This is the way the world works today:
In a Swiss airliner somewhere over France, a German businessman picks up the telephone and buys American dollars with Japanese yen on the London financial markets.
Meanwhile, in South Korea, a factory owned by Dae-Woo uses Japanese parts, Korean workers and German engineers to make Pontiac Le Mans cars for Americans, many of whom think they are buying an American-made car.
At the same time, in congressional hearings in Washington, lawmakers grill administration officials on what they plan to do to hold down the interest rates Americans pay, increase the exports that create jobs for American workers and control the value of the once-mighty dollar in world markets. The officials know, even if many of the congressmen don`t, that their government has lost much of its power to control these matters.
At issue is sovereignty-the ability of a nation to run its own affairs, including its economy. Nothing is more fundamental to nationhood, and for centuries threats to sovereignty have been enough to spark wars.
As the global economy continues its inexorable expansion, reaching into the workings of more and more businesses and the lives of more and more workers, the United States and countries on every continent are less and less masters of their own houses.
Now, the wars are economic. The very capitalists who have fueled the economic system of every Western country are using sophisticated new technologies that enable them to joust on a global battlefield, setting off hand-wringing in boardrooms and backlash in Washington and other capitals.
”Technology is rapidly making the basic notion of national sovereignty obsolete in many areas of economic affairs,” W. Michael Blumenthal, chairman of Unisys Corp. and former treasury secretary, has written.
”Before, American economic success and failure were determined here, not anywhere else,” said Lester Thurow, dean of business at the Massachusetts Institute of Technology.
”You could argue that (Federal Reserve Chairman Alan) Greenspan has an obsolete job. He`s supposed to control the American money supply. But there isn`t an American money supply. There`s a global money supply.”
Consider this scenario:
Japanese investors, as is well known, hold hundreds of billions of dollars worth of U.S. government bonds. It is by selling these bonds to investors in the United States and around the world that the government borrows the money to fund the federal budget deficit.
What would happen if the Japanese, out of worry about some aspect of the U.S. economy, stopped buying so many bonds? The U.S. government would still need to fund its deficit, so it would have to find an incentive to lure new bond buyers, or entice the Japanese buyers to return.
The way to do this would be for the government, through the Federal Reserve Board, to raise interest rates. But while the higher rates would make the bonds more attractive to Japanese investors, they also would mean that borrowers of all kinds would have to pay higher interest.
Consumers would begin slowing their purchases of homes, cars and other goods because of higher borrowing costs. With sales down, companies would be forced to reduce payrolls and slash investment plans. The economy would slide toward recession.
Financial markets-the early warning system for an economy`s troubles-would spot the trends immediately. Stock prices of companies deemed to be in trouble would sink.
The end result could be a stock market collapse.
Fanciful? That is precisely what led to the crash on Wall Street on Oct. 19, 1987, according to no less an expert than Nicholas Brady, who headed the presidential task force that studied the crash.
”That, to me, is what really started the 19th-a worry by the Japanese,” said Brady, now treasury secretary.
Brady`s observation means that he, President Bush and Greenspan no longer have the independent power to take steps to stimulate the economy or to thwart inflation. They can take actions, of course, but only with the risk that reactions by other countries could make things worse.
”We have to make policy in a global context, not a national context,”
said Alan Stoga, economist with Kissinger Associates. ”We are dependent now on foreigners to sustain our economy. This substantially changes the way we interact with the world economy.
”Most Americans don`t understand this and don`t like it,” Stoga said.
Despite years of teeth-gnashing by business and political leaders, the U.S. economy is holding up well in the era of globalization, and businesses continue to find ways to adapt to the new realities. How well they do this over the long haul will have a powerful impact on the nation`s prosperity.
There has been an international economy since the colonial era, as companies in different nations imported and exported goods. Multinational corporations gained great power in the 20th Century by extending their operations.
Trade in goods is still largely between nations, but in the last few years, the global economy, based on lightning-fast financial communications, has emerged to overpower the old international economy, which is still chugging along but grows much less rapidly. After all, goods must still be shipped from port to port. They cannot be bounced off a communications satellite the way a financial transaction can.
