3
Some of the consequences were less benign. So much money was pouring into the United States that the nation became a net debtor—owing more to the rest of the world than foreigners owed us—for the first time since 1917. A lot of this money could leave the country as quickly as it came in. As a result American banks became highly vulnerable to global financial trends. Electronic twitches on Telex machines could signal imminent bankruptcy.
There was a second, even more pressing problem. American manufacturers and farmers, already under siege by the rest of the world, saw their markets shrink radically at home and abroad. The excess of imports over exports swelled from $36 billion in 1980 to over $160 billion in 1986. American jobs in export industries were being lost. Some manufacturers moved abroad, where they could pay for parts, fuel, and labor in cheaper currencies. Others withdrew from international trade, shifting into industries like food processing, insurance, and defense contracting where foreign competition could not yet reach. Even giant companies that had been world powerhouses of innovation and productivity—firms such as GE, Honeywell, General Motors, TRW, Westinghouse, and RCA—retreated into defense businesses, and began distributing (under their own brand names) computers, subcompact cars, and other advanced products made abroad.6
Other American firms sought shelter of a different sort. With foreign goods priced so low, it was easy for companies to claim intolerable injury and to charge foreigners with trading unfairly. They took their cases to Washington. In 1979 sixty-two petitions to restrict imports were filed with the U.S. International Trade Commission; by 1984 the number had more than tripled.7 Hundreds of bills were introduced in Congress, designed to stem the tide. The Reagan administration vowed to “get tough” with our trading partners. Diplomatic arm twisting (and the threat of unilateral protectionist legislation) extracted from other nations “voluntary” agreements to hold back exports to the United States of steel and automobiles, among other products. All this protectionist pressure had an effect. In 1980, 20 percent of the goods produced in America were protected from foreign competition by barriers other than outright tariffs. Just four years later, over 35 percent of our products were similarly sheltered.8 The dollar would eventually fall, but many of these impediments to commerce would remain.
4
Keep following the trajectory. Remember that it began with an arms buildup, aimed at getting tough with the Soviets. But soon trade tensions were mounting around the globe. Our Western European allies applauded the American recovery, but they worried about the outflow of savings to the United States. How were they to rebuild their older industries, they wondered, if their capital was going to pay America’s bills? To preserve their capital and make themselves more attractive to international investors, they were forced to raise their own interest rates as well. But this tactic made it more expensive for Europeans to borrow money, which in turn threatened to slow down their economies.
The Europeans—troubled by double-digit unemployment and eager to export—were also riled by American protectionism. The European Economic Community threatened to retaliate against American quotas on European steel and other products. Jacques Delors, the head of the Common Market Commission in 1985, summed up the state of transatlantic relations as “abysmal.” Europe, he said, is the victim of an “increasingly aggressive and ideological American administration.”9 Canada, America’s largest trading partner, was incensed when election-year pressures led to duties on certain timber products. Relations with Japan were not much better. In 1986—even as the dollar receded—the United States imported almost $60 billion more from Japan than Japan did from us. Congress thundered about retaliating by closing off more of the United States market to Japanese goods.
5
But it was in the Third World that the boomerang we are following took its sharpest turn. American protectionism hit less developed nations especially hard. Agreements that fixed the amount they could export to the United States by reference to some historical share of the American market, such as those negotiated for steel and textiles, stunted their industrial growth. And because Third World nations possess substantially less bargaining leverage with the United States than do European nations or Japan, they became prime targets for additional trade restrictions. In 1984 the Reagan administration sharply tightened the rules governing textile trade. The following year the administration imposed duties on billions of dollars’ worth of previously dutyfree Third World imports. The Commerce Department launched investigations of several Third World producers who were alleged to be subsidizing their exports. Quotas were imposed on sugar imports; this restriction alone would cost Latin American and Caribbean exporters some $180 million a year. Western Europe, facing severe unemployment and fearful that products originally destined for the American market now would be diverted to Europe, took similar steps to block imports from low-wage countries. By 1985 nearly one-fifth of the Third World’s manufactured exports to industrialized nations were covered by quotas; nearly one third of their agricultural exports were meeting a similar fate.10
Follow the path further: Several of the largest Third World nations were deeply in debt. Most of these debtors were located in Latin America, virtually on our doorstep. They had borrowed enormous sums of money at floating interest rates during the heady 1970s, when their rapid growth and banks’ eagerness to “recycle” Arab oil money made borrowing easy. But these loans had to be repaid in dollars, and the dollar was now more expensive than the borrowers had anticipated. At the same time, rising public and private debt in the United States, coupled with America’s relative political stability, shouldered the Third World away from the world capital market. These nations, desperate to service existing loans and blocked from getting new money, were undercut by protectionism in their efforts to raise foreign exchange by exporting to America and Europe. By the middle of the 1980s these trends were converging to drive emerging nations back into poverty.
