Posted By Clyde Prestowitz Wednesday, January 30, 2013 – 9:05 PM
Recent statements from Beijing and Tokyo suggest that China and Japan may be pulling back a bit from the brink of confrontation over the Senkaku/Diaoyutai islets. Let’s hope it’s true, but regardless of whatever diplomatic settlement evolves, we must recognize that the whole affair undercuts a central premise of U.S. foreign policy.
This is the notion that globalization leads to peace. It is actually quite an old notion. Richard Cobden, the English manufacturer and advocate for free trade who in the 1840s led the move to remove British tariffs on grain (so called Corn Laws), argued in the 1850s that globalization is “God’s diplomacy” and that free trade would lead to peace among nations. For a while in the early twentieth century it seemed that that might be the case. The global economy had become highly integrated with enormous flows not only of goods and services but also of capital creating global supply chains that tied nations together.
It was John Maynard Keynes who wrote of that period in The Economic Consequences of the Peace noting that:
” The inhabitant of London could order by telephone, sipping his morning tea in bed, the various products of the whole earth, in such quantity as he might see fit, and reasonably expect their early delivery upon his door-step; he could at the same moment and by the same means adventure his wealth in the natural resources and new enterprises of any quarter of the world, and share, without exertion or even trouble, in their prospective fruits and advantages; or he could decide to couple the security of his fortunes with the good faith of the townspeople of any substantial municipality in any continent that fancy or information might recommend. He could secure forthwith, if he wished it, cheap and comfortable means of transit to any country or climate without passport or other formality, could despatch his servant to the neighboring office of a bank for such supply of the precious metals as might seem convenient, and could then proceed abroad to foreign quarters, without knowledge of their religion, language, or customs, bearing coined wealth upon his person, and would consider himself greatly aggrieved and much surprised at the least interference. But, most important of all, he regarded this state of affairs as normal, certain, and permanent.”
Of course, it turned out in August, 1914 not to be permanent at all. The globalization of the 19th century had led to a high degree of interdependence among nations and to greater creation of wealth than had ever previously occurred. But the wealth not only served to improve the standard of living of the citizens of London and other metropolises. It also provided the means for pursuing ancient rivalries and for acting on paranoiac fears at an entirely new level of potential destruction. After the first shots of the Guns of August of 1914, the world economy would not be as fully integrated and globalized again until the advent of the Clinton administration in 1993.
Significantly, it was this administration that enthusiastically embraced globalization as America’s new strategy, replacing the containment (of the Soviet Union) strategy of the Cold War era. According to a popular mantra of the time, globalization would make all nations rich, being rich they would all become democratic, and being democratic they would all become peaceful because democracies don’t go to war against each other, or, at least, that was the belief. In effect, globalization was widely viewed among the American policy elite as a kind of Americanization. The whole world would become like the United States and then America would have no enemies and peace would reign.
This thinking was a powerful force behind the drive to bring China into the World Trade Organization. It was widely believed that countries whose industries participated in the same global supply chains would not go to war with each other. This view was reflected in the widely articulated notion of making China “a responsible stakeholder” in the global economy.
To be sure, World War III has not yet begun and hopefully never will. But what we are seeing in Asia looks a lot like what we saw in Europe in the early 20th century. Globalization has not led, at least not yet, to full democratization. The creation of wealth has not only lifted living standards. It has also increased the ability of nations to pursue ambitions and old rivalries despite being in the same supply chains and despite being interdependent.
Far from leading to peace, the god of globalization is revealing feet of clay as the possibility of war becomes more apparent.
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Clyde Prestowitz is the president of the Economic Strategy Institute and writes on the global economy for FP.
How the United States really tamed the Japanese economy — and why China’s a much meaner cat.