Currency markets are far and away the most powerful force in the global economy, and even though the markets themselves are in individual countries, the traders are everywhere-as exemplified by the hypothetical German businessmen buying dollars in London with yen while in a Swiss airliner over France. Stock and commodities markets are also moving toward globalization.
And companies in one country buy companies in other countries, creating exotic new forms of world conglomerates-witness the galloping globalization of the mass communications industry.
Japanese automakers borrow from Japanese banks and use Japanese construction firms to build plants in the United States in which American workers make cars, some of which are exported to Japan. Joint ventures are springing up that may operate in the U.S., Europe and Japan, with ownership shared among competing companies based in two or even all three countries.
Tribune correspondents interviewed scores of business and political leaders and other experts in Europe, Asia and the U.S. for this report.
Financial markets
Financial markets, where money is raised for business investment or traded by speculators, are now almost totally global and have a powerful impact that limits the ability of governments to control their economies.
Felix Rohatyn, a partner in the Lazard Freres investment banking house, calls the United States ”a prisoner of foreign capital.”
Because of technological advances, money now flies around the globe at the push of a button. On these money markets, more than $50 trillion worth of various currencies are traded each year. By comparison, the total trade in goods among the countries of the world is $2 trillion.
Some of this raising of money on world markets goes for true investment, as entrepreneurs look for the cheapest money they can borrow. But the vast share of it is speculative money-spinning, with traders making huge profits as various currencies change in value.
This activity has no relation to the ”real” economy of goods and services, but this doesn`t mean the speculation has no effect. Indeed, these volatile and mobile funds, like a great river flowing around the world, can drown a nation`s economic policy or cause other havoc almost overnight.
Chicagoans know that it was the decision of Japanese money traders to hold back billions of dollars of short-term loans that was the immediate cause of the collapse in 1984 of Continental Bank.
And this could be done by traders in Japan, or Europe, acting on their own reflexes, not on government orders. As powerful an erosion of sovereignty as this is, most people have little grasp of it, because currency trading is an arcane activity carried on in a rarefied world beyond the experience of all but a tiny group of specialists.
Stocks, commodities
Stock and commodity markets aren`t global yet, but they may be getting there. Already, major stocks are listed not only in New York but in London, Tokyo and on other leading exchanges, leading to trading around the clock.
That means that, somewhere, some stocks are on sale at any time of the day or night. This applies only to a minority of stocks now, but Roger Kubarych, a vice president of the New York Stock Exchange, predicts that this will be greatly expanded within 10 years.
There is no better symbol of this switch from national to international ownership than Britain`s recent selling to the public of its nationalized airline, steel company and other assets. Shares of these giants were sold around the world, with the national government bowing out as international business bowed in.
NYSE statistics show that foreigners own only 2 percent of U.S. stocks, but changes may be in the works that would make it easier for people in other countries to buy shares of American companies. Kubarych, among others, thinks stock markets are on the way to being deregulated the way currency markets in London and Tokyo were, potentially giving a huge boost to globalization.
Now, each nation has different rules on regulation of stocks, voting rights, corporate control and other factors. Antitrust legislation, which governs ownership of companies, also differs from nation to nation. So do accounting rules.
But global forces are expected to push countries to bring their laws closer together, if not make them identical. Tax treaties have been in effect for years. Banking laws were harmonized last year. Laws on stock markets cannot be far behind.
Buying businesses
Foreign investment in business is probably the feature of the global economy that inspires the most emotion and threatens the biggest backlash, because the erosion of sovereignty is so easy to grasp.
The U.S. pioneered foreign investment in the postwar world. American multinational corporations spread around the globe and weren`t above meddling in local and regional politics-the United Fruit company`s power through the years in Central America, for instance.
But now Japanese and Europeans are investing in the U.S. for the same reason that American companies invested abroad-they`re rich and want to get richer. Not only are Japanese auto companies threatening the supremacy of America`s Big Three, but dozens of famous American company names are now foreign owned-J. Walter Thompson, Brooks Brothers, Firestone, Doubleday, A&P, General Electric, Hilton International and Marshall Fields.
