Globalization and Politics

Faced with a battered American economy and a five-year high unemployment rate, US presidential candidates tend to slip into anti-trade mode. Piling blame on foreigners is convenient and attracts votes. But the US has misidentified the source of its economic woes, suggests Nayan Chanda in his column for Businessworld. Outsourcing is just one side of the coin of globalization; on the flip side, many countries continue to outsource many of their own jobs to the US, a glaring fact that US politicians omit from speeches. US protectionist policies will not only fail to lift the US economy, but could cause serious harm, by inviting a backlash. Global economies, including that of the US, are inextricably intertwined. Fighting the driving force globalization is pointless, and all nations would be wise to cooperate on trade and other matters for the common good. – YaleGlobal

Globalization and Politics

While politicians are decrying jobs leaving the US, a reverse offshoring is quietly taking place
Nayan Chanda
Wednesday, September 17, 2008

With unemployment reaching a five-year high and unremitting bad news from key sectors of the US economy, except export, the backdrop to the US elections seems tailor-made for a protectionist romp. The fact that the hard-hit rust-belts of Ohio and Pennsylvania have emerged as decisive battleground states makes it harder for Barack Obama to avoid anti-trade rhetoric. Of course, the hard election rhetoric tends to melt before the reality and responsibility of power.

A recent example: in 2000, George W. Bush won a key election in West Virginia, where the steel industry was battered by foreign competition, by promising protection through tariff barriers. Three years later, faced with WTO sanctions, the administration had to eat its words. But the campaign rhetoric is not cost-free as it sets the tone for policy that becomes expensive to reverse.

One of the refrains of the current Democratic presidential campaign has been the claim that the Bush administration has rewarded corporations with tax credit for shipping American jobs overseas. The claim resonates with tens of thousands of laid-off workers in mid-western states, but the reality is much more complex. There is no “tax credit” for setting up foreign operations, but US tax law does allow corporations to defer paying tax on their foreign earning until it has been repatriated to the US. In fact, this law has been around longer than the Bush administration. And despite periodically denouncing corporations for keeping their foreign profits abroad, successive houses of Congress have not been able to change the tax code. Apart from the clout of corporate lobbyists on the Capitol Hill, one of the reasons for not insisting on collecting taxes on foreign earnings has been the fear of losing tax revenue altogether by forcing companies to relocate abroad. The US corporate tax of 35 per cent is already one of the highest in the world, which makes tax holiday and subsidies offered by foreign countries to move offshore even more tempting.

Even if companies were willing to pay tax on foreign earnings upfront, there are many other reasons to move some of their operations abroad, not least the demands of supply-chain production, lower wages, proximity to market and, simply, higher profit margins. While the Democrats are compelled to address the immediate concern of the affected blue-collar electorate in Pittsburg or Detroit, or blame job loss on the incumbent administration, the constant harping about foreigners taking America’s jobs unfairly misplaces blame and reinforces myths about others being responsible for the current trouble.

The solution to economic problems can only be based on the reality of a transforming global economy in which capital moves with unprecedented ease to where profits are high, and production to where cost is low as are barriers to trade. The rise of populous countries with a large skilled workforce, such as China and India, has created opportunities for production and opened up markets that US companies would have been foolish to ignore. Many of the industrial jobs that left America’s shores for low-wage countries and gave the US cheap imports may never return. But with right policies, a superior US education system and its productive labour force, the country can move to the higher end of the production chain.

Ironically, while politicians are decrying jobs leaving the US, a reverse offshoring is quietly taking place. Propelled by many of the same factors that lead American companies to shift abroad, many foreign manufacturing and service companies are moving into the US, employing thousands of people. In recent months, major European automobile manufactures such as Volkswagen and Fiat, and German steel maker Thyssen-Krupp have been lured by major financial incentives from state governments to set up plants in the US. IT services company such as Wipro and Satyam have set up operations in the US to better serve their customers in closer proximity. The decreasing cost of containerised shipping was one factor behind factories moving out to low-wage production locations in Asia. Now rising cost of transportation is bringing some factories back to the US. The declining dollar also makes US wages more attractive to foreign investors.

This complex reasoning may not help win the votes of disaffected citizens in the rust-belt. But to come to grips with the challenge of new economic reality in an increasingly interconnected world, both parties would do well to understand today’s driving force: it’s globalisation, stupid!

Nayan Chanda is director of publications at the Yale Center for the Study of Globalization and Editor of YaleGlobal Online.

An ABP Pvt Ltd Publication Copyright © All rights reserved.