I

Twenty years ago no one talked of the “world economy.” The term then was “international trade.” The change in term—and everybody now talks of the world economy—bespeaks a profound change in economic reality. Twenty or thirty years ago the economy outside the borders of a nation—and especially outside the borders of a middle-sized or large nation—could still be seen as different, as separate, as something that could be safely ignored in dealing with the domestic economy and in domestic economic policy. That, as the evidence makes unambiguously clear, is sheer delusion today—but it is still very much the basic position of economists, of politicians, and of the public at large, especially in the United States.

The “international economy” traditionally had two parts: foreign trade and foreign investment. The world economy also has two parts—but they are different from those of international trade. The first part consists of flows of money and information; the second, trade and investment, rapidly merging into one transaction, and actually only different dimensions of the same phenomenon, namely, the new integrating force of the world economy, crossborder alliances. While both of these segments are growing fast, money and information flows are growing the fastest. They deserve to be looked at first.

The center of the world money flows, the London Interbank Market handles more money in one day than would be needed in many months—perhaps an entire year—to finance the “real economy” of international trade and international investment. Similarly, the trades during one day on the main currency markets—London, New York, Zurich, and Tokyo—exceed by several orders of magnitude what would be needed to finance the international transactions of the real economy.

The information flows—conferences, meetings, and seminars; telecommunications, whether by telephone, teleconference, fax, electronic mail; computer transmissions; software; magazines and books; movies and videos; and many other communications by new (and largely electronic) technologies—may already exceed money flows in the fees, royalties, and profits they generate. They are also probably growing faster than any category of transactions ever grew before in economic history.

Transnational money flows can be seen as the successor to what bankers call “portfolio investments,” that is, investments made for the sake of (usually short-term) financial income such as dividends or interest. But today’s money flows are not only vastly larger than portfolio investments ever were, they are almost totally autonomous and uncontrollable by any national agency or in large measure by any national policy. Above all their economic impact is different. The money flows of traditional portfolio investment were the stabilizers of the international economy. They owed from countries of low short-term returns—because of low interest rates, overvalued stock prices, or overvalued currency—into countries of higher short-term returns, thus restoring equilibrium. And they reacted to a country’s financial policy or economic condition. Today’s world money flows have become the great destabilizers. They force a country into “crash” programs—into raising interest rates to astronomical levels, for instance, which throttle business activity, or into devaluing a currency overnight way below its trade parity or its purchasing-power parity, thus generating inflationary pressures. And today’s money flows are not driven, by and large, by the expectation of greater income but by the expectation of immediate speculative profits. They are a pathological phenomenon bespeaking the fact that neither fixed foreign-exchange rates nor flexible foreign-exchange rates really work, though they are the only two known systems so far. Because money flows are a symptom, it is futile for governments to try to restrict them, for instance by taxing money-flow profits; the trading just moves elsewhere. They are a fever, to be sure; but they are not the disease. All that can be done—and it needs to be included in the specifications for an effective trade policy—is to build resistance into the economy against the impacts of money flows.

In contrast to money flows, the economic impacts of information flows are benign. Few things, in fact, so stimulate economic growth as rapid development of information, whether telecommunications, computer data, computer networks, or access (however distorted) to the outside world provided by the entertainment media. In the United States, information flows and the goods needed to carry them have become the largest single source of foreign-currency income. But just as we do not view the medieval cathedral as an economic phenomenon—although it was for several centuries Europe’s biggest economic activity next to farming, and its biggest nonmilitary employer—information flows are primarily a social phenomenon. Their impacts are primarily cultural and social. Economic factors, such as high costs, are a restraint on information flows rather than motivators. Yet information flows are an increasingly dominant factor in the world economy.

The first lesson of the world economy is thus that the two most significant phenomena—money flows and information flows—do not fit into any theory or policy we have. They are not even “transnational”; they are outside altogether, and “nonnational.”

