Free Trade: Is Globalization Hurting the U.S?

In the just-completed summer Olympics, America's status as the globe's athletic hegemon was clearly under attack. The United States won the overall medal race, edging out China 110 to 100. But the hosts won significantly more gold medals, and favored U.S. individuals and teams fell victim to Jamaican sprinters, Japanese softball players and boxers from pretty much everywhere. Action off the field also highlighted a similar shift in the balance of power, as viewers marveled at the impressive hardware (buildings like the Water Cube and the Bird's Nest) and software (the spectacular opening ceremonies). "None of these was an accident," says Edward Gresser, director of the project on trade and global markets at the Washington, D.C.-based Progressive Policy Institute. "They reflect the deep economic trends of a decade in which our competitors have raised their game and we haven't."

The Olympics may be the ultimate quadrennial global competition. But from China's gleaming maglev trains to India's superior wireless-phone networks, there are also signs that the United States is losing ground in the daily global competition for economic supremacy. In the 1990s, while the loss of manufacturing jobs was controversial, American consumers and businesses seemed to regard globalization and free trade as net positives. The integration of China and the former Soviet bloc into the trading system lowered inflation, opened new markets and brought billions of workers into the labor force. Armed with a strong dollar, Americans roamed across the flat world like Kenyan distance runners.

But in this decade, rampant growth in emerging markets has mercilessly boosted prices for energy and commodities; competition from foreign workers has tamped down wage growth, and the weak dollar has made U.S. companies vulnerable to foreign buyers. "In the 1990s, we got all the upside of globalization," said David Smick, a consultant and author of the new book "The World Is Curved: Hidden Dangers in the Global Economy." "Now we're getting some of the downside."

As a result, Americans are now more inclined to see themselves as victims of globalization—rather than as beneficiaries of it. A Los Angeles Times/Bloomberg poll this spring found that 50 percent of respondents said free trade hurt the economy, while only 26 percent said it helped.

Americans returning from jaunts abroad can't help but notice that the distinguishing features of modern capitalism, many of them developed in the United States, are being put to greater effect overseas. I've had better cell-phone service in Cambodia than in Connecticut. South Korea, and many other countries, has a higher rate of broadband penetration than the United States. An Ernst & Young report found that about 24 percent of America's major roads are in "poor to mediocre condition," while China builds ever-faster trains. In 2000, U.S. exchanges accounted for about half the value of global stock markets; at the beginning of this year, they accounted for just 33 percent. When the sale of Anheuser-Busch to InBev, the Brazilian-Belgian giant, is completed, each of America's Big Three beermakers will be part of a foreign conglomerate.

As capital and financial know-how spreads throughout the world, America's status as the global leader in risk management has taken a beating, thanks to Wall Street's credit immolation. The evaporation of savings has forced American bankers to beg sovereign wealth funds in Asia and the Persian Gulf for new capital. The Big Three automakers are lobbying for federal loan guarantees. The "ownership society"? More like "bailout nation."

More troubling are the signs that the United States has lost its capacity to determine the direction of the global economy. In the past, when American motorists cut back on driving, the price of oil would plummet; in 2008, not so much. This summer the Doha round of trade talks, aimed at lowering trade barriers, ended in failure, despite an aggressive U.S. push. Sean Spicer, assistant U.S. trade representative, said the diffusion of economic power is partially to blame. "The World Trade Organization now has 153 members," he said. "Ten years ago it had 80. And China and India obviously now have bigger seats at the table." Russia's recent actions in the Caucasus have revealed that the United States no longer has the ability to use economic power as a tool of statecraft. How can the Bush administration impose economic sanctions on a government that owns hundreds of billions of dollars of U.S. debt?

And we ain't seen nothing yet. Jeffrey Garten, professor of international trade and finance at the Yale School of Management, notes that in 2000, the world's wealthiest countries accounted for about 70 percent of the global economy, compared with 30 percent for developing economies. "At the midpoint of the 21st century, those percentages are going to be reversed," he said.

So must 21st-century America adjust to a humbler role in the world's economy, just as 20th-century Britain did in the wake of the collapse of its empire? Not necessarily. Back in 1992, Massachusetts Sen. Paul Tsongas declared that the cold war was over, and that Germany and Japan had won—right on the cusp of a decade of extraordinary growth for the United States. Globalization doesn't have to be a winner-take-all, zero-sum game. Mark Zandi, chief economist of Moody's Economy.com, notes that exports—up 13.2 percent in the second quarter—have created hundreds of thousands of jobs this year. And there are still plenty of economic events in which the United States sweeps the medals: farming, high tech, higher education, branded goods.

The global economy is no longer an individual event. Now it's more like the eight-person crew. That's an event in which several powerful strokers propel the boat forward through choppy waters. It's also an event in which the American women nudged out furious international competition to win gold.