November 16, 1997
Global Good Times, Meet the Global Glut
By LOUIS UCHITELLE
President Clinton's failure last week to persuade Congress to give
him freedom to negotiate trade deals reflected skepticism among
Americans about the benefits of a global economy -- not only free
trade, but an entire system that allows money, factories and jobs to
move anywhere.
Domestic politics, of course, played a big role in the president's
decision to retreat when he failed to muster enough votes for
passage. But the skepticism is not limited to politicians jockeying
for the next election, or union officials charging that jobs are
going south. The worriers are often the very business executives and
international investors who built today's global economy and now fear
that it might backfire.
There IS something to worry about. The Asian financial turmoil may be
the first stage of a developing worldwide crisis driven mainly by a
phenomenon called overcapacity: the tendency of the unfettered global
economy to produce more cars, toys, shoes, airplanes, steel, paper,
appliances, film, clothing and electronic devices than people will
buy at high enough prices.
"There is excess global capacity in almost every industry," Jack
Welch, chairman of General Electric, said in a recent interview in
The Financial Times of London.
The problem arises because the global economy sucks businesses into
building too many factories. Allied Signal, for example, a
multinational corporation based in Morristown, N.J., built a
polyester plant in Longlaville, France, in 1993 and expanded it last
year. The polyester, used in nylon carpets and tire cords, is sold in
France and shipped across open borders to customers everywhere in the
region.
But a group in South Korea, an emerging industrial nation seeking to
be a big player in many major industries, opened a polyester plant in
Korea recently. Taking advantage of open borders, the Koreans are
shipping their polyester into Europe and other countries, grabbing
away customers and market share by offering lower prices. And the
customers, offered more polyester than they need, have encouraged a
price war.
Price wars, up to a point, are good for consumers. The inflation rate
in the United States has fallen in part because of global
overcapacity, and business people everywhere complain that they can't
raise prices. "That is what overcapacity means," said Peter L.
Bernstein, an economic consultant.
The danger is that at some point this house of cards must tumble
down. In an open-border global economy nearly every car manufacturer,
for example, is trying to have a presence in every market. But when
all the factories crank out more cars than people can buy, down come
car prices. Down go the profits of car companies. Out go the workers.
And down go the number of people who can afford to buy cars.
Economies can spiral downward toward recession, or worse. That is
what is beginning to happen in Asia now.
East Asia has been the main source of the world's overcapacity in
recent years. Since 1991, countries like Thailand, South Korea,
Indonesia, Malaysia and the Philippines have accounted for half the
growth in world output, primarily manufacturing, according to David
Hale, chief global economist for the Zurich Insurance Group.
The financing for this new production often came from international
investors moving huge sums across borders. They frequently borrowed
the money at low interest rates in Japan and the United States and
then invested in booming Asia in expectation of earning a high
return. Money borrowed at 1 or 2 percent a year in Japan might
typically pay 8 to 10 percent invested in Asia.
Chunks of this money inevitably went not into factories but into
speculation. Borrowers defaulted. And as the hoped-for big returns
failed to materialize, fear grew, first in Thailand, that money
invested in that country's currency, the baht, would not earn enough
to pay debts incurred in dollars or yen. There was a run on the baht
last summer, which spread to stock prices and to other Asian
financial markets.
The factories -- the new capacity -- remained intact, but the millions
of Asians counted on to be customers pulled back. In their place, the
energetic consumers in the world's richest country, the United States,
have become the targeted buyers for much of the unsold Asian output.
And as imports from the region rise (they have risen only slightly so
far) there is downward pressure on prices in the United States and on
the wages of workers who make products that compete with the imports.
Just the threat of an Asian alternative produces this downward
pressure, some economists argue.
The global economy appears, in effect, to be capable of
self-destruction. That is the view of William Greider, a journalist
who writes extensively on economics and whose recent book, "One
World, Ready Or Not" (Simon & Schuster), has made him a principal
voice among those who point to the dangers of an unregulated global
economy.
"It produces more and more goods even as it suppresses wages at both
ends of the world, in industrial as well as developing countries," he
said. "You cannot do that forever -- producing more and cutting the
wages of those who buy -- without some collapse."
That view has been attacked by several influential economists,
particularly Paul Krugman of the Massachusetts Institute of
Technology. The U.S. economy, he says, is still mostly
self-contained; global trade has not made that much of an inroad.
What's more, he says, workers will eventually share in the earnings
from rising production.
And finally, Krugman maintains, overcapacity is not a question of too
much supply, but a faltering of demand.
The Krugman solution is to turn up the demand; central banks do this
by cutting interest rates so companies and consumers can borrow money
less expensively. "There is no shortage of things on which people
want to spend money," Krugman said. "You would have to have a
worldwide depression to shock them into not buying, into sitting on
their money."
That seems unlikely, but in the end it could happen. Already central
banks in Asia, instead of lowering interest rates to encourage
spending, as Krugman suggests, have raised them in an effort to
strengthen their currencies, among other reasons.
South Korea could be the next country in trouble, analysts say,
hurting Japan in the process. Some of the huge sums invested in Korea
were borrowed from Japanese banks. A loan default in Korea could
bring down a Japanese bank already weakened by the recession in that
country. And with its own consumers already balking, the fresh blow
of a bank default would make Japan even more eager to export its
unsold goods -- its overcapacity -- to the United States. With that
in mind, Treasury Secretary Robert Rubin publicly urged the Japanese
government last week to spur domestic consumption.
Rubin's concern is understandable, given that the United States is
the alternative if the Japanese don't buy enough -- Americans being
the world's consumers of last resort. The U.S. trade deficit keeps
rising as imports grow, forcing American manufacturers to cut back.
Just last week Eastman Kodak announced 10,000 job cuts, in part to
accommodate overcapacity in film manufacturing, especially
competition from Fuji of Japan.
But the U.S. trade deficit would have to quintuple before the economy
gets into trouble, said David Wyss, research director at
DRI/McGraw-Hill, an economic forecasting service.
"There is the possibility," he said, "that you can bring in so many
low-priced imports that businesses in this country would have to cut
back and unemployment would rise. But that sure is not happening
now."
Copyright 1997 The New York Times Company
Posted under fair use rules
