November 4, 1997 Issue Brief #123
FAST TRACK AND THE GLOBAL ECONOMY
by Jeff Faux
The core economic claim for the version of “fast track” rules being pushed by President Clinton and Rep. Bill Archer is that the benefits of expanded trade and overseas investment will be so large that they justify the abandonment of worker, environmental, and public health safeguards. But the financial crisis in Southeast Asia reminds us how volatile world markets are, and thatany policy based on rosy predictions of future trends in foreign economies is extremely dangerous.
A short time ago, the nations of Southeast Asia now in crisis were the darlings of the international financial markets. The countries were promoted by the U.S. Department of Commerce as immensely profitable “emerging markets.” Their governments were applauded for welcoming foreign capital, deregulating their banks, and linking their currencies to the U.S. dollar to suppress inflation. Today, those same nations are being denounced for borrowing too much foreign capital, not regulating their banks sufficiently, and failing to break the link of their currencies with a rising U.S. dollar.
Similarly, four years ago the Mexican government of Carlos Salinas was hailed in Washington as representing a new breed of honest, competent reformers. Mexico was the international investor community’s poster child for sound economic development, largely because Salinas had deregulated Mexico’s fragile financial system and opened it up to global capital. The provisions of NAFTA required Mexico to further abandon regulation of speculative capital. As a result, U.S. government officials confidently predicted that NAFTA would immediately create a huge, prosperous middle-class market for U.S. goods.
A year later, Salinas fled his own country when Mexico’s boom went bust. As in Southeast Asia, much of Mexico’s surface prosperity was the result of over-borrowing of short-term capital that had entered the country in search of quick speculative profits. When stocks and other assets became too inflated, the money left just as quickly. The peso plummeted, the economy collapsed, and the government was revealed as corrupt and incompetent.
The stock market recovered, but the Mexican people still have not. Massive unemployment, lower incomes, bankrupted businesses, and social disorder were left in the wake of the peso’s crash. The small U.S. trade surplus with Mexico turned into a $16 billion trade deficit, costing jobs and putting downward pressure on U.S. wages. Now, the cycle is starting over. Despite the fall in the last week, the Mexican peso is still overvalued. We don’t know when, but we can expect another drop.
Today in Southeast Asia, domestic interest rates are being driven up, slowing internal growth and increasing pressure to export even more. The devaluation of their currencies and the reduction in wages and incomes will automatically make their goods more price competitive in the U.S., which is the largest open market for third world goods. The experience with Mexico suggests that this rise in exports will cause further job loss in U.S. manufacturing and further downward pressure on wages – particularly for non-college graduates (who represent three-quarters of the U.S. workforce).
Those who promoted the Mexican and the East Asian “miracles” learned nothing from the experience. If anything, the Archer-Clinton fast track proposal will make things worse. For example, their version has dropped the provision of the previous fast track authority that established coordination of monetary policy as a negotiating objective. This omission effectively prohibits any effort to prevent the kind of financial instability that wrecked NAFTA’s rosy scenario for Mexico.
The over-promotion of the global economy has left the impression that the world financial markets are simply larger multilingual versions of the New York Stock Exchange. This is not the case. The United States has the most efficient money markets in the world in part because of the Federal Reserve Board, the Securities and Exchange Commission, and other regulatory agencies that reduce risk and volatility. The U.S. has also developed systems of self-regulation that, for example, allowed officials of the stock market to suspend trading to prevent a downward spiral of price deflation and panic. We have learned that financial market booms and busts can play havoc with the “real” economy that produces jobs and income for the vast majority of the population. Whenever we have allowed government supervision of the banking system to lapse, financial disasters – such as the savings and loan crisis of the 1980s – have been the result.
There are no such safeguards in the international marketplace, which is why we need to be cautious.
Since NAFTA we have learned that no one can predict the future of the fragile economies of Mexico, Thailand, Indonesia, or any other developing nation. No one would have predicted that Japan would still be suffering from the aftermath of a financial deflation that is now seven years old. What we know for sure is that we don’t know, which is why we need to build into these agreements enforceable safeguards to protect living standards, the environment, and the public’s health.
The Archer-Clinton proposal ignores that lesson, reflecting a naive insistence on rushing into even more complicated trade and investment deals for their own sake. Giving the administration another blank check to pursue this reckless course will put American workers, and businesses that want to produce in America, at increasingly perilous risk.