Global Economy Offers Problems, Promise for U.S. : Trade: As the pace of international commerce accelerates, the lives of Americans increasingly are influenced by business decisions made half a world away.
French families flock to visit a wondrous new American import--Euro Disney, the giant amusement park. A tumble in Tokyo’s stock market, meanwhile, triggers a plunge on Wall Street and rattles nerves in financial capitals everywhere.
At the same time, overseas rivalry hits Peoria, Ill., as giant Caterpillar Inc. makes tough new demands on its workers, it says, in order to survive.
Together, these recent headlines provide a vivid glimpse at the churning global economy--in effect a worldwide swap meet of goods and services that links the fate of consumers, workers, managers and investors on different continents as never before.
The ties that bind U.S. fortunes to events overseas have grown tremendously in just the last few years, creating new promise--and controversy--as America’s own economy struggles to emerge from a lengthy slump. In the giant global bazaar, outside forces increasingly affect the pace of U.S. economic growth, the level of mortgage rates paid by American home buyers, the availability of credit and the survival of industries.
“When you have a global economy, anything that happens in one part of the world will have an impact on the other parts of the world,” declares Theodore H. Tung, chief economist at National City Corp., a Cleveland-based banking firm.
The global marketplace might be viewed as the multitude of dealings in which goods, services, money, labor and equipment flow with increasing freedom across national boundaries. South Carolina farmers who export soybeans to China are participants, as are Japanese auto makers with design shops in Los Angeles, retirees whose pension funds own stocks in Germany, consumers who buy anything made overseas.
Everybody plays, in other words. And the game is getting bigger. After decades of isolation, Eastern Europe and the former Soviet Union eagerly eye foreign investment--and customers--as do developing nations from Mexico to South Korea. The easing of trade barriers, the growing portability of factory technology, advances in communication and transportation are all giving the process a big shove.
The world economy is “the interaction of all the people on the face of the globe for economic gain,” explains Richard B. McKenzie, a professor of management and economics at UC Irvine. “They’re linked up in ways that 30 or 40 years ago they couldn’t imagine.”
Of all the links, the key, perhaps, is foreign trade, with sellers and buyers on opposite sides of national borders accounting for a fast-rising share of all the world’s economic activity. Such trade has expanded at an annual pace of close to 6% on average since the mid-1980s, despite the tensions and tiffs that frequently emerge. That’s double the tempo of overall economic growth, according to data compiled by the WEFA Group, an economic forecasting firm in Bala Cynwyd, Pa.
The United States has been a winner in this process, selling more products overseas than ever, and narrowing the trade gap that was once an embarrassing issue. Sales of goods abroad now account for more than 11% of U.S. economic activity, according to WEFA. The figure was just 7% in the mid-1980s. To appreciate the magnitude of such a change, consider that each percentage point equals about $49 billion, adjusted for inflation.
This trend has special significance at a time when the nation seeks to rebound from recession. The strength of U.S. economic recovery will depend more than ever on the vibrancy of foreign economies, and the ability of overseas customers to keep buying American in the coming months.
But while slowdowns in Japan and Germany now threaten to dampen a U.S. recovery, there are more upbeat scenarios for an economy increasingly oriented to selling its products abroad. “The global economy also means that an upturn in Latin America could help U.S. growth,” points out Richard B. Hoey, chief economist at the Dreyfus Corp.
Beyond the trade in goods, from microwave ovens to machine tools, there is a growing financial tapestry among nations, as investment flows across borders with the speed of a few taps on a computer keyboard.
At the dawn of the 1980s, only 38 foreign-based corporations were listed on the New York Stock Exchange; today there are 105. Last year, Americans plunked down $35 billion in foreign stock investments, more than triple the amount of U.S. stocks purchased by foreigners, according to the Securities Industry Assn. in New York.
The dramatic increase--it was more than the entire amount Americans spent for foreign stocks between 1982 and 1990--seemed to reflect a keen new awareness of the changing world, along with growing opportunities to invest overseas.
“You don’t have to buy GM anymore,” observes David G. Strongin, international finance director for the securities industry group. “An individual or an institution might say, ‘Why can’t I buy Volkswagen or BMW? They’re good companies.”’
For many economists the picture verges on utopia: a world without government restrictions on free enterprise, where no bureaucratic rules distort prices, interfere with investment or shelter inefficient companies from competition. In such an idyllic place, each country would produce what it does best, and consumers would be lavished with top-notch products at bargain-basement prices, the theory goes.
Yet all agree that the world is far from the harmonious, multicultural beehive idealized in economic theory. A recent Administration proposal to lift the tariff on a type of hard, Hungarian cheese unleashed a small uproar on Capitol Hill. U.S.-Japan trade tiffs, the “America first” theme of Patrick Buchanan’s presidential campaign, organized labor’s opposition to a trade accord with Mexico all underscore the controversies of globalization.
