KARACHI, Nov 1: With its globalization policy taking a hit, the United States is now seeking refuge in crony capitalism, protectionism and captive market.
While advocating free trade, America has strengthened protectionism.
Soon after 9/11, President Bush bailed out US airlines by providing subsidy. Then, duty on steel, wood etc., was raised to curb imports.
This was followed by tax cuts to shore up companies in financial distress. Tax reduction were designed to help improve corporates’ balance-sheet, fudged by firm bosses to enhance share value and to profit by it.
The corporate financial health was more important for the Bush administration than the tax benefits to low income groups badly needed to boost consumer incomes and spending that accounts for two-third of the US GDP. The budget deficit did not matter as much and is likely to touch a high six per cent of the GDP this year. It has enlarged the current account deficit to $500 billion.
But this was not enough as US globalization policies have reached a dead end. Domestic demand did not pick as all three — the government, corporates and consumers were under heavy debt. And the prosperous industrial markets, suffering from slump did not have much to offer for US goods and services.
Going by the past experience, the Bush administration saw war as the only option for economic recovery. And it found strong supporters in the UK, Australia and Spain. Suffering from huge trade deficits like the USA, these coalition partners saw Iraq, without Saddam, as a lucrative market. They went to war.
In a captive Iraqi market, a segment of corporate America with easy access to President George Bush, Rumsfield and Dick Cheney gets contracts for reconstruction of Iraq without tenders or competition from domestic or foreign firms. In view of the security problems, firms get contracted amount of money without 100 per cent delivery, though the risks are covered in the arbitrary pricing of the deal. It is crony capitalism at its best in a captive market.
Though the war has helped the American defence industry to prosper, any early sustained US economic recovery is not yet in sight. The key issue is: fiscal, trade and current account deficits. There is trade deficit of $500 billion. So, what Washington wants is to cut down on imports and protect its domestic industry from foreign competition. And to quote US senators, the United States wants an “even playing field” for its domestic industry. For this to happen, the senators want that China and Japan should stop “manipulating” their exchange rates. They want these states to revalue their currencies to make their goods expensive in the US market.
US treasury secretary Snow says that more than one engine (USA) is needed for world economic growth. He told the US Senate last week that nations should focus on growth of domestic market.
While accusing US trade rivals for manipulating their exchange rates, the senators ignore the fact that the $2-2.5 trillion global currency trading is dominated by speculators. No less than $5 trillion mobile money, moves in and out of countries, often devastating developing economies.
Many of the world’s leading banks and financial institutions thrive in this speculative environment. And developing nations pile up huge foreign exchange reserves merely to beat back speculative attack on their national currencies and maintain a stable exchange rate.
The US treasury secretary wants China to move towards a flexible exchange rate and to gradually remove capital controls. He does not have much leverage because China has invested quite a few hundred billion dollars in US treasury. Snow did not join the senators in accusing China or Japan of manipulating their exchange rates. There are limits to economic power and leverage.