As the backlash set in, Congress considered laws restricting foreign investment. The Reagan administration blocked the purchase of a California computer chip maker by a Japanese company. Other countries-Japan, Britain and Belgium-have rallied to limit foreign ownership.
Yet, all the while, countries, states and towns, from Ireland to Shelbyville, Ind., were locked in cutthroat competition to lure foreign investment.
Trade
Unlike money flows and international stock trading, trade in goods has been around forever. Also unlike the global financial markets, trade in goods is not exploding, but growing at a stately pace-about 4 percent per year.
Goods still move from one country to another, despite the growing internationalization of production, like that Pontiac Le Mans factory in Korea.
Trade trends intrigue some experts and worry others. While finance goes global, trade appears to be going regional. There are signs that the world is splitting into three big trading blocs-an Asian bloc centered on Japan, a European bloc centered on the Common Market and a North American bloc centered on the U.S.
In 1992, the Common Market nations will become a single market, with almost no trade barriers among the member countries. Other nations have expressed the fear that this will create a ”Fortress Europe” that will keep out non-European imports.
Partly in reaction, the U.S. and Canada have signed a free-trade treaty. The pact was a divisive issue in a Canadian election, with opponents expressing the fear that their economy would be dominated by the U.S. economy- a sovereignty issue.
Exports and imports now represent the equivalent of more than 24 percent of American output, double the 1970 level. Interestingly, the share of trade in total world production has gone up by an identical amount. But Paul Krugman, an economist at MIT, notes that the real growth in world trade took place in the 19th Century, collapsed during the two world wars and the Depression and has recovered only since World War II.
”It wasn`t until 1970 that the world got back to its 1913 level,”
Krugman said.
If the scope of trade is nothing new, some parts of it are. One is the fact that much of the world`s trade-up to 50 percent, according to some figures-is not between countries but between different parts of multinational corporations operating in different countries.
For instance, Caterpillar Inc.`s factory near Toronto takes in parts from other Caterpillar factories around the world-winches from Brazil, engines from Japan, axles from Belgium and transmissions from the U.S.-and puts them all into equipment to be exported to countries around the world, including Brazil, Japan, Belgium and the U.S.
Another new factor is the new popularity of managed trade. Mercantilism-the use of government policies to maximize a nation`s exports and minimize its imports-was used by Japan with stunning success and has since been adopted by newly industrialized nations such as Brazil and South Korea.
”I`d argue that this tendency to move toward a more managed trade, on a regional basis, flies in the face of globalization,” said Stoga, the Kissinger Associates economist.
Forces at work
Deregulation of currency markets is one reason for the new global economy. So is the rise of Japan, joining the U.S. and Europe as an economic center and ensuring that the sun never sets on world business.
But the biggest reason is technology. Computers and modern communications enable businesses to do more to gather, analyze and act on information, and to do it faster, over longer distances and cheaper than ever before.
”Without data-processing capacity and high-capability communications, you wouldn`t have a global market” for currencies, Harvard Prof. Richard Cooper said. ”There`s been a tremendous cheapening of transatlantic and transpacific communications.”
”Before, the major link between countries was the ocean,” said Jacob Frenkel, economist at the International Monetary Fund. ”This meant ports and manufactured goods. Today it`s the satellite. This means information and trading in portfolios. This is fundamental.”
”Information has become the key to modern economic activity,” according to Unisys Chairman Blumenthal. ”Information is not and cannot any longer be geographically limited or confined. The new technology moves it
instantaneously across national boundaries, anywhere and at any time.”
The ability of a country to prosper now, he said, lies in its ability to use the new information technology.
Technology not only is fast, it`s cheap. As Harvard economist Ray Vernon points out, the cost of an international telephone call has gone down by 90 percent, not counting inflation, since the 1950s.
”The cost of moving information across space,” Vernon said, ”doesn`t count any more.”
Government
MIT economist Rudiger Dornbusch thinks the speed and efficiency of communications and financial markets have gone too far and that the government should try to gain some control.
”Technology has made it possible to react instantly,” Dornbusch said.
”It has made us all-policymakers, manufacturers, etc.-hostages of the markets.”
