The Dangers of the Global Economy

Eighteen years have passed since a youthful Al Gore successfully defended the fledgling North American Free Trade Agreement (NAFTA) on live television in a spirited debate against Ross Perot. Shortly afterwards, the pact was voted in law, and the free trade union between Canada, Mexico, and the United States began its highly successful run.

Or did it? Many critics complain that its track record over the past two decades has been anything but successful. Although NAFTA has indeed encouraged cross-border trade between the three nations, its original proponents promised that American manufacturers would move their plants from the fifty states to northern Mexico, which would then export their finished goods back across the border to American consumers.

In other words, although the United States would lose its “low technology” manufacturing industry, it would do so to a neighboring nation with close economic ties. Mexican consumers, rising into the middle class, would grow progressively wealthier and then purchase more expensive goods and services from the United States. In addition, as a result of their increasingly home-grown affluence, Mexicans would be less tempted to cross the border of the Rio Grande as illegal aliens in search of employment opportunities.

For a while, this vision appeared to come to fruition in accordance with the original plan. Maquiladora factories sprung up in Mexico, within easy trucking distance of the American border, and contributed to an emerging Mexican middle class. And the southwestern regions of the United States experienced an economic boom as well.

From China to Greece

So how did this vision go awry? Why aren’t American firms still manufacturing everything from toys to textiles within North America? And why does illegal immigration remain a challenge for the United States and Mexico?

Why? The reason is global interconnectivity. American buyers realized that the geographical proximity of Canada and Mexico isn’t very much of a economic advantage any longer, now that communication and transportation systems have made the world a smaller place. If goods can be manufactured more cheaply in China than in Mexico, despite the fact that China is half a world away, then factories can just as easily serve the American market from Asia as from Latin America.

For similar reasons, an economic meltdown in Greece — of all places — is now depressing the stock market values of American firms and exacerbating economic risks for American communities. Oddly enough, the path of economic danger that runs from Greece to the United States appears to be passing through — to reiterate, of all places — France.

It’s The Banking System!

Why Greece … and why France? This “strange but true” tale begins with the federal government of Greece, a culturally rich but economically small nation on the southeastern periphery of the European Union (EU). The government ran up a huge public debt, engaged in fiscal shenanigans to hide it from their fellow EU nations, and then turned to those same nations to finance a bail-out when faced with the prospect of imminent default.

The German leader Angela Merkel, head of the largest and most prosperous economy in the EU, initially balked at the cost of the bail-out. But French leader Nicholas Sarkozy, prompted by the pleas of the three largest French banks that invested heavily in Greek government bonds, convinced his EU partners that a bail-out would be required to prevent the economic chaos that would result from a governmental default of an EU member.

How does this European intrigue affect the United States? Apparently, the global ambitions of major American banks have exacerbated the risks facing firms and taxpayers in the United States. Unfortunately, American banks have sold securities to the French banks to insure them against losses in the event of non-payment by the Greek government. And a Belgian-French bank called Dexia SA, taking advantage of free trade laws with the United States, entered the American municipal loan market a few years ago, and is now raising interest rates on strapped American cities to compensate for its own loss exposure to Greek debt.

A Two Edged Sword

It is, of course, undeniable that the globalization of business and the economy has drastically improved the lives of countless millions of people. Within two generations, China has progressed from a nation beset by rural poverty to one boasting the second largest economy in the world. Its fellow BRIC nations of Brazil, Russia, and India have made similar strides as well, and various African nations are now hoping to follow the same path to prosperity.

Nevertheless, although the historically wealthy nations of the G-7 have certainly not slid into poverty during this time, they have learned that globalization can be a two edged sword. This is apparently why the United States Congress is now hesitating to ratify new free trade agreements with Colombia, Panama, and South Korea, and is looking warily at requests to continue pursuing new pacts through the World Trade Organization.