The United States chose to respond by relying on the “discipline of the market” as interpreted by international bankers. The Reagan administration left it to the International Monetary Fund, and to the large U.S. banks who held much of the Latin American debt, to work out austerity plans. Austerity was a nice way of saying lower living standards. The plans were intended to clamp down on these nations’ consumption and investment to free resources for debt service. There was something vaguely unseemly about imposing austerity on them when their problems stemmed in part from our reluctance to pay for our arms buildup with higher taxes or lower domestic spending instead of borrowing the money abroad. But no American politician who valued his political career would whisper that the United States should endure austerity of anything like the degree Latin American politicians were expected to impose on their citizens.
The timing of these austerity plans would eventually be seen as unfortunate. Much of Latin America was just beginning to experiment with democracy. Beginning in 1980 generals had allowed power to pass to elected civilian presidents in Peru, Bolivia, Argentina, Honduras, Panama, Uruguay, and Brazil. These democratic forays were immensely valuable in themselves, of course, and no version of the American mythology would countenance a failure to applaud them. They were also critical to America’s long-term security, for they held out the promise of gradual reform leading to a modicum of political stability and popularly based friendship with the United States. These newborn democracies were delicate. Antidemocratic forces were waiting in the wings (the military on the right, the communists on the left) to pick up the pieces if democracy should be seen to fail. And the economic squeeze the United States had unwittingly helped to precipitate by its budgetary policies, and had explicitly endorsed, was entirely capable of undermining support for the new Latin American regimes. High unemployment and collapsing living standards are not the most favorable accompaniments to democratic experimentation. The colonels and the comrades were both content to wait.
The United States, uncomfortable with the military right but in horr
or of the militant left, responded by increasing arms shipments to the anticommunist governments of the region, democratic or otherwise. There was no such increase in economic aid. In 1985, nearly two out of every three dollars of American aid to Latin America was in the form of military assistance. Between 1981 and 1985, military equipment was our fastest growing export to Latin America. This phenomenon did not greatly trouble those American manufacturers who had found commercial tranquility through specializing in weaponry, but it did distract these fragile nations from their primary mission. Peru, for example, which had been the first of the military-ruled nations to return to civilian rule in 1980, owed foreign banks over $13 billion and had to abide by their demands for austerity. Its democratically elected president, Fernando Belaúnde Terry, was a loyal ally of the United States, but leftists were gaining ground. Thus by 1982 Peru was spending $370 million a year on imports of arms; this was about half the sum it spent on educating its citizens that year, and substantially more than it spent on their health.11
The boomerang curves back toward where it began. Wending its way through the world economy, the financial disruption that began with the American defense buildup jeopardized our relations with our allies and the stability of Latin American democracies. The Soviets, of course, liked nothing better than a gradual dissolution of NATO and a disaffected Japan; they relished sharpened unrest in Latin America. To jeopardize these relationships in the name of toughness against the Soviets amounted to a peculiar strategy for national security.
6
Follow the boomerang back, finally, to its origin. The effects of economic stagnation in the Third World, and especially in Latin America, worked through the system until they reached the United States. In 1980 the Third World accounted for about 40 percent of American exports. But mounting protectionism in the United States cut these nations’ earnings while the rising dollar and austerity campaigns sapped their purchasing power and slowed trade. Between 1981 and 1986, the drop in demand for American goods among indebted nations—even taking into account the growing arms trade—caused a larger deterioration in America’s trade balance than did the influx of Japanese imports into the United States. The shrinking markets translated directly into shuttered factories, greater joblessness, blocked upward mobility, and greater American poverty.
Meanwhile, millions of Latin Americans poured into the United States. Some were fleeing political repression; others, destitution; still others, the social strains caused by rapid industrialization and fiscal austerity. The best guess was that more than a million Latin Americans slipped across the border each year. The consequences were mixed. America got the benefit of another generation of immigrants; each earlier wave had demonstrated the determination and ambition of those who chose to leave their homelands for America. But there were costs to pay, such as housing and educating these new immigrants. In 1982 federal, state, and local governments were spending more resettling immigrants from the Caribbean and Latin America than America was providing in foreign aid to the entire region.12 Children born in the United States to illegal immigrants automatically become U.S. citizens, entitled to all the social benefits that any other citizen may receive. And beyond these direct costs, many American blue-collar and service workers were growing increasingly anxious that the new immigrants would take their jobs. There were calls to get tough on immigration—to reduce the number of aliens allowed in, to increase border surveillance, to end bilingual education, to penalize employers who hired illegal aliens.
