Gabor Steingart

Speech at the Brookings Institution, Washington D.C. 2007

A “TRADE NATO” FOR THE WORLD ECONOMY?

Thank you kindly for your invitation, Bruce Katz, Vice President of the Brookings Institution. I am very proud to be with you today and it’s an honour to be your guest You have done so much research on the globalisation issue, both theorethically and practically. I admire the work you have done with the urban age project, which you began years ago together with Wolfgang Nowak, the President of the Alfred-Herrhausen-Society. I know you gave a lot of intellectual support to the Clinton-Administration, which worked very well at last.
You asked me to speak about my view on the global world and what politicians can do under the conditions of a world market. A lot – even a lot more than governments think. So let’s go straight into the subject.
Once upon a time, the great John Maynard Keynes told us:
“If the facts change, I change my opinion.”
Today I call upon you to rethink globalisation, to change your opinion about international trade and its consequences, because: The facts have changed – and because the facts have to change.
I believe there are six popular misconceptions in this great debate. These misconceptions are responsible for a collective misunderstanding of our world today and they are responsible for wrong politics that we follow now. Most voters don’t know anything about this, but they feel that the traditional way of thinking doesn’t work anymore.

Firstly: The West won the Cold War. The general perception, as well as the spin from the Reagan White House, was that the West destroyed the Soviet Union.
I believe the communists destroyed themselves. They were simply unable to organise their economy. When the oil price came down in the years of Michael Gorbatschov, they had a hard landing.

But the Soviet Union had been melting away for decades – its productive core, its standard of living and last but not least the quality of the Red Army’s weapons.

The true winners of the Cold War period were not the Western countries, but all the rising stars from Asia. Nobody heard them coming, nobody saw the enormous strength of their economies and nobody sensed their unbelievable political will to achieve great economic power. The establishment and the young people of those countries have built a grand coalition to escape their own past – with enormous success.

China and India are the fastest growing economies world history has ever seen. They grow much faster than the British Empire did 150 years ago, when globalisation started. They also grow much faster than Germany did after the Second World War. The Chinese miracle is even bigger than the German economic miracle was.

If their growth rate remains sustainable and if they learn to handle their environmental and social problems they have a real opportunity to become the next superpower – first in economics, then in politics and, in the end, perhaps in a cultural dimension.

Should we be afraid? No. Can we ignore? No.

We should look to them with a lot of respect and goodwill, but without naivety. It’s too early to speak about an Asian Century, but it’s time to recognise that something is going on outside: What is taking place right now is not a continuation of our present age but the beginning of a new one.

Secondly: What we see is a win-win situation, all economists told us. I am sure: they are all wrong. Economic size matters – especially in the world of international politics. Even if the current globalisation lifts all boats of the global economy up the tide, we are faced with a shift in the political power. The world of politics is a relative world – there we know only zero-sum games. Look at the pre-presidential campaign: The rise of one candidate means the fall of another. It’s impossible to end an election with a win-win-situation. You need winners and losers if you want to create leadership. The same phenomenon we have in international politics: Falling and rising nations are connected. They only represent different sides of the coin.

Why do so many political leaders close theirs eyes given this development? I provide you with one possible answer: The Cold War had an important impact on our behaviour. The permanent struggles with Stalin, Khrushchev and their successors deformed our brains. Millions of Western people – also in government and the business community – became unable to recognise an enemy if he didn’t look the same as the Russians.

We have problems to understand, because our political radar system doesn’t give us any warning. Some people panic, maybe because it’s so silent. Most of us ignore. Both is wrong. We have to analyse what has happened and what will happen next. The Chinese government flies in a stealth bomber and most of our fellow citizens don’t even see them coming, because they were not attacking us with words, they were not organising great military parades, and not trying to teach us ideologic lessons.

Instead they started to organise their economy so that – from the outside at least – it even looked like a market economy with free market access for everybody. But it’s not a market economy, it’s a guided economy. They play by their rules. It’s not anti-China, it’s realistic to see and to say this. Maybe they are not dangerous, but at this time it’s important to understand one thing: They are different.