BY CLYDE V. PRESTOWITZ | NOVEMBER 2010
When I arrived in Washington in the fall of 1981 to serve as counselor to President Ronald Reagan’s commerce secretary, the United States was more afraid of Japan than it had been since Pearl Harbor. The Japanese auto industry was preparing to have Detroit for lunch. Imports of gas-sipping Hondas and Toyotas were forcing America’s Big Three automakers to close plants and lay off hundreds of thousands of workers. The American semiconductor industry, pioneered by Silicon Valley start-ups, was on the ropes: Japanese producers, supported by their government, took over half the market for the newest generation of computer chips. And all this was happening amid a crippling U.S. recession.
Japan’s economic miracle was no accident: It came out of a careful program of subsidized investment in “strategic industries” — steel, machinery, electronics, chemicals, autos, shipbuilding, and aircraft. Japanese leaders focused on exports to drive their economy, suppressing domestic consumption with taxes and limited consumer credit, while encouraging high savings and investment rates. They established world-class factories and emphasized Japanese-developed technology, while requiring foreign companies to hand over their own as a condition of market access. They prevented industrywide labor unions and kept the yen undervalued against the dollar, while protecting domestic industries with tariffs and trade barriers.
If this sounds familiar, it should. Japan’s economic miracle became the template that other Asian tigers would follow in the decades to come: South Korea, Malaysia, Singapore, Taiwan, Thailand, and now, the biggest of them all, China. Which is why it’s important to know the truth about how the United States, today facing a new Asian economic challenge, dealt with the last one — not the myths we’ve told ourselves for the past 20 years about how our free market tactics defeated our Japanese rival.
For all its laissez-faire rhetoric, the Reagan administration fought fire with fire, responding to Japan’s market-distorting industrial and trade policies with a firm hand. It quickly concluded a “voluntary export restraint” agreement under which Tokyo, threatened with protectionist congressional legislation, limited its auto exports to 1.68 million per year. In effect, this forced Japanese automakers to build transplant factories in the United States, somewhat stanching the loss of U.S.-based auto-production and manufacturing jobs. Washington also rescued the failing Harley-Davidson company by raising tariffs temporarily on certain high-end motorcycle imports and was even more aggressive in its support of the domestic semiconductor industry, initiating anti-dumping procedures and getting Tokyo to guarantee U.S. manufacturers 20 percent of the Japanese market.
Most important was the 1985 Plaza Accord under which Washington convinced Tokyo to revalue the yen to reduce the large U.S. trade deficit. Over the next few years, the yen rose against the dollar, and the tide of U.S. imports from Japan receded. The trade deficit fell from $55 billion in 1986 to $43 billion in 1991. Harley-Davidson and Silicon Valley came rushing back, and Detroit’s automakers gained a new, if temporary, lease on life.
Somehow these successes from America’s last great trade war have been forgotten — blotted out by patriotic sloganeering (“American industry pulled up its socks to meet the Japanese challenge”) and economic shibboleths (“Trade is always and everywhere a win-win proposition”). But wishful thinking won’t help with China — much less at such a volatile time in the global economy.
Like 1980s Japan, China today is pursuing an export-led growth strategy, suppressing domestic consumption, pushing savings, and guiding investment into strategic industries. It has a multitude of trade barriers, weak labor unions, and an undervalued currency. The U.S. trade deficit with China is now about $250 billion — four times that with Japan. Despite its early welcome to foreign investors, Beijing is focused intensely on developing its own technology. More importantly, U.S. high-tech industries — solar energy, computer chips, and fiber optics — are increasingly being offshored to China. And Chinese commitments to strongly protect intellectual property are often honored more in their breach than in their execution. As one Chinese friend explained to me last year, “Now we have all the foreign dogs in the kennel, and we’re going to beat the stuffing out of them.”
But Washington has become so convinced it beat Japan with free market policies that it is not responding to Beijing at all as it did to Tokyo. Barack Obama’s administration has filed only one WTO complaint since taking office and has steadfastly refused to label Beijing a currency manipulator — though it clearly is. Washington has not even dared to think about voluntary export restraints and has had little success persuading Beijing to revalue the yuan. That’s no surprise: The Chinese are convinced that the Plaza Accord led to Japan’s collapse and have vowed to avoid the same mistake. As one high official of the People’s Bank of China told me, “We’re not going to be crazy like the Japanese.”