II

For practically everybody, international trade means merchandise trade, that is, imports and exports of manufactured goods, farm products, and raw materials such as petroleum, iron ore, copper, and timber. And merchandise trade is what the newspaper reports on every month. But increasingly, international trade is services trade—little reported and largely unnoticed. But even merchandise trade is no longer what practically everybody, including economists and policy makers, assumes it to be. Increasingly it is not a “transaction” that is a sale or a purchase of individual goods. Increasingly it is a “relationship”—either structural trade or institutional trade—in which the individual transaction is only a “shipment” and an accounting entry. And both services trade and relationship trade behave differently from transactional merchandise trade.

As everybody knows, the United States has a large and intractable trade deficit. Actually, though, U.S. trade is more or less in balance and may actually yield a small surplus. The trade deficit that is daily bewailed by our newspapers, our businessmen and economists, our government officials, and our politicians is a deficit in merchandise trade (caused primarily by a.) our appalling waste of petroleum and b.) the steady decline in both the volume of and the world market prices for U.S. farm exports). The United States has, however, a very large surplus in services trade. It is being generated by financial services and retailing; by higher education and Hollywood; by tourism; by hospital companies; by royalties on books, software, and videos; by consulting firms; by fees and royalties on technology; and by a host of other businesses and professions. According to the official figures—published only every three months and then in a little-read government bulletin—the U.S. services surplus amounts to two-thirds of the merchandise trade deficit. But as is acknowledged even by the government statisticians who collect the figures, U.S. services exports are grossly underreported. They may be some 50 percent higher than the official statistics tell us—and services exports are still growing fast.

The United States has the largest single share of the world’s services trade, followed by the United Kingdom, with Japan at the bottom of the list among developed countries. But in every developed country, services trade is growing as fast as merchandise trade, and probably a good deal faster. Within ten years it may equal, if not exceed, merchandise trade, at least for highly advanced countries.

Only one major component of services trade is at all susceptible to the “factors that govern international trade according to trade theory and trade policy: tourism. It responds immediately to foreign-exchange fluctuations and, sluggishly, to change in labor costs. The rest—some two-thirds or more—is impervious to such changes. Most services trade involves exporting and importing knowledge.

More and more merchandise trade is, however, also becoming impervious to short-term (and even to long-term) changes in the traditional economic factors. In structural trade the decision regarding where manufacturing will be done is being made when the product is first designed. For a new automobile model, such major parts as engines, transmissions, electronics, and body panels will be produced by plants—some owned by the automobile manufacturer, many more by suppliers—in a dozen different countries, countries such as the United States, Mexico, Canada, Belgium, Japan, and Germany. Final assembly will also be done in plants located in four or five countries. And until the model is redesigned in ten years, the plants and the countries specified in the original design are “locked in.” There will be change only in the event of a major catastrophe, such as war or a fire that destroys a plant.

The big Irish plant of the Swiss pharmaceutical company equally does not “sell.” It ships chemical intermediates to the company’s finished-product plants in nineteen countries on both sides of the Atlantic, charging a “transfer price” that is pure accounting convention and has as much to do with taxes as with production costs. Markets and knowledge are very important in structural-trade decisions; labor costs, capital costs, and foreign-exchange rates are restraints rather than determinants.

But there is also “institutional” trade. When a manufacturer builds a new plant or when a discounter opens a new superstore, it will, nine times out of ten, use for it the machines, tools, equipment, and supplies it has been working with in its existing facilities, is familiar with, and knows it can rely on. It will buy them from the firms that supply its existing plants or stores. This holds true whether the new plant or the new store are in the firm’s home country or abroad. It holds true whether the company is an American one building a plant in Spain, a German one building a superstore in the United States, or a Japanese one acquiring and reequipping a plant in Shanghai. And as in structural trade the traditional “factors of production” are largely irrelevant to it.

