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Managing the World Economy: The Consequences of Corporate Alliances.

In politics and public life, intellectual fashions often change suddenly, especially after a presidential election. With the victory of Bill Clinton, a new breed of activist arrived in Washington eager to manipulate the levers of government.

This generational transition coincided with the end of the Cold War, a development that is allowing public officials to reallocate resources and address new national priorities. Instead of viewing foreign relations narrowly through a Cold War prism, the new policymakers at last have the opportunity to concentrate on global economic competition. No longer primarily concerned with preserving delicate political and security alliances negotiated a generation ago, they can contemplate the formidable task of constructing a durable international economic order in conjunction with leading economic partners.

But who should manage the emerging economic system? Invisible hands responding to supply-and-demand forces or the visible hands of government regulators or common people?

In a book written for the new vanguard, not for the general public, political scientists Peter F. Cowhey and Jonathan D. Aronson embrace the regulation option. They do so largely because they believe that the proliferation of international corporate alliances (ICAs)--"private partnerships" involving coproduction, technology sharing, and other forms of cooperation between competitors from major countries--is severely complicating the ability of nation-states to manage their trading relationships. Indeed, the authors argue, these strategic alliances "may require new forms of international oversight" extending beyond the powers of national governments and involving new responsibilities for the General Agreement on Tariffs and Trade (GATT).

Cowhey and Aronson vigorously argue that the new world economic order depends on renewed government "activism" and "open industrial policies." They say that the "internationalization of domestic regulations" and the harmonization of national economic policies will distinguish the emerging model, as free trade and investment characterized the post-World War II order.

Radical departure

Obviously, their recommendation for expanded government management differs fundamentally from the market internationalism still preached, for instance, on the editorial pages of the Wall Street Journal. During the Reagan and Bush administrations this free trade philosophy actually motivated policymakers in Washington, who eagerly attempted to open markets abroad and remove government regulations at home. Of course, even doctrinaire free traders must occasionally bow to statutory and political realities. And so, in a seeming paradox, the Reagan-Bush free traders reluctantly consented to restraints on steel, automobiles, semiconductors, and other products while continuing to preach the deregulatory gospel.

If invisible hands inspired the last two Republican administrations, visible hands guide the Clinton executive branch. Academic appointees--for example, Labor Secretary Robert Reich and Laura D'Andrea Tyson, chairwoman of the Council of Economic Advisers--strongly support strategic trade and industrial policies. The Clintonites apparently desire to use the power of government to rebuild the U.S. economy--and create high-paying jobs--while attempting to preserve a commitment to open markets and free trade.

For these officials, Cowhey and Aronson have a supportive policy message: Governments can "open markets to foreign competition and embrace industrial policies simultaneously."

In part one, the authors examine changes in the world economy during the past four decades. They tell the familiar story of how an American model based on free trade and capital flows came to dominate the world. The system's rules reflected U.S. dominance and corporate values and was based largely on classical economic theories. Goods and investments moved internationally, whereas services did not. What nations exchanged reflected immutable factor endowments. In trade negotiations, governments focused on reducing and removing visible barriers to trade, such as tariffs.

Relatively quickly, however, the system became outmoded. "The post-1945 international economic system has fallen apart," the authors write, "and like Humpty Dumpty, it is impossible to put it back together again." With the recovery of Europe and Japan, hybrid models of industrial organization flourished, featuring active government intervention and oligopolistic cooperation. And as the globalization of economies proceeded, the boundaries between domestic and international policies blurred, requiring bureaucracies to cooperate.

In part two, Cowhey and Aronson illustrate the changing rules of the game by discussing the automobile, semiconductor, and telecommunications industries. The structure of the automobile industry never fit the free-trade model, they say. Instead, Japan built up a world-class auto export industry, using import barriers and government assistance. Faced with intense Japanese competition, European and American producers turned to government import restraints and strategic business alliances to globalize and meet the competition. The authors argue that the three major trading powers must move away from protectionist expedients such as voluntary export restraints and antidumping duties and instead develop new "trilateral understandings."

In the fast-changing semiconductor industry, the U.S. government played a vital role, first in stimulating development and then in responding to the Japanese challenge with antidumping duties and bilateral trade agreements. Cowhey and Aronson point out that the current trend toward ICAs in this industry reflects not only the need to share costly new product development but also the attempt to blunt nationalistic calls for protection.

Intrusive behavior

Finally, in part three, Cowhey and Aronson present recommendations for reshaping the international economy. One is particularly indicative of how far they would take activist government management. With the Uruguay round of trade negotiations floundering, they argue that a global power shift away from U.S. dominance toward a system driven by corporate alliances justifies the development of industry-specific market access codes. Sectoral codes, not universal codes such as those regulating dumping and subsidies, would govern business relationships. Open industrial policies, they say, would permit domestic and foreign competition while allowing governments to play a role in shaping competitive advantage.

This appeal for industry codes to ensure fair competition is eerily reminiscent of the National Industrial Recovery Act experiment during the New Deal. For hundreds of industries, the Roosevelt administration drafted "blue eagle" codes regulating everything from wages and working conditions to pricing and terms of competition. Thus, the New Deal activists extended government intervention to an array of business decisions traditionally left to the marketplace. However, in late twentieth century America, there is no evidence that the public or private interests have any desire to return to a state of such intrusive regulation.

Implicit in the recommendation for sectoral codes is the authors' belief that the U.S. government has the experienced personnel and capacity to conduct an effective interventionist strategy without succumbing to political or policy pressures. Yet during the Cold War years, the State Department often intervened in policy decisions at the request of foreign governments. Consequently, the United States sacrificed shoe plants and jobs for military bases in Spain, and New England fish workers for economic opportunities in Iceland.

Also troublesome, and not adequately addressed, is dispute settlement in this active regulatory model. As a result of provisions in the Canadian-U.S. Free Trade Agreement, panels of temporary experts, not professional jurists, now render decisions with far-reaching implications for U.S. sovereignty and legal procedures. Such bilateral panels have already introduced their own interpretations of U.S. law to reverse Commerce Department decisions on the lumber and wine trades. The proposed North American Free Trade Agreement, involving Mexico as well as Canada, would establish similar dispute panels with broad authority. They could operate in secret and issue determinations effectively circumventing the U.S. Constitution. In effect, panel decisions could override the separation of powers and states rights.

Cowhey and Aronson may see such arrangements as necessary to support the global activities of transnational corporations and ICAs, but it is questionable whether individual citizens in the United States, Western Europe, and Japan are prepared to cede national sovereignty to ad hoc panels. Thus, one wonders whether the new regulated international economic order described in this book is any more realistic than the laissez-faire model zealously boosted during the 1980s.

As the Cold War recedes and ordinary citizens become more concerned about the quality of their own lives, I sense that both internationlist models lack popular support. In this new book The Myth of Free Trade, economist Ravi Batra argues that open markets and free trade have produced declining real wages and enhanced job insecurity for U.S. workers since 1973. Recently, the negative effects of globalization have begun to depress the incomes and job opportunities of white collar and service workers.

With a restive domestic electorate trying to preserve high-paying jobs at home and increasingly attracted to Ross Perot-style nationalism, Managing the World Economy is, in the end, more of a quixotic appeal for regulated internationalism than a realistic road map for the future.
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Author:Eckes, Alfred E.
Publication:Issues in Science and Technology
Article Type:Book Review
Date:Jun 22, 1993
Words:1405
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