The United States also has less leverage with China today than it did with Japan then. Washington needs China to deal with transnational threats like Iran, North Korea, and global warming, not to mention financing the mounting U.S. government debt. So Obama has been less able and less willing to act — except, that is, when he is making inexplicable concessions. During his trip to China last November, for example, Obama pledged that the United States would assist Beijing in developing its own commercial jet, though aerospace technology is one of the few U.S. strategic industries that still exports to China.
But even smarter tactics might not be enough to regain lost ground. For though Reagan’s aggressive policies were enough to stop the bleeding, they weren’t enough to make the U.S. economy genuinely competitive again. Most U.S. producers never recovered what they lost in the 1980s. In fact, the question of just who beat whom in the last great trade war has no easy answer. Consider this: Japanese GDP growth from 1990 to 2000 — Japan’s so-called lost decade — was just 0.2 percent less than America’s when you account for increases in the U.S. population. And Japan comes out ahead on a per capita basis. Even with the battering it took, Japan’s productivity growth outpaced that of U.S. workers in the 1990s.
As for that $55 billion trade deficit with Japan that so concerned Reagan in 1986? By 2006, it was $90 billion. Overall, the United States today is running a global trade deficit of roughly $600 billion.
The numbers aren’t lying: It’s time to realize that the United States never really beat Japan — and it’s unlikely to win against China without a new strategy. Chanting tired ideological mantras didn’t save us in the 1980s. And it won’t save us now.
8:11 PM ET
October 11, 2010
Reagan (or at least the government in the 80s) also decided to indulge in protectionism even though many of the Japanese brands were actually more efficient (on the international market that is).
Also stating that we didn’t ‘beat’ Japan doesn’t mention that the Japanese government decided to start spending at a ridiculous pace, creating a debt of about 200% the nations GDP and one that would take quite some time to pay off even if Japan did raise taxes as high as they would need to. That combined with a domestic market that’s simply not competitive with the rest of the world I’d say Japan came off far worse than this would suggest.
2:08 AM ET
October 12, 2010
Great article, it’s rare we get to hear a cogent and well explained defense of the reasons trade policy still works and can have a positive effect if we utilize it.
Mr. Prestowitz ought to have used inflation adjusted figures for the 2006 trade deficit, which show that it was in fact still 18% lower in real terms than in 1986. Maybe some of those controls were lifted with the creation of the WTO, maybe the long term effect is more influenced by the shift of many industries out of Japan and into China. Regardless of my nitpicking, the article illustrates both that there was a clear and quantifiable positive effect for America in the short term, and that Japan’s continued use of trade policy to promote economic growth has been an effective prop to their economy in the long term.
7:23 AM ET
October 19, 2010
Japan if he wrote this ‘masterpiece’ in 1993 a year after Reagan left office.
Trading Places – How We Are Giving Our Future to Japan and How to Reclaim It, 1993
Another political stooge leading the country down an idealogical fantasy land. Sure start a trade war with China.
10:47 AM ET
October 19, 2010
trying to say that the US is already in a trade war with China. And the only way, at least he thinks, is to fight “fire with fire”. I.E., ramp up protectionism and all that stuff that has never worked before, but suddenly seems like it could work this time cause we are smarter and have more knowledge about how this works than before…
4:55 PM ET
October 19, 2010
America only goes to war with countries that cannot fight back. Red China has nothing to worry about–so long as they have nukes.
6:38 PM ET
October 19, 2010
Ever here of the Soviet Union much? The Cold War?
5:34 PM ET
October 25, 2010
The Cold War did not involve the armies of the United States and the Soviet Union crossing one another’s borders.
However, the United States has crossed the borders of several countries much smaller and poorer than the USA since WWII.
That, I believe, is the meaning of Maosayton Gue’s post.
6:39 PM ET
October 19, 2010
“Now we have all the foreign dogs in the kennel, and we’re going to beat the stuffing out of them.”