But that institutional trade, and structural trade as well, do not behave according to the accepted rules is far less important than that neither is “foreign trade”—except legally—even when it is trade across national boundary lines. To the individual business, it makes absolutely no difference whether the stuff comes from its own home country or whether it comes from a plant or supplier in what is legally a foreign country. This is increasingly as true for shipments from outside suppliers as for intracompany shipments. For the individual business—the automobile manufacturer, the pharmaceutical company, the discount retailer—these are transactions within its own “system.”

Both structural and institutional trade have grown explosively these last thirty years as business after business has gone multinational. We have no reliable figures. Estimates range from one-third of total U.S. merchandise trade (probably an understatement) to two-thirds (almost certainly too high). Whenever I have been able to get the figures, I have found structural and institutional trade to be 40 to 50 percent of a company’s total export and import volume—for big companies and mid-sized ones alike. Traditional transactional merchandise trade is still larger, I am sure. But the relationship trade is growing faster. Traditional transactional merchandise trade may be no more than a third of a developed country’s trade by now. Two-thirds are either services trade or relationship-based merchandise trade—both behaving quite differently.

Similarly, “investment”—the other area in the traditional model of the international economy—is now becoming something markedly different. Portfolio investment, as has been discussed, has mutated into money flows, which aren’t investment at all. But now “direct investment”—investment abroad to start a new business or to acquire an existing one—is also beginning to change, and fast. For a long time in the postwar years, direct investment seemed impervious to change. The multinational of 1970—the carrier of direct investment—looked little different from the multinational of 1913 (and the multinationals of 1913 controlled as much of the world’s manufacturing as multinationals now control and far more of its banking and insurance). Traditional direct investment is still growing; in fact, since the mid-eighties, direct investment in the United States—by Europeans, Japanese, Canadians, Mexicans—has grown explosively. But the action is rapidly shifting to “alliances”: joint ventures, partnerships, knowledge agreements, “outsourcing.” And in alliances, investment is secondary, if there is any at all. One example is the recent alliance between American-based Intel, the leading-edge microchip designer, and Sharp, a major Japanese electronics manufacturer. Intel will share with the Japanese the design of a very advanced microchip; the Japanese in turn will make the chip and share the product with Intel. One contributes technical competence, the other one production competence.

There are alliances between scores of university research labs and businesses—pharmaceutical firms, electronics firms, engineering firms, computer firms, and food processors. There are alliances in which organizations outsource support activities: a great many American hospitals now let outside, independent suppliers do their maintenance, housekeeping, billing, collections, and data processing and increasingly let them run the labs, physical therapy, and the diagnostic centers. And so, increasingly, do hospitals in the United Kingdom and in Japan. Computer makers now outsource the data processing for their own business to contractors like Electronic Data Systems, the company Ross Perot built and sold to General Motors. The same computer manufacturers are everywhere entering alliances with small, independent software designs. Commercial banks are entering alliances with producers and managers of mutual funds. And small and medium-sized colleges are entering alliances with one another to do the paperwork jointly.

In some of these alliances there is substantial capital investment, as was the case in the 1960s and 1970s joint ventures between Japanese and American companies entered into to produce in Japan and for the Japanese market American- designed goods. But even then the basis of the alliance was not capital but complementary knowledge: technical and manufacturing knowledge supplied by the Americans, marketing knowledge and management supplied by the Japanese. Increasingly, whatever investment there is is symbolic rather than substantial—a small minority share in each other’s business to signify the bond between the partners. In more and more alliances there is no financial relationship at all between the partners—there is apparently none between Intel and Sharp. And there has never been any investment relationship in the oldest and most successful alliances around, the ones forged by the English retailer Marks & Spencer in the early 1930s with a host of manufacturers of textiles, clothing, and footwear (and later with manufacturers of specialty foods as well)—alliances that the Japanese copied after 1950 for their keiretsu. Marks & Spencer and the manufacturer in these alliances jointly develop the products, with the manufacturer committed to making them only for Marks & Spencer and Marks & Spencer committed to buying them only from that manufacturer.