Thirdly: The economists are telling us, that the natural progression for a developed economy is to move from an industry-based economy to a service-based economy. They say it’s just repeating the change that happened when we moved from an agricultural based economy to the age of industrialisation.

But history doesn’t like repeating itself. I am sure: What we see outside is not the end of the industrial age, but merely a shift of the industrial jobs in the developed countries to the emerging markets.

There are more people doing industrial jobs than ever before. There are 600 million blue collar workers worldwide. Even in India most of the new jobs are in the industrial sector. Of a total Indian workforce of nearly 500 million people, only 1.3 million are working in the software industry. In the latest 5-Year-Plan the biggest amount of money is put into the development of the traditional industrial sectors. The same is happening in China.

Only the Western countries are losing these jobs: Minus 29 percent in Germany since 1991, most in East Germany after the reunification. Minus 17 percent in France since that time, in the USA the economy has lost more than a quarter of its industrial jobs since the late 70s. It’s unfriendly and it’s unfair to blame the Asian countries for all our problems. It has a lot to do with new technology, the internet revolution and all the new possibilities to replace simple work.

The one thing that is important to understand is: It is definitely wrong to speak of a post-industrial age. The world of a service society is not the successor of the industrial society – it is merely a part of it.

Let’s put it in terms of the family: the service jobs are not the sons and daughters of the industrial father, but simply his brothers and sisters. The service job is the end of the production chain. The pilot flies an airplane, the product of the aircraft industry; the servant serves the meal made by our food industry; the investment banker sells real companies with real workers.

Fourthly: Economics and morals have nothing in common – or so we are told. But this is also not true.

Every product is made up of only three things: resources like oil, plastics, steel, rubber, glass, paper and wood.

The second thing inside every product is knowledge, the know-how to build a sports car, a computer or a mobile phone from all this plastic, steel, rubber and glass.

The third component of every product is the most important one: value. Or to put it in different words: The most important matters in today’s business world are the rules and regulations, which allow to combine resources and knowledge. By this I do not just mean the salary of a worker, but also all of his benefits – his coffee break, separate toilets for men and women, his holiday pay, his sick pay, his overtime pay, his Christmas bonus, his unemployment insurance, his pension, but also the health and safety regulations that protect the worker in the factory or even in the coal mine. The values we are talking about here go much deeper:

These Western values also include the protection of the environment, clean air, clean water and proper housing, and these values also mean the way in which we treat our children: In our societies they are children, not working slaves. We send them to school, not down into the coal mine.

Nearly everything in our world is regulated, because we are interested in a sustainable growth of our economy: Also the financial market is under control; the standard is set by our government not by the greed of some individuals. The authorities do a lot of observation. The market participants are interested in a level playing field, which is the most important condition for a fair competition.

Now let’s have a look at the emerging markets in the Far East: These countries and we here in the West buy our resources from the same dealers – and we pay similar prices. The know-how mostly comes from the Western countries, whether legally or illegally.

But the big difference lies in values. Here the playing fields are not level. Sorry, but my admired colleague Thomas Friedmann from the New York Times is completely wrong: What we see today is the opposite of a flat world. The new industrial power is the rebirth of the Manchester capitalism of the Victorian age. Many people have to compete against their own past.

The Chinese of today have no significant natural resources, they haven’t invented anything significant. Their biggest advantage is an endless supply of very cheap labour.

This advantage – if we don’t look at it with the eyes of a chief financial officer – is a negative one, because their main advantage is to ignore our rules and regulations. This is the reason why for millions of low skilled and low paid people in the West the Asian Tigers are attacking states:

They attack their way of producing and their way of living in a way that makes not only working poor but at the same time it makes dreaming poor for millions of people in Europe and the US. For them optimism was yesterday.