What a jackass comment, we’re going to beat the stuffing out of China!
9:35 AM ET
October 22, 2010
There’s no such thing as international “free trade.” Heck… even internally – within the nation, even within individual states – there are political distortions that create a mockery of “fair” trade in the context of “free” trade.
Our national goal, our federal government’s goal, should be to ensure that America “wins” the trade “game.”
By “wins” I mean we can’t be in a position where we’re at the mercy of any foreign supplier of… er… anything vital.
(Let’s not waste time and energy trying to define “vital”; reasonable readers “get” the concept.)
Right now China has a stranglehold on vital/”rare” mining resources. First they chose to employ this stick against Japan… presently they’re employing it against us. (They’ll of course step back from the brink, but their point has been made.)
Folks… it’s not like your foreign produced sneakers cost you $6.00; no, they cost you $60… perhaps $70… $90… $120. Even if it did cost $20 to manufacture a pair of sneakers in the good ol’ USA, even with marketing, transportation, stocking, and all the other associated costs factored in, I can’t imagine that a U.S. company willing to “settle” for a “reasonable” return on investment wouldn’t prosper.
Bottom line… lawyers, doctors, and other “professionals” cost a great deal in terms of supporting their incomes. Unless everyone is a professional the math just doesn’t work out. (We might as well go back to barter!) We’re seeing this with teachers – both their pay and benefits and especially their pensions. Costs are blowing up the system!
Plus… com’on… you don’t have to be a Charles Murray disciple to acknowledge that there are genetic as well as cultural and character/personality factors at work when it comes not just to basic IQ, but to how far a person can go on an academic track. Not everyone “has what it takes” – nor would want to even assuming ability – to become a “knowledge economy” professional.
Anyone look at black unemployment stats lately; native born Hispanic citizen unemployment stats? Our own people need the sorts of stable, fair paying factory and other “blue collar” jobs that only an industrialized nation provides in terms of mass open opportunity with upward mobility. We’ve largely deindustrialized. We desperately need to reindustrialize.
America also needs to treat food as OPEC nations treat oil. We’ve got a big stick if we’re willing to use it. We SHOULD be willing to use it.
Anyway… bottom line… U.S. trade policies should serve the mid-term interests of the average (median income) American. For all this talk of “spend less, live better” (the “Walmarting” of America) there’s a larger cost/benefit analysis to consider. Unless one is a very careful shopper indeed, “loss leaders” pose at least as much of a threat to consumers as they provide an opportunity to save.
Again… big picture… long view… America’s recent “instant gratification” consumer culture is in my mind not a plus, but a negative; a negative to the nation… a threat to our children and grandchildren.
1:01 PM ET
October 22, 2010
Since this article by Clyde Prestowitz is classified in ‘History Lesson’, a bit of history is indeed in order.
China was a pariah country in the world, just like today’s North Korea until that Nixon visit. All the West European and East Asian countries stayed away from China following the US lead until 1972 and embraced China after Nixon’s visit. While US would not give MFN status to Soviet Union (remember Jackson-Vanik amendment?) unless Russia shed Communism, it had no problem giving it to China’s Communist dictators with a capitalist mask. Trade with China expanded by leaps and bounds during 12 years of Republican rule beginning in 1981. After campaigning against butchers of Beijing in 1992 elections, even Bill Clinton became enthusiastic supporter of trade with China once he took lessons in foreign policy from Nixon in early 1993 during a special Whitehouse-arranged meeting.
Had it not been for that Nixon embrace in 1972, China’s economic miracle would have been far more slower with all the US, West European and East Asian markets closed to cheap Chinese products. Had it not been for that Nixon embrace, China’s technological progress would have been far slower in the absence of West’s technology transfers. Had it not been for that Nixon embrace, China’s military progress would have been far slower in the absence of huge forex reserves that China accumulated from the massive exports of cheap Chinese products and China used those forex reserves to acquire latest military technology.
Coming back to Mr. Prestowitz’s article, it is China that will tame US. In this day and age of MAD (mutually assured destruction) thanks to nuclear weapon stockpiles, second cold war has now started between US and China.