How many such alliances exist now nobody knows. In some cases they are not even embodied in a contract but are quite informal. Increasingly, however, alliances are becoming the dominant form of economic integration in the world economy. Some major companies—Toshiba, the Japanese electronics giant, or Corning Glass, the world’s leading maker of high-engineered glass—may each have more than a hundred alliances all over the world. Integration in the European Union is proceeding far more through alliances than through mergers and acquisitions, especially among the middle-sized companies that dominate most European economies. As in structural and institutional trade, businesses make little distinction between domestic and foreign partners in their alliances. An alliance creates a systems relationship, a family relationship in which it does not matter that one partner speaks Japanese, another English, and the third German or Finnish. And while alliances increasingly generate both trade and investment, they are based on neither. They pool knowledge.

III

Economic theory and economic policy know that developing economies are greatly affected by their relationship to the world economy. Economists talk of “export-led development” and “foreign-investment-led development.” But for developed countries, and especially for middle-sized and large developed countries, economic theory and economic policy postulate that the domestic economy alone matters. The autonomy of the domestic economy and its position as the locus of policy making is an axiom for economists, policy makers, and the public at large.

But as the preceding discussion should have made clear, the distinction between domestic and international economy has ceased to be economic reality—however much it remains political, social, cultural, and psychological reality. The one unambiguous lesson of the last forty years is that increased participation in the world economy has become the key to domestic economic growth and prosperity. There is a one-to-one correlation between a country’s domestic economic performance in the forty years since 1950 and its participation in the world economy. The two major countries that have grown the fastest in the world economy, Japan and South Korea, are also the two countries in which the domestic economy has grown the fastest. The same correlation applies to the two European countries that have done best in the world economy in the last forty years: West Germany and Sweden. The countries that have retreated in the world economy—notably the United Kingdom—are also the countries that have done consistently worst domestically. In the two major countries that have maintained their participation rate in the world economy within a fairly narrow range—the United States and France—the domestic economy has put in an average performance, neither doing exceptionally well nor suffering persistent malaise and crisis like the United Kingdom.

The same correlation holds true for major segments within a developed economy. In the United States, for instance, services have tremendously increased their world-economy participation in the last fifteen years—finance is one example, higher education and information are others. These are also the segments that have grown the most in the domestic economy. In manufacturing, the industries that have significantly increased their world-market participation—through exports, through investments abroad, through alliances—for example, telecommunications, pharmaceuticals, software, movies, are also the industries that have grown the most in the domestic market. American agriculture, which has consistently shrunk in terms of world-economy participation, has been in continual depression and crisis, masked only by ever-growing subsidies.

Conversely, there is no correlation at all between domestic economic performance and policies to stimulate the domestic economy. It is easy, the record shows, for a government to do harm to its domestic economy. All it has to do is to drive up the inflation rate—examples are the damage Lyndon Johnson’s inflationary policies did to the U.S. economy (which has not yet fully recovered twenty-five years later) and the damage which consistently pro-inflationary policies have done to the economy of Italy. But there is not the slightest evidence that any government policy to stimulate the economy has impact, whether that policy be Keynesian, monetarist, supply-side, or neoclassic. Contrary to what economists confidently promised forty years ago, business cycles have not been abolished. They still operate pretty much the way they have been operating for the past hundred and fifty years. No country has so far been able to escape them. But whenever in a business downturn a government policy to stimulate the economy actually coincided with cyclical recovery (as has happened only very, very rarely), it was by pure coincidence. No one policy shows more such coincidences than any other. And no policy that worked in a given country in recession A showed any results whatever when tried again in the same country in recession B or recession C. The evidence not only suggests that government policies to stimulate the economy short-term are ineffectual, it suggests something far more surprising: they are largely irrelevant. Government, the evidence shows clearly, cannot control the “economic weather.”

