Dangerous Business (Choate)

Pat Choate

Dangerous Business
The Risks of Globalization for America

2008

This is an excerpt from the 2008 book
Dangerous Business: The Risks of Globalization for America
by Pat Choate.
The emphasis is added.

But first, here are the contents of the front flap of the first, 2008 edition:


From one of the most respected and vigorous economic thinkers in Washington,
a wake-up call about the perils of unfettered globalization.
In this impassioned, prescient book,
Pat Choate shows us that
while increased worldwide economic integration
has some benefits for our fiscal efficiency,
it also creates
dependencies, vulnerabilities, national security risks, and social costs
that now outweigh its advantages.
He takes the long view of developments such as
technology-driven progress, the offshoring of jobs, and open trade,
arguing that current U.S. policies are leading to
worldwide economic and political instability,
in much the same way as before the Great Depression.

Choate writes convincingly about
the Defense Department’s growing dependence on foreign sources [Chapter 8],
the leasing of parts of our interstate highway system to overseas investors [Ch. 2],
China’s economic mercantilism [Ch. 1],
and international currency manipulation that damages the dollar.
We have been borrowing heavily from foreign lenders,
who by 2009 will own more than half of the Treasury debt,
a third of U.S. corporate bonds,
and a sixth of U.S. corporate assets—
all of which, if handled improperly,
could trigger a global economic collapse.
[And in any case, means that
foreign investors will receive the interest on those investments,
including the increases in interest rates that are inevitably coming.]

But our economic forecast need not be dire.
Choate sees a way out of these dilemmas
and presents politically viable steps the United States can take
to remain sovereign, prosperous, and secure.
He presents bold new research
that identifies the special interests and structural corruption
that have overtaken our democracy—
and shows how they can be corrected.
He illustrates how our policy-making and legislative process,
currently beholden to the highest bidder,
can be transformed from one of corporatism and elitism
into one of greater transparency.


[Now for the excerpts from the book itself:]

---

Prologue

The extraordinary enigma we must seek to understand is that
despite an expanding economy,
violence increases,
the number of those living in poverty grows and
urban slums spread in cities throughout the world.
How is that our greatest period
of technological and scientific achievement
has come to endanger the conditions that allow life on earth?
There is a growing realization that
something fundamental has gone wrong
and a pervasive feeling that
those in power do not know what should be done.

— Sir James Goldsmith
The Trap
1994

[Prologue-1]
After the fall of the Berlin Wall in 1989
and the creation of the World Trade Organization (WTO) in 1995,
the toughest geopolitical question the world faced was
how to integrate into the global economy the 4 billion people
who had long been separated from the West by their political systems,
which were primarily Communist or socialist.
The solution chosen by the United States, Europe, and Japan
is what became known as “globalization.”

[Prologue-2]
In 1994, months before the U.S. Congress was to vote on
ratifying the United States’ membership in the World Trade Organization,
the main institution for globalization,
Sir James Goldsmith,
one of Europe’s most flamboyant financiers and a staunch WTO opponent,
came to Washington to meet with like-minded people, of whom I was one,
in preparation for a similar political battle in Europe.

[Prologue-3]
A citizen of both England and France,
a member of the British establishment,
an aristocrat who owned a three-star restaurant in Paris,
a person who traveled on his own two-bedroom Boeing 757,
and a man with three families,
Sir James was greeted in Washington with some uncertainty.
Our doubts immediately disappeared, however,
when we exchanged views with him.

[Prologue-4]
Goldsmith’s concern was that

an unfettered global trade regime,
as envisioned under the World Trade Organization, would
“shatter the way in which value-added is shared between capital and labor.
That agreement has been reached through
generations of political debate, elections, strikes, lockouts,
and other conflicts.
Overnight that agreement will be destroyed.
The social divisions that this will cause
will be deeper than anything ever envisaged by Marx.”

[Prologue-5]
Transnational corporations, he argued in his book The Trap,
would seek the lowest-cost labor
in nations with the weakest environmental and worker safety regulations.
Those companies would shift as much of their manufacturing as they could,
as well as their service work.
The interests of these corporations, which owe allegiance to no country,
are divorced from those of society.

[Prologue-7]

Surely, he said, it would be a mistake
for a nation to adopt an economic policy
that would
make its corporations rich if they transfer production abroad
and eliminate their national workforce
but would
bankrupt them if they remain and continue to employ their country’s workers.
This was the trap.

[Prologue-8]
Sir James and his allies failed to persuade European governments
to reject the WTO
and create a less ideological, more practical system of global trade,
just as the WTO opponents in the United States failed.