The scourge of drug trafficking was not unrelated. As Latin American economies sank under the combined weight of indebtedness, fiscal austerity, and protectionism in the north, the production of illicit drugs became a major source of revenue. Bolivia’s 1985 cocaine shipments to America brought an estimated $450 million into that small country, or almost 10 percent of its gross national product. This was roughly as much as Bolivia earned on its legal exports, and about twice the sum it devoted to the education and health of its citizenry. Since International Monetary Fund austerity began constraining legitimate enterprise, cocaine production has been one of the few thriving industries in Bolivia, and one of the few sources of good jobs. Thousands of Bolivian farmers raise coca plants; thousands more work in the factories that transform coca leaves into cocaine. Between 1982 and 1985 the population of the Cochabamba Valley, where most cocaine production is undertaken, doubled to 80,000 inhabitants. When at the end of 1985 Bolivian police and officials from the United States Drug Enforcement Administration raided Cochabamban farms and factories, they were met with armed resistance; when they finally succeeded in closing them, the Bolivian peso suddenly lost about 30 percent of its value. Bolivia then pleaded with American authorities for a $100 million bridge loan to forestall currency speculation in the face of falling drug revenues.13
7
This chapter has traced only one loop connecting our military, economic, and social policies and the wider world on which they work. These connections are complex and changeable. In 1986 the dollar fell precipitously, setting off another set of reactions as the American economy ceased pulling everyone else behind it. Oil prices also fell, setting in motion a broadly more benign reaction. (The members of the Organization of Petroleum Exporting Countries discovered the Boomerang Principle on their own; when they pushed up oil prices, they crippled the nations that were both their customers and the custodians of their new wealth. Oil prices eventually collapsed, OPEC’s investments withered, and the rest of the world reduced its energy appetite and developed alternative sources.) But my one example should suffice to illustrate the general principle: Any bold, unilateral attempt at assertiveness, launched in defiance of the intricate system that absorbs the initiative, is quite likely to rebound in distressing ways.
We cannot withdraw in fear or distaste from the Mob at the Gates; our interests are too intimately bound up with theirs. Nor can we boldly assert our will; our control over the rest of the world is too contingent and tenuous. Rather, we must recognize their interests, appreciate their power, and seek out possibilities for mutual gain. This is neither Machiavellian manipulation, nor old-style accommodation, but it bears a resemblance to both. It is a good deal more likely that the world’s transformation will work in our favor if other peoples find it in their interest to share our agenda, if the allocation of the costs and gains of change are generally seen as fair.
We can neither withdraw from, nor intimidate our way out of, the challenge to adapt. Nor can we delegate authority for dealing with this joint evolution to our military strategists, our bankers, or our besieged manufacturers and farmers. These nominees are ill suited to the role. Military strategists are worried about Soviet aggression, bankers about their loan portfolios, manufacturers and farmers about their profits. Each group holds responsibility for a limited domain of international relations and has every incentive to ignore the broader damage wrought by a narrowly tough stance.
The same effects set in motion by the recent military buildup, differing only in the particulars, could be expected from America’s unilateral attempts to erect stronger bulwarks against cheap foreign goods, or support any and all anticommunist insurgents and anticommunist dictators around the globe, or subsidize exports, or build a giant barrier against hostile missiles, or even drastically reduce its budget deficit. To the extent that these steps were dramatic and vigorous, undertaken without careful consultation and coordination with other nations, and designed to benefit the United States at the direct expense of others, the Boomerang Principle is likely to apply. The world has evolved beyond the point at which either assertion or isolation is a tenable option for America.
CHAPTER 5
AMERICA’S TWO COMPETITORS
1
The United States is engaged in two global contests. The first is a political rivalry with the Soviet Union. The second is an economic rivalry with Japan. The first, which began shortly after the end of World War II, involves high technology and high finance and a delicate set of alliance
s. The second, which began about a dozen years ago, involves high technology and high finance and an intricate set of trading relationships.
Both contests are commonly cast as “races”—an arms race with the Soviets, a race for economic preeminence with Japan. But the metaphor is not quite apt, since neither contest can ever be definitively won. The arms race can be won only in ways that are implausible (we agree to become communists or they agree to become capitalists) or unthinkable (both sides are obliterated, but the loser is obliterated first or more thoroughly). The consequences of “victory” in the economic contest, if less cataclysmic, would also be unwelcome to both sides—neither we nor the Japanese would gain if one of us decided to forget about the cars and computers and retreated to the production of novelty salt-shakers and ashtrays, for then there would be less wealth to be traded. In these two contests, both contestants either lose or win together. In the one case, a joint victory means limiting the peril and expense associated with a deep and durable ideological quarrel; in the other, a joint victory means ever more efficient production and ever more rewarding exchange. But we tend to appreciate these facts only incompletely and intermittently, and the myth of the Mob at the Gates is much at fault.
Tales of a New America Page 7