destabilize the nation’s fragile banking system.

Others believe that decontrol, but at a gradual pace, could conceivably temper such concerns.

China has become an important addition to the global trading system. A prosperous China will bring substantial positive benefits to the rest of the trading world.

Therefore, it is important to all of us that the Chinese succeed in navigating through their current economic and financial imbalances.

Excerpted from a speech Mr. Greenspan gave at the World Affairs Council in Dallas, Texas. To read its full version, click here.