But the one-to-one correlation between domestic economy and participation in the world economy—over long periods and over a wide range of different phenomena, including widely different economies with different structures, different fiscal and tax policies, and even different forms of participation in the world economy—shows convincingly that participation in the world economy has become the controlling factor in the domestic economy of a developed country. Two examples: that the U.S. economy in 1990–92 did not slip into a deep recession (let alone a real depression), and that unemployment rates for adults, both men and women, never became as high as they had been in earlier post–World War II recessions (and actually stayed low by any historical standard), resulted entirely from the increase in world-market participation on the part of both U.S. manufacturing and U.S. services, with a sharp increase, for instance, of manufacturing exports. And, similarly, that Japan has so far—as of the end of 1993—not slid into a profound recession with unemployment figures at European levels, that is, around 8 to 10 percent (hovering instead below 3 percent), is clearly the result of Japan’s manufacturing industry sharply increasing its exports, and especially institutional exports, to mainland Asia.

The world economy has thus become the engine of growth, prosperity, and employment for every developed country. Every developed economy has become world-economy led.

IV

We can now address the question, What works and what does not work in the world economy? The debate today is largely between advocates of “mandated trade,” Japan-style, and conventional free traders. But both are wrong, and the evidence is crystal clear. Mandated trade means government picking “winners” and pushing them. But not one industry picked by MITI (the Japanese Ministry of Trade and Industry) has turned out to be a real winner. MITI’s efforts in the sixties and seventies were concentrated on aluminum, other nonferrous metals, aircraft, and aerospace, and none has gotten anywhere. In the late seventies and eighties MITI switched to high technology, sponsoring such industries as biomedicine, pharmaceuticals, mainframe computers, telecommunications—but also international brokerage and international commercial banking—again without great success in the world markets. The Japanese industries which have become the world-beaters either have been bitterly opposed by MITI, as were SONY in its early days and the automobile industry well into the 1970s, or have been ignored by MITI until after they had succeeded by their own efforts. The Japanese policy to create consortia in which major companies work together to produce new technology—for example, in supercomputers or biogenetics—has had only very limited results.

The reasons are clear, at least in hindsight. First, picking winners requires a fortune teller. MITI picked—and had to pick—what was successful at the time in the then more advanced countries, especially the United States. It did not pick—and could not have picked—what would be successful in an unknown future. Thus MITI pushed mainframe computers in the early seventies, just before the totally unexpected debut of the PC, that is, just before the mainframe plateaued. Secondly, MITI picked what had been successful in other countries. But that means it picked industries that fit other countries’ competencies. It did not pick—and could not have picked—what turned out to fit Japan’s competencies, namely, the extraordinary ability to miniaturize. One reason was that the existence of this competence was well hidden and unknown even to the Japanese. Another reason was that no one, inside Japan or outside, realized its importance before the advent of the microchip. Also, the Japanese ability to downsize the large American car and to make it small and fuel-efficient was not an asset on the U.S. market until the 1973 and 1979 “oil shocks” made it into one. And no one could—or would—have predicted the inability of the industry’s world leaders, the American giants, to respond to the Japanese invasion for all of twenty years. Finally, and most importantly, the world economy has become far too complex for anyone to be able to outguess it or to outanalyze it. The available data simply do not report such important developments as the growth of services trade, the growth of structural and institutional trade, the growth of alliances.

But as will be argued (and rightly), Japan has performed outstandingly. This surely cannot be explained as the free traders try to do—that is, it cannot be explained as really being a triumph of conventional free trade. And we do now know what underlies it, primarily because of a recent (1993) World Bank study entitled The East Asian Miracle.

