The Fundamental Flaw in the Global Ecosystem

By Shlomo Maital    

Clyde Prestowitz

    My friend Clyde Prestowitz, President Ronald Reagan’s chief trade advisor, someone who understands the realities of world trade better than anyone, blogs at the Foreign Policy website.  His latest blog makes a simple but painful point.  Many countries in the world pursue a policy of export-led growth:    Japan, Korea, China, Taiwan, Singapore, the Netherlands, Malaysia, Vietnam, and Brazil.  It sounds logical. Build your economy by selling to others.  The problem is, the ‘rules of the game’ say you need to do this fairly, without illegally subsidizing or helping your exporters or taxing imports.  China, for instance, maintains its exchange rate at hugely undervalued levels, to keep its exports cheap. World Trade Organization rules don’t allow this. But China’s been doing this for years, and will continue to do so.  Even Germany, according to Prestowitz, is ‘mercantilist’ (i.e. following a policy of maintaining forever an export surplus).  Part of Europe’s problems is not the misguided wreckage of dumb policy in Greece, Ireland, Spain, Portugal and Italy, but the fierce export-driven policy of Germany, which in part comes at the rest of Europe’s expense.  Keep in mind that if one country runs an export surplus, some other country will necessarily have to have an import surplus.  All the countries in the world cannot each have exports exceed imports, unless we start trading with Mars.  Germany piles up export surpluses, then balks at using its wealth to assist fellow EU countries that have suffered because of those surpluses, thus endangering European union.

     America more or less adheres to the rules of free trade, and as a result has had trade deficits for over 30 years, causing high external debt, and very weak economic growth. (Imports, remember, create jobs abroad, not at home).   How long will America continue this losing policy?

     When some countries play by the rules, and others bend or break them, the system is unstable. And that is what we have now.   When everyone becomes mercantilist, world trade breaks down, as it did in the 1930’s. 

    There is a stark choice. Either all countries embrace free trade, fairly and openly, or no country will in the end adopt free trade.  The latter seems increasingly likely.