The strongest allies of the attacking states are our Western consumers: They are interested in a good deal, not in the process of producing. Today you can choose to buy a washing machine that comes with a built-in welfare state from a company like AEG in Nuremberg. It may cost more, but it also guarantees that those values will be respected. Otherwise, you can buy a cheaper brand that comes directly from the Yangtze delta where the welfare state doesn’t exist.

If you want to buy a car that comes with the whole social package, then it comes from Ford in Detroit and costs $1,600 more. It would be cheaper if you drove to the Hyundai dealer on the next corner. They shrink their costs, but at the same time they are also shrinking their own well-being. They pay less, but maybe they lose more.

In reality the bill of the products comes in two parts: it’s cheap in the shop, but you burden the states, the companies and the families with extra costs.

In the US you are faced with millions of working poor. That’s the big difference between the transformation from an agricultural to an industrial society. In former times people climbed up the ladder, they earned much more, they got a lot of social packages; nearly everybody saw the progress.

Today we have the opposite. The salary for millions of normal employees is sinking, their social package is becoming smaller. Thanks to your flexible labour market most of the displaced workers find new jobs, but most take a pay cut. The experts are talking about global integration. But for them it’s a permanent process of disintegration. In Europe we are counting 20 million people, who are unemployed and poor, also in a well-doing business cycle. Many more workers are worried that their jobs will be at risk. In Europe overall public safety nets are far more generous, although in many countries they are scaled back.

Fifthly: Free trade brings advantages to all nations who participate in it.
That was true before China and all the others started integrating into the world economy. But nowadays, that idea is increasingly becoming an illusion. But why? Let’s take a look at what has changed since they have entered the world market.

Before they entered, the important markets were organised in a Western style in Europe and the US. Wall Street set the standards for the financial markets and labour markets also looked similar. Nearly 500 million employees in the West were working under similar conditions. It doesn’t matter whether the pension comes from the government (like in Germany) or from big corporations, like in the US.

Important is: There was no real price competition on the labour market. Africa was far away; the Soviet Union and its satellites were cruising in another solar system, the biggest parts of Asia were living in the Middle Ages, people were poor, ill and unable to take part in the world economy.

India was a planned economy in the Russian style, China was one of the poorest regimes the world has ever seen.

Then the unbelievable happened: Mao died and his successors started to reform the country in a very radical way. When the Soviet Union crashed, India followed suit. Since that time we have seen anarchy in the world labour market. There is no regulation framework. 500 million workers in the West are now forced to compete against 1.5 billion low-wage workers on the emerging markets.

These new capitalists do what they have to do: They are offering their work power under similar conditions to those of 150 years ago. But that means: The once existing level playing field was broken into two parts. The world had become the opposite of flat. Under these conditions, free trade is creating pressure for those who cannot compete – the Western industrial worker is a dying species, the simple industrial work is being destroyed. What we see is a process, which creates winners and losers in each of our Western countries.

Sixth: Don’t worry, a lot of experts told us. The working conditions of the emerging markets are improving, the salaries increasing, and even environmental protection is becoming a bigger issue. It sounds good and maybe it’s correct, but it takes too much time.
The process of price building in the world labour market is a very complex one. Every country is connected with all its neighbours, so wage costs in China are rising, and at the same time they are falling in the advanced nations around the corner. Let’s have a look at Taiwan: there the average salary of an industrial worker has fallen from 1.250 Dollar in 2000 to 850 Dollar per month in 2006. The Munich based ifo-Institut has calculated that, even if the salary in China might rise by eight percent annually, it will still be only half of the average German salary in thirty years time. If we don’t do anything, if we leave everything to the market, then the iron fist will destroy more and more factories in the Western world. And – by the way – it will also destroy the trust of the voters in the political system.

