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«Home | Subscribe | Current Issue Has Globalization Passed Its Peak? By Rawi Abdelal and Adam Segal From Foreign Affairs, January/February 2007 Summary: ...»

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Underlying these moves, the very nature of the Chinese development model has, with little fanfare, changed in recent years. In 2005, Beijing concluded that its previous model, which had been in place since around 1978, had been too dependent on greenfield foreign direct investment (that is, foreign money that goes to the construction of new facilities and new technologies). Foreign investors in China had received better tax and regulatory treatment than domestic entrepreneurs. Beijing decided to reverse this orientation, and in November 2005, China's National Development and Reform Commission, a sort of overarching reform ministry, accordingly issued the innocuous sounding Measure 39. Under this regulation, domestic venture capitalists now receive much better tax and regulatory treatment than do their foreign counterparts. China will still, to be sure, find a place for foreign investment, but Beijing will no longer give it the protected status it once enjoyed.

Beijing, like other governments, is also coming under increasing pressure to address the inequalities brought on by rapid economic development and globalization. According to Chinese sources, the richest 10 percent of households in China now account for more than 40 percent of the country's wealth, whereas the poorest 10 percent of households account for only about 2 percent. The regional income gap is also increasing, with coastal provinces now enjoying a per capita gross domestic product more than ten times that of the poorest interior provinces. President Hu Jintao has publicly recognized the need to address these disparities by making the attainment of a "harmonious socialist society" one of his government's central goals, and he is slowly taking measures, such as simplifying and reducing the tax burden on farmers, to effect it.

OIL OF ONE'S OWN

One of the best ways to measure the health of globalization worldwide is to look at energy markets, and those for oil in particular. Oil has become the ultimate global commodity, unparalleled in importance. As go oil markets, therefore, so goes the global economy. And here, too, the signs are worrisome.

Both sets of states in the oil market -- those countries that have oil and those that do not -- have changed the way they do business in recent years. Among the haves, the rising price of oil has increased the temptation of governments to assert control over the resource. Throughout Latin America, governments have reasserted their authority over extraction projects that they once had ceded to foreign firms. Moscow has similarly muscled its way into direct control over Russia's vast oil and gas wealth and has used that control to extend its strategic influence.

In response, a number of the oil have-nots have taken measures to insulate themselves from a disruption in their oil supply. This helps explain China's seemingly illogical drive to acquire stakes in oil production facilities abroad. So long as oil remains a global commodity, consumers need not own the means of its production; they can simply buy all they need on the world market. China, however, seems to be preparing for a day when oil becomes far harder to acquire and transport and has thus signed various oil and natural gas agreements over the last five years with Angola, Brazil, Iran, Nigeria, Venezuela, and Sudan. This strategy makes so little economic sense that it can only be explained by an expectation that global oil markets will at some point break down, due to either a worldwide recession or a conflict between China and the United States.

SAVING GLOBALIZATION, SLOWING DOWN

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past 30 years. These institutional foundations may have been weakened of late, but enough rules and organizations remain to ensure that the current global economy is unlikely to suffer the same fate as the last. In other words, although globalization has passed its peak, it is unlikely to unravel completely.

Still, the flaws in multilateral institutions such as the WTO and the growing discontent with globalization will make it harder and harder for politicians to pursue free markets. If the United States, in particular, fails to do more to ensure that the benefits and opportunities of an internationalized economy are spread as widely as possible, there could be an even more potent backlash.

This is where smart policies should come in. The U.S. government must work harder to convince the American public -- particularly those Americans who fear losing their jobs to international competition -- that the costs of undermining or reversing globalization would be worse than the benefits. There is plenty of evidence to point to. Wal-Mart, for example, may have wreaked havoc on the U.S. retail sector with its relentlessly competitive business model, but it has also brought American consumers declining real prices for their mobile phones, dvd players, and televisions.

Similarly, the Chinese manufacturing juggernaut may worry some Americans, but without it there would be no lower-cost products for Wal-Mart to sell.

Washington must also do more to ensure the that United States remains competitive in the global economy. Legislation has been introduced in Congress to enact President Bush's American Competitiveness Initiative, which would double federal support for fundamental research in the physical sciences and engineering, make the R & D tax credit permanent, expand math and science education, and ease immigration for highly skilled workers. But this legislation has not been passed, and its fate remains uncertain. Too little has been done to retrain workers who have lost their jobs to outsourcing. The corporate sector can and should help, not only by publicizing the benefits of openness but also by bearing some of the costs of the resulting dislocation.

Internationally, the United States must resist the temptation to continue down its path of ad hoc globalization. Bilateral treaties have been an effective and convenient way to advance short-term priorities, but they have undermined vital multilateral processes and institutions. Were Washington to embrace the rule-based European approach, it would reinforce the institutions that all countries depend on to preserve the gains of globalization.

Meanwhile, as skepticism about global markets continues to increase, U.S. corporations should prepare for rough going in their international operations. U.S. managers may once have assumed that understanding the politics and rules of the countries in which they traded and invested -- and the international organizations of which those countries were members -- was a luxury. Such knowledge is now essential, however, and U.S. business leaders should prepare themselves for the new rules and restrictions that they will face -- and that the United States itself is considering adopting in the wake of the cnooc and Dubai Ports World debacles.

Other key stakeholders in the globalization project must also do their part. The multiplicity of EU rules governing the liberalization of markets has come to feel increasingly onerous to Europeans -and too far removed from those rules' original social and political purposes. Last year's constitutional crisis was just the latest symptom of the growing public fear that the EU is causing the marketization of daily life (as opposed to the protection of traditional European practices).

Politicians and European Commission officials must start interpreting the EU's rules more flexibly if they are to legitimize the organization and its integrated model in the minds of their constituents.

Chinese leaders face even more serious challenges. The export-driven Chinese economy cannot Page 7 of 7 survive without a flourishing global economy fed by U.S. consumption. Beijing must therefore work to counter the widespread hostility to China in the U.S. Congress by, for example, better protecting intellectual property rights. China must also try to lessen income inequality at home in order to limit the dislocation caused by globalization.

If all or most of these efforts are made, the world will no doubt find a way to muddle through. But this muddling must not be taken for granted; it will require hard and sustained effort by U.S., European, and Chinese leaders. Washington, especially, needs to think hard about how to sell globalization, and not just to the U.S. public but to the world. After all, the U.S. economy can ill afford a serious threat to the open markets on which it and, indeed, all of us depend.

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