[Prologue-9]
By joining the WTO,
the United States altered its trade policies with other nations radically.
The domestic social compact
forged among corporations, workers, and society over the prior century
was fractured and soon began to shatter.
Millions of American workers and the communities in which they lived
were left to their own devices.
Moreover, those were only the most visible and most immediate consequences
of this great policy shift.
Which brings us to the subject of this book:
the dangers of globalization.

---

[Prologue-10]
We are now deeply trapped in the world that Goldsmith feared.
Millions of American workers are moving
from higher-paying jobs with health insurance and pensions
to lower-paying positions with no benefits.
Lifetime jobs are being replaced with short-term, dead-end work,
undermining our middle class.
The U.S. industrial base is being hollowed out to the point that
the nation is unable to produce domestically
the weapons and technologies required for an assured national security.
The federal government has gone deep into debt,
with foreign owners holding almost half of its obligations.
The U.S. trade deficit has soared to more than $700G (billion) per year.
Washington has surrendered, through dozens of trade treaties,
its sovereign right to act unilaterally against other nations
that violate their trade obligations to the United States.
The economies of most developing states, such as Mexico
are so ravaged by these policies that millions of their citizens cannot find work at home
[I do not see how one can argue that globalization is eliminating jobs both in American
and in Mexico.]
and millions have illegally entered the United States in search of jobs.
Foreign laborers are being abused in dozens of countries by U.S.-owned corporations to a degree and on a scale
that future historians will view as economic war crimes.
And as Goldsmith predicted,
the global environment is being rapidly destroyed.

[Prologue-11]
These historic changes are neither political accidents
nor the consequences of immutable cosmic forces.
They flow directly from the policy decisions of our last three presidents
[at the time of writing, those were
41-George H. W. Bush, 42-Bill Clinton, and 43-George W. Bush]
and Congress,
who year after year have purposefully ignored
the outsourcing of American jobs
and the resulting decline in U.S. living standards,
even as they pursue more open-ended trade treaties
while not providing even the most elementary safeguards
for American workers and consumers.
[In the next part of the book, the Introduction,
he explains what he means by safeguards for consumers.
He rehearses at length to problems caused by
impure food and pharmaceuticals imported from China
which had not been inspected for purity.]

[Prologue-12]
The globalization policies of
Presidents George H.W. Bush [41], Bill Clinton [42], and George W. Bush [43]
collectively constitute the worst economic policy mistake in American history.
Their policies have enabled leaders of transnational companies and global finance to enrich themselves
and advance their interests at the expense of the larger society.
These companies and financiers and the campaign fund-driven politicians they support are transforming the United States into a corporately governed nation, the mass of whose citizens face an increasingly bleak future.

[Prologue-13]
The challenge we face is to institute a new approach to globalization that will create a broad-based prosperity with stability and economic justice, sovereignty with vision, and security with peace, while not endangering the conditions that allow life on Earth.

[Prologue-14]
The central question surrounding further integration of the world economy (globalization) is not whether the U.S. economy will become more entwined with those of other nations, for it will.
The issue is how will this be done, by whom, and in whose best interests.
This book explores three fundamental questions:

1. Why did the government of the United States, the world’s trading and economic powerhouse, choose to integrate its economy with those of the rest of the world without providing the most basic safeguards for the nation and its people?
2. Can the United States maintain its standard of living, pay its debts, retain its sovereignty, and ensure its national security under its present policies?
3. Can the United States gain the benefits of globalization without plunging into economic ruin?

---

Chapter 8
Security

[8.1.1]
The United States spends more on national security
than all other nations combined.
Its approach to globalization, however, massively undermines
the very security that money supposedly buys.

[8.1.2]
The United States, for instance,
allows other governments to buy key American defense suppliers.
In 1995, Washington permitted the Chinese government
to purchase a subsidiary of General Motors
that produces special magnets used in precision-guided munitions.
China’s government-owned company now holds
the Department of Defense contract to make
the high-tech motors used in U.S. precision-guided smart bombs.

[8.1.3]
The GM subsidiary was the last U.S.-based producer of such technology.
Once the Chinese completed the purchase,
they closed the plant
and moved its machines, technology, and production to Tianjin, China,
where the magnets will also be used to
improve China’s smart bombs and long-range cruise missiles.
Earlier, the Beijing government acquired
the other two U.S. manufacturers of such magnets
and also moved their technology to China.
By these maneuvers, China obtained an exotic technology it lacked,
and the United States now depends on China
for a key component it needs for weapons systems.

[8.1.4]
Outsourcing the U.S. defense industrial base is so far along
that the United States no longer has an assured capacity
to manufacture enough ammunition for its forces.
The Surge Roundtable, a group of ammunition producers, reported in December 2006 that of 302 items critical to ammunition production,
the defense industrial base had deteriorated to the point that
71 had only one supplier.
It also reported that 10 percent of U.S. ammunition components
now come from thirteen different countries.
No U.S. sources exist for those vital items.

