Monday, November 5, 2007

Is Sovereignty Fully Compatible with Globalization?

Globalization is touted as an important factor in global growth, helping to uplift millions of people out of poverty in developing nations. Globalization is also touted as beneficial to the United States and other advanced economies. Moving production of goods and services offshore holds down costs, enabling American consumers to purchase a wide variety of goods and services at low prices.

But globalization is not all sweetness and honey. U.S. residents are voracious consumers. For many years, Americans have consumed more than they have produced. As a result, the U.S. economy has increasingly come to rely on foreign savings. Rising home values and other financial assets mean that Americans have more wealth than ever before, though the current slide in housing prices may correct that trend. If U.S. reliance on foreign saving and investment continues at the current pace, there is growing risk that U.S. sovereignty could be compromised as foreigners, many unfriendly to the U.S., own a larger share of the U.S. economy and accrue greater influence on U.S. foreign policy. To give but one example, four of the twenty-five largest bank holding companies in the U.S. were owned by foreign firms five years ago. That number has doubled to eight. China has become an increasing owner of U.S. government debt. New England’s residents receive subsidies in their home heating bills thanks to largess of Venezuela’s dictator, Hugo Chavez.

The dependence on foreign saving and investment is traceable to the current account deficit, foreign trade in good and services. The two principal culprits are America’s heavy dependence on imported oil and a massive trade imbalance with China. The current account deficit is in the neighborhood of $800 billion, which means that Americans transfer this sum to to oil-exporting nations and China. Sustained large trade deficits typically lead to weaker currencies. The dollar has fallen sharply in 2007 against almost all foreign currencies, those of both advanced and developing nations. Economic theory says that a weaker dollar, by raising the price of imports and lowering the price of exports, will gradually reduce the trade deficit. Exports have shown a marked rise as predicted, but high oil and commodity prices keep the trade imbalance from narrowing more than a few billion dollars. Another source of dollar weakness is interest rate cuts in the U.S. At some point, a weak dollar runs the risk of increasing inflation. The Federal Reserve Board will then have to raise interest rates, the exact opposite of current policy to prevent a meltdown in the credit markets. A return to the Catch-22 stagflation of the late 1970s and early 1980s is not inconceivable.

The steady transfer of America’s assets to foreign governments and state-owned enterprises amounts to gradual foreign socialization of the U.S. economy. This process can continue for many years to come without any noticeable decline in the American standard of living and conduct of U.S. foreign policy. But those who remember the oil embargo of 1973 in response to Israel’s victory in the Yom Kippur War, know that a great deal of damage can be done by those who curtail access to vital resources.

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