Schwab on trade: in an exclusive interview, America's chief trade negotiator assesses the world

International Economy, The, Fall, 2007 by Susan C. Schwab

TIE: It seems we've had an experiment with globalization over the last quarter-century that has resulted in enormous wealth creation and poverty reduction. People now take the prosperity for granted. It's been like nothing in recorded history. But do you sense things starting to go backwards? Is there a retrenchment beginning?

Schwab: Two things set the current era apart. One is the tremendous growth and opening up economically of China, and the corresponding implications for policy and politics for a lot of countries, not just the United States. The second is the fact that we have seen so much prosperity and economic growth that in many ways we're victims of our own success. Most barriers to trade and capital flows have disappeared, and we have seen the benefits. There is complacency associated with this growth--leaders in countries growing at double-digit rates ask, "Why do I need a trade agreement? Why do I need to make tough choices and jeopardize my political standing with my agriculture community or my manufacturing community?" I'm not talking about the United States, but about India, Brazil, Argentina, and South Africa.

If we were to move into an era of more stagnant growth, would that make politicians think more about how to jumpstart growth and thus become more enthusiastic about trade agreements? The solution to sustaining these growth rates is to try to open markets.

TIE: Some say the situation in China is beginning to look like a classic bubble. The Chinese have been stockpiling commodities and building manufacturing capacity, not necessarily driven by a market assessment of demand. One inevitability of life is that bubbles burst. Could a post-bubble China become a huge global disinflationary force?

Schwab: There is a real risk of Chinese progress in moving from a controlled economy to a market economy stalling or going backwards. You see that in certain decisions being made about protecting and nurturing national champions, about restrictions on foreign direct investment.

TIE: It was reported recently that the Bank of China alone holds nearly $10 billion in U.S. subprime mortgages. Around the time of this announcement, the Shanghai market jumped 20 percent, while the rest of the global market was melting down. What's wrong with this picture?

Schwab: We talk in the Strategic Economic Dialogue about issues of transparency, disclosure, and access to information. The downside of controlling information is you can have tremendous skewing of markets.

TIE: Countries such as China, India, and the oil producing economies--in most cases not democracies or certainly not free economies--have accumulated trade surpluses and huge currency reserves. In the 1970s, we recycled petro dollars by selling the Middle East weapons. In the 1980s through the beginning of this decade, we sold the booming Asian economies Treasury bonds. Lately, we're seeing quasi-governmental or official government investment vehicles using surplus dollars to try to buy hard assets. Have surpluses built to the point where the savings-surplus governments really have to diversify in their investments? Will Americans allow a KGB-run government in Russia or the Chinese government to buy 10 percent of Microsoft or 10 percent of Boeing, earning board seats at those companies? Of course U.S. businesses invest heavily in Chinese firms, but our investors aren't government entities. Aren't we looking at some tough political and strategic decisions to be made that call for some preemptive thinking on national treatment of industries?