If US had a upper hand in the first cold war against Soviet Union, then China has a upper hand against US in this second cold war. China has US by its tail – US businesses are hooked to huge profits that cheap Chinese products generate for them as a walk through any Walmart, Sears, Home Depot or Macy’s filled with Chinese goods proves and US government is hooked to huge investments that China makes in US treasuries.
Little could Mao or even Deng have imagined that by wearing a capitalist mask, their followers will beat capitalists at their own game. Lenin used to say that ’capitalists will sell us the ropes with which we will hang them’. With the West selling such ropes (in the form of technology transfers), China has proved that Lenin saying quite prophetic.
Nixon’s embrace of China to counter Soviet Union has come back to haunt US in the form of second cold war just as Reagan’s embrace of Islamic fundamentalists to counter Soviet Union in Afghanistan came back to haunt US in the form of 9/11 attacks.
What goes around, comes around indeed.
6:34 PM ET
October 24, 2010
CPC/PRC Army General Chi Haotian writing on June 6, 2009 stated that “World War III is not far from us and is the midwife of the Chinese century.” That’s World War 3 this lunatic is talking openly of.
The US government is trying hard to avoid wars of currencies and trade and a Second Cold War because we know the dopes in Beijing who compulsively must say things such as dogs in kennels getting the stuffing beat out of us state a mentality that, as the author points out, is an aggressive and intransigent one.
During the 1980s I met some smart and highly competent people in the Reagan administration but, unfortunately, I never had the pleasure of meeting Mr. Prestowitz. (Lawrence Korb is another of the delightful finds apart from the Reagan Cro-Mangnon types who grabbed all the headlines.)
I’m going to buy his book, however, I’m just not confident all of the geniuses of the world can stop the Chinese absolute certainty they were created to command and rule all that is under (their) 5000 year old fantasy heaven. Fortunately not all Chinese are inflicted by this menacing disorder and syndrome, but far too many still remain irreversibly deluded in this way.
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Kerry Admits It: “Foreign policy is Economic Policy.”
John Kerry embraces John McCain at his recent confirmation hearings. Via Flickr/Glyn Lowe.
At his confirmation hearing, the new Secretary of State, John Kerry, declared flatly: “Foreign policy is economic policy.” Now them is fightin’ words if they’re spoken by a scholar of U.S. foreign policy. Scholars of the “revisionist” school have been attacked, reviled, and marginalized for decades simply for saying what Kerry seemed to say: Economic motives are the main drivers of foreign policy. So when revisionists hear a top government official say it out loud, it’s like discovering gold: It’s hard evidence that their view is correct.
And, like discovering gold, it doesn’t happen very often. When U.S. government officials speak in public, they are usually careful to say that American foreign policy has one overriding aim: promoting American values and ideals around the world. Those values and ideals hold true everywhere, the official narrative has always insisted. So our foreign policy goal is to promote the good of everyone, all over the world.
It is permissible, sometimes obligatory, to add that U.S. foreign policy also aims to protect the United States against enemies. And that can readily lead to the goal of “promoting American interests.” But the official narrative assumes that the stronger America is on the world stage, the more able it is to promote its universally true values, which are the only key to world peace. So there can be no conflict between our interests and our altruistic ideals. That identity of interests and values has always been the bedrock of the official story.
It was still the bedrock on Inauguration Day, when Barack Obama proclaimed: “We will defend our people and uphold our values through strength of arms and rule of law. … Our interests and our conscience compel us to act on behalf of those who long for freedom. … Peace in our time requires the constant advance of those principles that our common creed describes.” The official narrative seemed alive and well.
But just three days later Senator Kerry — a solid pillar of the foreign policy establishment — had surprisingly little to say about values and ideals in his statement to the Senate Foreign Relations Committee. He did talk openly about “advanc[ing] America’s security interests in a complicated and even dangerous world.” And he warned that “we will do what we must to prevent Iran from obtaining a nuclear weapon.”
