By Clyde Prestowitz
The Boston Globe
May 31, 2005


US Pressure on Beijing to revalue its yuan is now dominating the
news, but China is only following Japan as a manifestation of a much
bigger problem. Globalization is broken. As currently structured, it
is undermining US productive capability and becoming unsustainable.

Without fundamental change in the rules of globalization, any
conceivable yuan revaluation now won't have much impact on world
economic imbalances. Remember that economists said a 20-30 percent
revaluation of Japan's yen (then at 260 yen to the dollar) would
balance trade in the 1980s. But the yen has more than doubled since
then, and Japan still maintains a large trade surplus both globally
and with the United States, as do all of the world's major economies.

The real problem is that globalization is a different game for many
countries than it is for America. While China's peg of the yuan to
the dollar is now the focus of criticism, most Asian countries have
long managed their currencies to remain weak against the dollar in
order to stimulate their exports. Japan has spent over $300 billion
in currency intervention in recent years to keep the dollar up and
the yen and export prices down. In addition, many countries offer
tax holidays, financial incentives, and protected markets to attract
new facilities in ''strategic" industries that no one expects to
move just because currencies fluctuate.

These actions follow from policies specifically aimed at
accumulating large trade and dollar surpluses as a matter both of
stimulating growth from exports and of assuring national economic
sovereignty by avoiding dependence on foreign lenders.

While US state governors extend financial incentives to attract
investment, they have only peanuts to offer compared to foreign
countries, and, of course, do not control their own currencies. The
federal government has long shown no interest in attracting foreign
factories to or keeping US factories on its shores. Rather,
America's emphasis is entirely on consumption-led growth. Banks
aggressively offer credit cards to students with only part-time
jobs. Home equity loans with tax deductible interest payments are
used to pay for vacation trips. Not only does the White House call
for tax cuts in wartime, but tells consumers it's their patriotic
duty to buy more. Americans at all levels really do believe that
debt and deficits don't matter.

The confluence of America's consumerism with the strategic,
export-led growth policies of many other countries has produced a
world with one net consumer, the United States, which now consumes
about $700 billion a year more than it produces. All other major
economies are net sellers, depending directly or indirectly on
US-bound exports for much or all of their growth. Because America
consumes more than it makes, it must borrow from abroad to finance
its excess consumption. In a kind of vendor finance program, a few
foreign central banks provide the financing by buying US Treasury
bills and other US assets.

Thus, globalization has evolved into a kind of
pyramid scheme. To maintain global growth, the United States must
consume and borrow ever more while foreign banks buy ever more US
Treasuries so their producers can export ever more.

America has long been ambivalent about this situation. Consumers
love the low import prices, US CEOs love the foreign tax holidays,
and the US government loves the foreign lending that helps keep US
interest rates low. But the chronically overvalued dollar and the
foreign investment incentives also cause a steady transfer of
production and technology abroad while putting downward pressure on
wages and building large foreign claims on future US income. This
results in political pressures and US charges of unfairness against
trading partners with big surpluses. In the past, cosmetic ''fixes"
like ''voluntary" export restraint agreements were used to relieve
pressure while the fundamental forces kept operating until the next ''fix."

Now the sustainability of the system has been put in question by the
entrance of 3 billion new players from China, India, and the former
Soviet bloc at a moment when the Internet and global air express
have negated time and distance along with the long standard economic
assumptions that labor, capital, and technology don't move between countries.

These new players are unusual. While having the low wages of
developing countries, several hundred million of them have first
world skills. That they are effectively next door and also planning
to grow by exporting to US markets dramatically increases the
pressure on an already stressed system. Even for America there are
ultimate limits on consumption and borrowing. US borrowing already
absorbs 80 percent of the world's available savings. At 100 percent
the global economy will be in deep crisis.

The only way to avoid that is to insist that the globalization game
be played the same way by all its players. Sure, China needs to
revalue, but without other big changes, globalization as we know it
will be on life support.

Clyde Prestowitz is the author of the recently published ''Three
Billion New Capitalists: The Great Shift of Wealth and Power to the East."