So, let’s have a very clear view of the normal people everywhere in the West: They are under pressure. They are members of a farewell-society because they have to say goodbye all the time. They are losing salary, social benefit, their reputation, sometimes even their job. And they are losing their personal dream of climbing up the social ladder. These are the glorious days of global capitalism – but not for them.
So the average couple is under attack from four directions:

• Today’s consumer is a really aggressive person for them, even if they are victim and offender at once.
• The new technology helps us raise productivity, but it puts away the work of the low skilled people.
• In a lot of countries, the government pushes them under water. The tax legislation, and especially the way of financing the social security net in Europe, means additional pressure for our average couple. Often it doesn’t make sense to work anymore at all.
• Last but not least, the ordinary people from the Far East enter the stage. Millions of new workers are willing to do their work.

Now every politician has to make his or her own decision: You can continue to sing the old song: Don’t be afraid! In the long run globalisation is good for everybody! It’s a win-win-situation! Free trade is without any alternative!
But I think it’s time to rethink globalisation and that means, to stop arguing against reality. Millions of people are fighting for their living standard and the political class should help them. We know children require protection, we are familiar with environmental protection, we are used to giving investor protection. Now we also need job protection. That means we are leaving the economic sector and stepping into politics. There are several ways to protect our jobs:

Job protection through information! The consumer has to learn more about the products. The environment protection movement has left marks on every product. Today we know a lot about calories, vitamins, fat and chemical additives in our food. We learn whether plastic is dangerous for kids or not. We get information about paint and varnish. We learn about the ability of a product to get recycled or not.

Now we have to learn more about the process of producing – with free trade unions or without them? How much carbon dioxide has been emitted during its production? What is the normal salary for a worker in his factory? How many accidents have happened during the last year? What about children’s work? Nobody wants to stop free trade, but if there was more information, you would get a realistic chance to make our today’s trade free and fair.

Job Protection by tax reform! We have to free the simple industrial work and the lower service jobs from all income taxes. And maybe we have to give people money, so that they continue to work. The concept of a negative income tax could play an important role.

Job Protection by better education! We have to invest in the quality of our workforces. In the modern war for wealth, knowledge is a strong weapon. The billions of new capitalists imply permanent devaluation for our workforces. To counter this, you have to increase their value and that means heavy investments in their education.

Job protection through trade policy! NATO was established during the Cold War to protect the West. Now we need a NATO for the world economy, which could be started as a transatlantic common market. This common market is powerful because behind its borders you find 60 percent of the world’s social product. By teaming up, Western nations can defend their values, their social standards, their way of living and producing, their idea for protecting the environment. The terms of trade are not a law of nature. They are the result of political decisions.

This common market is a political statement of its own. Everybody around the world will understand the message: the West is not managing its own decline, our governments are going to start fighting back. This common market could use the whole toolbox of trade policy. The borders should not be seen as walls, but they are points of control. All products from the Far East are welcome, but:

Those who do not respect Western intellectual property rights will be punished. Imports from a company that violates those rights could, for example, be banned for a year.

Child labour is banned. All the companies have to sign up to this. If there are children in their factories, they risk losing their import licences.

The West puts pressure on China’s central bank. If they don’t devalue their currency, the governments have to react. Their current policy means a subsidy of nearly 15 percent on all export products.

The Western governments take care of a level playing field also for investors. It’s no longer allowed for Indian companies to take over companies in Europe or the USA if they don’t allow the same merger in their country. For the time being, it’s only allowed to buy a 5-percent-share in India’s financial sector. In the US they can buy a whole bank.

In my point of view, job protection is a strategy, which works both economically and politically. It defends the interests of millions of people who are not able to react by themselves. And it defends the interest of our corporations who often face an unfair competition. Our generation has to create a regulation framework for the global world economy for several reasons: to make the growth in the former Third World Countries not only impressive, but sustainable; to reduce the imbalances between winners and losers in their and our societies, and that means to slow down globalisation speed.

Does this sound unrealistic? Or like another political fantasy? Maybe, but as you all know, if the facts change, we have to change our opinion. And sometimes, as we learnt from the great German philosopher Friedrich Hegel, it works the other way around:

If many people change their opinion, they have the power to change the facts.

Thank you for listening!