But Kerry went out of his way to put emphasize what revisionists have long seen as the most precious, closely-guarded secret: Economic interests are the mainspring of foreign policy. And he treated it as if it were an obvious, ordinary observation.
The establishment press put the spotlight just where the new head of State wanted it. “Kerry Links Economics to Foreign Policy,” the New York Times headlined. Though he “outlined no grand agenda for the next four years,” the Washington Post reported, “the closest he got to a foreign policy mission statement” was the simple equation: foreign policy = economic policy.
As Kerry explained himself, he gave a whole arsenal of ammunition to the revisionist argument. He introduced his discussion of economics and foreign policy this way: “It’s often said that we can’t be strong at home if we’re not strong in the world.” Then he warned that the U.S. it at risk of losing its “leverage … strength and prospects abroad.”
Leverage and strength for what prospects? Kerry gave several kinds of answers.
The first sounded like classic revisionist theory: “The world is competing for resources and global markets. Every day that goes by where America is uncertain in that arena, unwilling to put our best foot forward and win, unwilling to demonstrate our resolve to lead, is a day in which we weaken our nation itself.” In other words, the global economy is like a huge pie. America’s strength is defined by how big a slice we get. The goal of foreign policy is to make sure we get a bigger slice than anyone else.
Kerry’s other explanations for building American “leverage” and “strength” were less direct. “The first priority … as we work to help other countries create order … will be that America at last puts its own fiscal house in order. “Order,” revisionists point out, has been a central term in American foreign policy discourse for a long time. It’s a code word for a stable capitalist system, where capitalists can safely predict that they’ll get a decent long-term return on their investments.
Kerry was warning that if capitalism can’t guarantee long-term prosperity in the U.S., foreign nations will not be so eager to accept American investments in their own land.
He also had another kind of warning: “It is hard to tell the leadership of any number of countries they must get their economic issues resolved if we don’t resolve our own.” Getting “their economic issues resolved” is another coded message, one straight from the fount of common capitalist wisdom: To create the “order” that makes investment safe, many nations must cut public expenditures drastically. To make the world safer for American investors, the U.S. government must use its “leverage” and “strength” to compel other governments to make those painful cuts.
The underlying premise here is the premise of all U.S. foreign policy since at least the 1930s: America’s role in the world is to create and safeguard global “order” — to make the world safe for capital investment, especially American investment. The U.S. is entitled, in fact obligated, to impose “order” everywhere, by any means necessary. Now that means, in most cases, imposing austerity.
But, Kerry said, demands for austerity from the U.S. won’t be credible if we have a huge budget deficit of our own. So “the first priority of business which will affect my credibility as a diplomat … is whether America at last puts its own fiscal house in order.”
No doubt Kerry said all this to support Obama’s budget battle against the Republicans. Obama’s call (in his inaugural speech) to “to act in our time” was a message to the GOP to quit their obstructionist ways and accept the centrist compromises the president is always ready to offer. The administration is trying to make the case on every front that the nation’s well-being demands it. Kerry was showing that he’ll be his boss’ loyal servant and sound appropriately urgent.
But Kerry’s eagerness to make the “Foreign policy is economic policy” case reflects more than short-term political tactics. It’s a sign that that the official narrative of American foreign policy is changing, or at least is open to change. Top officials are ready to say openly what revisionists claim they’ve been saying privately, among themselves, all along (and revisionists have plenty of evidence to support that claim).
Why the shift?
The government always faces a major problem when it comes to foreign affairs: Not many Americans care much about the rest of the world, and certainly not about spreading American ideals throughout the world. Government officials have to come up with some other reason to justify their extensive involvements abroad and the tax dollars they spend on those involvements.
It’s not so hard when there is some clearly identified enemy to fight — as long as the public thinks their tax dollars are buying American victories. Now, though, the only “victories” are pinpoint attacks on “terrorists,” and Obama wants to preserve his freedom in that fight by keeping it secret. The obedient Kerry’s single mention of “terrorism” and “drones” was to downplay their importance.