Nor can the enduring importance of regional factors on economies be denied, from Germany’s burden of unification to the U.S. recession to political instability in many parts of the world. Indeed, one analysis of the ups and downs of different nations’ stock markets found little parallel between rallies and stumbles in one country and another.
“This concept that there’s a lock-step global market really doesn’t pan out when you look at the statistics,” said Gavin Dobson, president of the Murray Johnstone International investment firm, who has compared stock movements in 18 countries during the 1980s. “To expect that an event in America will have an immediate impact in Finland is silly.”
But if Dobson considers the global economy something of an overused buzzword, his own life is a dramatic example of its reach. Born in Germany and educated in Scotland, he runs a firm in Chicago that currently manages assets in 19 countries (the parent company is Scottish). “Here I am--a Scotsman sitting in America, selling Japanese stock to U.S. investors,” he marvels.
In reality, the expansion of global enterprise can disturb everything from local sensibilities to employers, whose less-efficient operations are put on the defensive.
The $3.9-billion Euro Disney project, for example, is both a textbook example of today’s mobile investment, representing one of the largest commercial developments in Europe, and an illustration of capital’s power to affect culture. Not surprisingly, Mickey Mouse and his Walt Disney Co. cronies are viewed by at least some of the French as unwelcome symbols of America.
For all its benefits, a byproduct of the global economy is a cultural “homogenization” process, notes Irvine’s McKenzie. “There are pluses and minuses, and one of (the minuses) is the loss of national or even local identity.”
The recent roller-coaster ride on Wall Street symbolizes another face of the worldwide bazaar. Financial markets are increasingly linked, with instability in one place jumping elsewhere, like impulses shooting through a single nervous system.
Despite findings by Dobson and others that different stock markets tend to move independently over time, the recent two-day, 94-point skid in the Dow Jones industrial average, sparked by bad news from Japan, halted only after the Federal Reserve Board cheered up American investors by lowering U.S. interest rates.
Most analysts maintain that Japan’s short-term outlook is gloomier than America’s, and that the overseas stock plunge reflected localized problems, such as a sinking economy and Tokyo-based banks saddled with shrinking assets.
With little evidence of a direct connection between the financial chaos in Asia and North America--such as Japanese investors dumping their American stocks to raise cash--analysts concluded that the New York decline was a psychological echo, prompted by the plethora of business links between the two countries.
In addition, financial frailty in Japan can have real meaning in this country for the vast majority of consumers who don’t dabble on Wall Street.
To cite one example, Japanese banks are pulling back from financing overseas, due to their domestic problems. This drop in the amount of credit available is believed to be one force helping to keep long-term interest rates, including those for home loans, somewhat higher than they otherwise would be.
“The average American looking to buy a home may very well be affected by the Tokyo stock market,” said Irwin Kellner, chief economist at Chemical Banking Corp. in New York.
For the average worker, the new international dealings have two sides. They are creating opportunities for consultants, distributors, warehouse operators, importers, exporters, longshoremen, entrepreneurs and others.
At the same time, unskilled workers in advanced countries increasingly find themselves in competition with counterparts from the Third World. Wages in high-pay nations, such as America, may sink, or rise much more slowly, as employers struggle to compete with low-cost rivals overseas. Lurking in the background is the reality that investors chase opportunities with a disappearing regard for national boundaries, often shifting jobs from advanced nations to developing ones.
Such pressures are behind organized labor’s resistance to the proposed U.S.-Mexico trade accord, currently under negotiation. Similarly, they are at the heart of the fiery dispute at Caterpillar Inc., the maker of earth-moving equipment in Peoria, Ill., where workers have yet to accept management’s tough, new contract demands on pay and work rules.
“The global economy is here--opposing it is like being against the sunrise,” concedes Jeff Faux, president of the liberal Economic Policy Institute in Washington. “But that doesn’t mean we have to accept all the trappings of free-market theory.”
The theory says that efficient new industries rise from the ashes of their uncompetitive predecessors. But the process can be agonizing for displaced workers, labor advocates argue, citing claims that half a million U.S. jobs would rush to Mexico if barriers between the two economies were lifted.
Thus Faux would prefer more effective training programs, a national policy to strengthen and develop key industries and a climate of much stronger economic growth before lifting trade barriers that cost American jobs. “The benefits of a global economy are in the future and uncertain,” he said. “The losses are here and now--and deal with real people.”
To many mainstream economists, however, the virtues of an unfettered world marketplace outweigh any disadvantages. Barriers only “make things much worse in the long run,” especially for consumers, said Kellner. But he allows, “It’s easy for economists sitting in their ivory tower” to say things like that.