Traders, acting for short-term profit with no thought for the wider economy, can speed money around the world, because it costs essentially nothing, he said. Dornbusch, like Nobel Prize-winning economist James Tobin, thinks it would be a good idea to charge a small financial transaction tax,
”like a speed limit,” to slow trading and remind traders ”that there are real machines and assets out there.”
At the moment, he said, global financial markets ”are totally, unreasonably dominating.”
All this has happened so fast and involves such complex technology that few government officials understand it, let alone know how to bring it under their control.
Other nations, long aware that they live in a world economy, make international economic policy a central function of government. For smaller trading nations like Belgium and South Korea, trade is paramount. In West Germany, the government and central bank subordinate everything to making sure that inflation remains low so that German exports remain competitive.
The U.S. has no coordinated world economic strategy. Instead, what passes for U.S. policy results from a chaotic struggle between the State Department and the Pentagon, which emphasize political considerations, and such agencies as the Commerce and Agriculture Departments and the special trade representative`s office, which favor economic considerations.
As Brookings Institution economist Ralph Bryant says, the policy that emerges from this struggle is often a surprise, and the intended effect may be diluted-maybe even reversed-by the actions of the markets and other countries.
”If one country wants to go north when the others want to go south, it can`t do it,” Bryant said.
Examples abound. France tried to expand its economy in the early 1980s, when the other European countries were in an austerity mood. After two years of unexpected inflation and almost no growth, the French gave up.
The first Reagan administration tried a go-it-alone economic policy, cutting taxes and stimulating the economy with no regard for what its allies were doing. In effect, says Robert Z. Lawrence, also a Brookings economist,
”It ignored the rest of the world.”
After four years of resulting trade and budget deficits, James A. Baker took over the Treasury Department, reversed ground and launched a policy of economic coordination with allies. Only when the policy was in place did Baker tell President Reagan, who reportedly accepted the reversal of his international economic policy without a quibble.
Since then, government and central bank officials around the world have consulted regularly, partly on currency exchange rates and interest rates and partly on overall policy, to make sure that their countries don`t get too far out of line in a world where such individualism carries a high price.
”This is revolutionary,” the IMF`s Frenkel said. ”You have representatives of one country talking to six others about political measures that each will take.” In addition, there is an economic summit each year between leaders of the seven major industrial nations; President Bush will attend his first in Paris in July.
With this kind of cooperation, a government can lower its interest rates to stimulate its economy without lowering the value of its currency, if it persuades its allies to lower their interest rates, too.
Bush seems to understand the problems and limits of the global economy better than his predecessor, even though the issue was barely mentioned in his campaign. So do Baker, now secretary of state, and Brady. Congressional observers, though, say that few senators and congressman can see beyond their constituencies, let alone national borders.
”Politicians are national,” Vernon, the Harvard economist, observed.
”Businessmen have interests all over the world.”
European economists predict that, no matter what governments do, the 1992 unification project will succeed, because business people expect it to and are already acting as though it is a reality. In the same way, Americans and other business people created the global economy without waiting for government to take part.
Can government catch up?
”We`re either halfway to a new international monetary system or halfway to chaos,” said Stephen Maris of the Institute for International Economics in Washington.
”The real actor that has to be moved is Congress,” Maris said, noting that the president and his advisers can commit the U.S. to international economic policies that can flop if Congress balks.
”But how do you get around legislators?” he asked. ”How do you get Congress to agree to policies? Unless the international consequences of national policies can be brought into the domestic debate, it may be impossible to manage the system.”
The implications for America`s governmental system-and its sovereignty-could be immense.
Ever since the Magna Carta 774 years ago, the power of the purse has been vested first and foremost in the legislature-in Britain`s House of Commons and, by descent, in Congress. Congress has been loath to give up any of this power to presidents, who tend to operate more comfortably in a global context, but the global economy may grow so strong that it could demand this change in the way our government operates.
That economic complexity can erode sovereignty is hardly a new idea: The Europeans accepted it in 1958 when they agreed to submerge their national economies in the Common Market.
”What`s different now,” said Lawrence, the Brookings economist, ”is that it`s happening to us.”
Monday: A tale of three nations.