How can the whole foreign policy enterprise be justified today? At a time when public opinion focuses so single-mindedly on the economy, the answer is obvious: Just say, loud and clear, “Foreign policy is economic policy”; there’s a global economic struggle going on; we Americans need to be strong enough to win it; the only way to win it is to control economic life around the world.
And there’s no great danger for an incoming Secretary of State to say all that, nor to have it headlined in the nation’s leading newspapers. The revisionists have been so effectively silenced that their cries of “I told you so” are not likely to cause much of a ripple. So there’s no reason for the foreign policy establishment to be afraid of their criticism.
But there’s a lesson here that foreign policy revisionists might want to ponder. The stories that interpret and justify public policies — I call them myths — are created for political purposes. They can shift as quickly as the political winds. Sometimes those winds blow a heavy dose of truth into the myths. That’s why a myth is not a lie; it’s a mixture of truth and falsehood, with the proportions depending, in large part, on the political needs of the time.
Precisely because the political winds can shift so quickly, groups that have little influence today may find themselves with a lot more influence tomorrow. So the revisionists have good reason to store up their political resources, polish up their own myths, and pack them with as much empirical truth as they can. The golden nugget offered by John Kerry is a treasure that can serve revisionists well for all three of those purposes.
Economic Strategist Clyde V. Prestowitz Jr. Discusses U.S. Financial Doctrines
In his recent book, The Betrayal of American Prosperity: Free Market Delusions, America’s Decline and How We Must Compete in the Post-Dollar Era, Clyde V. Prestowitz, Jr., warns that the “U.S. is rapidly losing the basis of its wealth and power, as well as its freedom of action and independence.” In an April 7 visit to the Kennedy School, he expanded on the “false doctrines” the country’s government subscribes to in a talk as part of the Mossavar-Rahmani Center for Business & Government’s (M-RCBG’s) business and government seminar series.
Prestowitz, founder and President of the Economic Strategy Institute, served as counselor to the Secretary of Commerce in the Reagan Administration. He has served as vice chairman of the President’s Committee on Trade and Investment in the Pacific, sits on the Intel Policy Advisory Board and the U.S. Export-Import Bank Advisory Board. He also played key roles in achieving congressional passage of NAFTA and in shaping the final content of the Uruguay Round, as well as providing the intellectual basis for current U.S. trade policies toward Japan, China, and Korea.
In his talk, he said the production outsourcing to Japan that existed in the 1980s and is now seen between the United States and China is resulting in a whittling away of middle class prosperity. While computer and cell phone components are made in places like Japan, Korea and Taiwan, they are assembled in China not for reasons of cost savings, but more for geo-political gain.
“Our ability to provide the kind of welfare seen [in the United States] from 1948 to 1975 or even something like it has been seriously eroded because of false doctrines,” said Prestowitz. “The priority of the U.S. ever since 1940 or 1941 has been national security…to achieve our geo-political objectives, we’ve become accustomed to making economic concessions.”
Prestowitz used as an example a speech President Obama made last November regarding a meeting with Chinese Premiere Hu Jintao that included an agreement to help China develop a new commercial jet liner.
“We want China to help us with North Korea and with Iraq,” he said. “We have a lot of geo-political fish to fry and here was an economic bone we could throw to China.”
In addition to causing a large human death toll, the recent Japan earthquake also severely disrupted the global supply chain, Prestowitz pointed out.
“Japan makes 90 percent of the resin used to package chips for laptops and cell phones…that production has stopped,” he said. “Over time, other countries have fostered these industries and provided subsidies, while the U.S. has taken a laissez-faire, unilateral free trade approach…this has gradually moved production to Asia.”
In addition to creating incentives for increased production to stay in the U.S., Prestowitz also called for corporations to hold themselves accountable to societal stakeholders, not just shareholders.
“Who says a CEO has a fiduciary responsibility to shareholders? That idea originated at Harvard Business School relatively recently,” he said. “The mission should be to take care of the stakeholders, of which there are many, not just the shareholders.”