The World Bank studied eight East Asian “superstars”: Japan, South Korea, Hong Kong, Taiwan, Singapore, Malaysia, Thailand, and Indonesia. The eight started at very different times, but once they got going, all have shown similar growth in both their domestic economy and in their international economy. Together they supplied 9 percent of the world’s manufactured goods exports thirty years ago. Now they supply 21 percent (which means a loss of twelve percentage points primarily by the United Kingdom, the Netherlands and Belgium, the former Soviet Union, and some countries in Latin America). Thirty years ago, two-fifths of the population in the eight East Asian countries lived below the poverty line; the figure is less than 5 percent today, despite rapid population growth in most of them. Several of them—Japan, Hong Kong, Singapore, and Taiwan—are now among the world’s richest countries. Yet among the eight there are tremendous differences in culture, history, political systems, and tax policies. They range from laissez-faire Hong Kong, through interventionist Singapore, to statist Indonesia.

What all eight have in common are two economic policies. First, they do not try to manage short-term fluctuations in the domestic economy. They do not try to control the “economic weather.” In fact, in every case, the economic miracle did not begin until the country had given up the attempt to manage domestic short-term fluctuations. Each of the eight countries focuses instead on creating the right “economic climate.” They keep inflation low. They invest heavily in education and training. They reward savings and investment and penalize consumption, thus encouraging a high savings rate.

The second economic policy that the eight East Asian Miracles have in common is that they put performance in the world economy ahead of the domestic economy. In their decisions the first question is always, How will this affect the competitiveness of our industry and its performance in the world economy? It is not, How will this affect domestic economy and domestic employment?—which is the question that most Western countries focus on, especially the United States and the United Kingdom. And then the eight actively foster, encourage, promote their successes in the world economy. Though MITI did not anticipate Japan’s successes, the whole Japanese system is geared to taking a world-market success and running with it—by offering substantial tax benefits to exporters; by making credit readily available for international trade and international investment (where it has been scarce and expensive for domestic business); by deliberately keeping high prices and profits on a protected domestic market to generate cash for investments abroad and for penetrating foreign markets (the popular belief in the “low” profit margins of Japanese companies being pure myth); by reserving special recognition (e.g., the prestigious and highly coveted membership in the executive committee of Keidanren, Japan’s top industrial organization) to the heads of companies that have done particularly well in the world economy; and so on. Each of the eight countries of the East Asian Miracle does things its own and different way. But all of them follow the same two basic policies: first, provide the right economic climate at home through stressing the fundamentals of monetary stability, an educated and trained workforce, and a high savings rate; and second, make performance in the world economy the first priority of economic and business policy.

Exactly the same lessons are being taught by the examples of the two countries in the West that—until very recently—showed similar growth: West Germany and Sweden. These two countries too have very different domestic policies. But both first created and maintained an economic growth climate, and through the same measures: control of inflation; high investment in education and training; and a high savings rate obtained by high taxes on consumption and fairly low taxes on savings and investment. And they both have systematically given priority to the world economy in governmental and business decisions. In both countries, the first question asked is always, How will this affect our world-market standing, our world-market competitiveness, our world-market performance? And the moment these countries forgot this—when the trade unions a few years back subordinated Germany’s competitive standing to their wage demands, and the Swedes subordinated their industry’s competitive standing to ever-larger welfare spending—the domestic economy of both countries went into stagnation right away.

And one reason why creating the right climate is so important is that it stands as the one and only way to build into a domestic economy resistance to money flows and their shocks.

The last forty years of the world economy yield another lesson as to what works: investment abroad does not “export jobs.” Instead, it creates jobs at home. We should have learned this from the U.S. performance in the sixties. When the American-based multinationals expanded investments rapidly, in Europe, in South America, in Japan, the domestic economy created jobs at a fast rate. And when in the eighties American multinationals resumed heavy foreign investment—particularly in Europe—domestic employment again expanded fast. The same is true for Japan, where, as has been said earlier, the jobs created by the rapidly expanding investment in East Asia—with very heavy investment in plants that produce goods for the Japanese home market—has not destroyed jobs but has saved them in large numbers. It was equally true for Sweden, which, of all industrialized countries, has gone the furthest in investing abroad in manufacturing plants.