[8.1.5]
Surprisingly, the Department of Defense
does not know the extent of its supply vulnerability
because it does not collect all the data.
The Government Accountability Office (GAO) reported in January 2006
that, for data collection purposes,
DOD defines a foreign contractor as
a company that is not incorporated in the United States.
DOD does not consider purchases
from a company incorporated in the United States
but owned by a foreign parent as “foreign.”

[8.1.6]
DOD foreign subcontractor data also do not identify
subcontracts beyond the second supplier tier,
subcontracts worth less than $500,000,
subcontracts in which less than $100,000 of work is done abroad, or
subcontracts whose place of performance is abroad.
The GAO also found that most of the top 100 defense contractors
are not complying with requirements
to report the details of their foreign subcontracts.

[8.1.7]
The Pentagon is not aware of the sources of thousands of components
in the weapons it buys.
Thus, it cannot guarantee the armed forces
have an assured supply of parts or weapons needed for national defense.
As President Dwight Eisenhower [34] feared and warned against in his farewell address to the nation in 1961,
the “military-industrial complex,”,
what I term corporatism,
has put their profits over the interests of national security.
In other eras, this would have been viewed as criminal malfeasance.


[8.1.8]
Little discussed, but also eminently dangerous,
America is increasingly vulnerable to “cyberwar,”
a tactic the United States used in the 1991 Iraqi conflict.
In the 1980s,
the United States supplied the Iraqi government
with the computers, equipment, and software
used in its military command and control systems.
Unknown to the Iraqi leaders—and undetectable had they known—
the United States had embedded “Trojan horse” viruses in that equipment.
When the U.S. attack on Iraq began,
American military hackers triggered the viruses
and Iraqi military computers shut down permanently.
Iraqi military chaos ensued.

[8.1.9]
China’s People’s Liberation Army has developed an extensive cyberwar capacity,
which it constantly improves and tests.
Chinese government hackers have repeatedly penetrated
the computers of U.S. corporations, banks, regional power grids,
telephone companies, federal agencies, and even the Pentagon.
Yet the federal government, including the State and Defense Departments,
buys computers from companies that rely heavily on
Chinese and other foreign-made components susceptible to such rigging.

[8.1.10]
The U.S. government, moreover,
does not routinely inspect such computers and software
for “Trojan horse” viruses,
which can be triggered by telephone, Internet, or remote control.
In 2005, the State Department purchased from a Chinese-owned company
16,000 computers,
all of which were potentially vulnerable to virus implants.
The department eventually agreed not to use the computers in secure functions, and to cut its order to 15,000,
but only after a strong protest from Michael Wessel
and other members of the
United States-China Economic and Security Review Commission
and Representative Frank Wolf (R-VA.),
a powerful member of the House Appropriations Committee.

[8.1.11]
The unfettered, unexamined global integration
of vital U.S. communication and computer networks,
coupled with lax and ineffective security,
gives a hostile foreign power or terrorist group
the ability to shut down major parts of the U.S. economic and defense base
almost at will,
creating a fundamental threat to economic and military security.


[8.1.12]
As described in chapter one, another security threat stems from
America’s growing dependence on foreign-based producers
for a large portion of
the advanced technology products (ATPs) the nation requires—
the newest, best, most sophisticated technologies and innovations
essential to greater economic productivity and an assured national defense.
For decades, domestic-based U.S. manufactures dominated world production in opto-electronics, information and communications systems,
advanced materials, life sciences, flexible manufacturing equipment,
and other high-tech fields.
By 2007, that dominance was lost.
Instead, America imported more than $369G of such products,
a serious dependency in this high-tech age.
This shift is significant because the Defense Department
encourages the development and use of dual technologies;
that is, military technologies that can also be used in commercial products.

[8.1.13]
The primary source of these vital goods is
China and the surrounding countries
within the Chinese sphere of military and political influence.
Of the $369G of ATP goods the United States imported in 2007,
almost 52 percent came from that region.
This production is now
the only source of many vital advanced technology products.
U.S. trade data provide a very detailed view of
our growing industrial dependence in a widening field of economic sectors.
The figures below are calculated
from trade statistics compiled by the Department of Commerce.
This vast body of data can be organized in ways that give
a detailed, month-by-month, product-by-product, industry-by-industry view of
the United States position in global markets.

[8.1.14]
A deeper look into this trade data reveals that
the United States is running trade deficits not only in high-tech industries,
such as scientific instruments and airplanes,
but in a majority of all industries.
Of 1,344 separate major industries
tracked by the Commerce Department at a four-digit code level,
almost two thirds (851) had a trade deficit, for a total of $766G in 2005.
This means that in these industries, producers were facing massive foreign competition within their own domestic market,
a danger sign about their failing competitiveness globally.

