Globalization to The Rescue?

The shrinking trade deficit reflects two realities. First, the dollar has depreciated. Since 2002, it's down 21 percent against a basket of 26 currencies. That makes U.S. exports cheaper abroad and foreign imports more expensive here. Complementing this is what economist Jim O'Neill of Goldman Sachs calls the "decoupling" of the U.S. and world economies.

For years, the U.S. economy was an engine of global economic growth. Americans were truly the shoppers of last resort. Other countries boosted production and jobs by exporting to us. No more. In the second quarter, U.S. consumer spending grew at a meager 1.4 percent annual rate. O'Neill asserts that the added spending of consumers in the so-called BRIC countries (Brazil, Russia, India, China) now contribute more to global economic growth than American consumers.

"At a time of subdued U.S. consumption," he writes, "the world is helping the U.S. economy." In a report last week, the International Monetary Fund reinforced the point. It expects the world economy to grow 4.8 percent in 2008, more than double the projected U.S. growth of 1.9 percent.

There is a larger lesson. We have wrongly made globalization a scapegoat for much that ails us. It's easier and more satisfying to blame faceless forces beyond our borders. But globalization is not, as another IMF study shows, the chief culprit in explaining greater economic inequality. New technologies probably deserve that distinction by widening pay gaps between skilled and unskilled workers. Similarly, China has sold us shoddy goods, but so have domestic U.S. firms.

Globalization is not a worry-free zone, but we should focus on the right worries. China's currency remains undervalued; that's a problem. The swelling U.S. trade deficits have long been a legitimate anxiety. Could the world prosper without them? Would the flood of dollars overseas trigger a currency crisis, as global investors dumped the dollar, causing a sharp depreciation and disrupting well-established trade and investment patterns? Against these doomsday possibilities, a gradual dollar depreciation and decline of the U.S. trade deficit would be reassuring. But the crucial word here is gradual. Abrupt changes could reap enormous economic damage.

All the ritualistic denunciations of globalization by politicians and pundits are not harmless. Psychology matters. If global investors fear that the United States might make its economy less open to foreign trade and investment, the result might be the very dollar panic that everyone fears. The dollar's status as the world's central international currency depends on its usefulness in buying and selling. The more we restrict, the less useful it becomes. Globalization's casual bashers should remember that. They think they're playing only to a domestic audience, but the world is listening, and it may not like what it hears.

© 2007