The reason is, of course, the institutional trade generated by such investment. In manufacturing—and in a good many services, such as retailing—investment per worker in the machinery, the tools, and the equipment of a new facility is three to five times annual production. The employment generated by the institutional trade to get the new facility into production is thus substantially larger for several years to come than the annual output and the annual employment of the new facility. Most of this institutional trade comes from the home country of the investor; and most of it is produced by high-wage labor. “Exporting jobs” will thus actually create—at least for the medium term—several jobs in the home country for every one it “exports.” This explains why the Ford Motor Company, which has aggressively built in Mexico since that country opened itself to foreign investment five or six years ago, is the one U.S. automobile company which has added jobs at home. It explains why the two Mexican manufacturers—a cement maker and a glass maker—that have aggressively built and bought plants in the United States are among the few major Mexican manufacturers who have added jobs in Mexico these last few years. So far, however, only the Japanese seem to understand this. Ten years ago they were panicky about “hollowing out industry,” that is, about exporting to mainland Asia labor-intensive work (for example, in consumer electronics) to supply the Japanese home market. Today the export of high-value machinery and tools to these Japanese-owned plants on the Asian mainland, that is, institutional trade, has become the biggest contributor to Japan’s export surplus and the mainstay of Japan’s engineering and high-tech employment.

The last forty years also teach that protection rarely protects. In fact the evidence shows quite clearly that protection in a good many cases hastens the decline of the industry it is intended to protect.

Every developed country massively protects agriculture. But in the United States some farm products, such as soybeans, fruits, beef, and poultry, are either not subsidized at all or are very much less subsidized than the “traditional” crops, such as corn, cotton, and wheat. These less-protected products have done a good deal better on the world market—despite intense competition—than have the heavily protected ones. Farm population in all developed countries has declined steeply since World War II. But it has declined the most steeply in the two countries in which agriculture is most highly protected and/or subsidized: France and Japan. It is equally suggestive that the decline in U.S. market share of the American automobile industry dramatically speeded up as soon as it became highly protected in 1980, when the U.S. government forced the Japanese into “voluntary export restraints.” That protection breeds complacency, inefficiency, cartels has been known since well before Adam Smith. But the counterargument has always been that it protects jobs. The evidence of the last forty years strongly suggests that it does not even do that. At least it did not do so in agriculture in any developed country. It did not do so in the U.S. automobile industry or, as the last few years indicate, in the European automobile industry either. It equally did not protect jobs in the U.S. steel industry or in the steel industries of Europe or Japan. Protection no longer protects jobs; it is more likely to hasten their demise.

Conclusion

What the last forty years teach is that free trade is not enough. We have to go beyond it.

The world economy has become too important for a country not to have a world-economy policy. Managed trade is delusion of grandeur. Protectionism can only do harm. But not to be protectionist is not enough. What is needed is a deliberate and active, indeed an aggressive policy that gives the external economy, its demands, its opportunities, its dynamics, priority over domesticpolicy demands and problems. For the United States (and for a country like France—as well as most of Latin America), this would mean a radical reversal of decades of traditional policy—it would mean abandoning, in large measure, economic policies that have governed American thinking and American economics ever since 1933, and certainly since 1945. We still see world-economy demands and world-economy opportunities as “externalities.” We usually do not even ask, Will this domestic decision hurt American participation, American competitiveness, and American standing in the world economy? Yet what we really need to ask is, Will this domestic move advance, strengthen, promote American participation in the world economy and American competitiveness? The answer to this question then determines what are the right domestic economic policy decisions and domestic business decisions. This, the lessons of the last forty years teach us, is the only economic policy that can work. It is also—as the last forty years unambiguously teach—the only policy that can rapidly revive a domestic economy mired in turbulence and chronic recession.

1994