[8.1.15]
U.S. industries with a positive trade balance are mainly commodities such as
cotton, soybeans, corn, scrap paper, rice, coal, tobacco, hides, meat, and wheat.

[8.1.16]
The profile of the U.S. trade position today is that of
a nation being economically colonized—
one that is purchasing high-value-added commodities
and manufactured goods from abroad
and paying for them with
the export of agricultural commodities,
massive foreign borrowing, and
the liquidation of its own national assets.

[8.1.17]
Although many advocates of unfettered globalization argue that
trade in services—
such as architecture, software, engineering, research and development,
and finance—
will provide a substitute for America’s loss of its manufacturing industries,
Commerce Department trade data refute that hope.
Eighty percent of the U.S. workforce is employed in service work,
but trade in services in 2007 produced a net surplus of only $104G,
up from $40G in 2000,
offsetting barely 12 percent of the overall $815G deficit in goods.

[8.1.18]
Alan Tonelson, at the U.S. Business & Industrial Council Educational Foundation,
an association that represents small and medium-sized companies,
reports that foreign import penetration is between 50 and 90 percent for 114 individual industries vital to the overall economy, including
aircraft engines and parts, industrial valves,
printing circuits, optical instruments,
telephone switching equipment, broadcasting equipment, computers,
tires, industrial controls, motor vehicle steering and suspension systems,
X-ray equipment, semiconductor production equipment, and environmental controls.

[8.1.19]
Tonelson notes that
such massive import penetration contradicts the argument that
a strong dollar is the principal trade-related problem
faced by U.S.-based manufacturers.
The vast majority of U.S. industries lost market share
both when the dollar was rising (1997–2002)
and then when it was falling (2002–2004),
indicating that other factors were in play.
He also maintains that
the issue of rising import penetration rates
is not mainly cyclical in nature.
U.S. industry lost position
both when the economy was growing stronger
and when it was becoming weaker.
The changes under way, he concludes, are structural;
that is,
the very foundation of the economy is shifting,
and in ways that are undesirable.

[8.1.20]
As Barry Lynn, a former executive editor of Global Business magazine,
documented in Harper’s (June 2006)
and in his book The End of the Line,
most of the corporations that supply U.S. manufacturing needs
are increasingly shells
whose headquarters staffs coordinate a flow of components
from tens of thousands of independent suppliers located around the globe.
The result of this business disintegration is
an expanding vulnerability of supply
equal to or grater than
what Britain, Germany, and the United States faced in World War I,
at the end of the first era of globalization.

[8.1.21]
As Lynn wrote, the hollowing U.S. industrial base
undermines companies that retain their factories here,
making them dependent on networks that stretch around the world
and creating an unprecedented peacetime vulnerability to interrupted supplies.
A Dell computer assembled in Texas, for instance,
is composed of 4,500 parts produced by hundreds of suppliers,
most of which are clustered in China and surrounding countries.
Dell maintains a four-day parts supply.
If that supply line is interrupted for five days,
the company must close its assembly lines.
The Dell example, moreover, is neither unique nor extreme.

[8.1.22]
As the United States loses its manufacturing base,
it is also giving up related R&D activities and capacity to innovate.
Case studies of innovation have repeatedly documented that
the process is one of incremental losses.
Japanese manufacturers, striving for constant improvement,
have production workers directly involved in identifying innovations
that can be implemented.
Already, IBM, General Electric, Microsoft, Cisco Systems, and General Motors
have shifted parts of their R&D activities
to be close to the foreign locations where they do their manufacturing.
The idea that the United States
can remain a place where R&D and design are done,
leaving to contractors in other countries the work of manufacturing,
is simplistic and has limited application.

[8.1.23]
Equally disturbing, the outsourcing of jobs and work
that has drawn so much attention for the past decade
is probably only a foretaste of what lies ahead
if present policies on globalization are continued.
Alan S. Blinder, a Princeton University economist
and former vice chairman of the Federal Reserve System,
wrote in the March—April 2006 edition of Foreign Affairs that
this offshoring of work will likely cost
the remaining 14 million U.S. manufacturing jobs
and up to three times that number in the service sectors.

[8.1.24]
As a result of this decline in manufacturing,
the United States is increasingly unable to
shift production from consumer goods to military goods
in a time of emergency because
neither the consumer nor the military goods are being made here.
Year by year,
there are fewer factories to convert and workers to staff them,
as was possible in World War II,
and what factories remain are capable of supplying
only part of any potential military and civilian demand.