Trade Lessons from the World Economy

Peter F. Drucker

From Foreign Affairs, January/February 1994

Article preview: first 500 of 3,219 words total.

Summary:  The world economy is changing profoundly due to the enormous growth of services exports, the forging of new kinds of business alliances and the merging of transactions of different types. Effective policies will recognize the deficiencies of both managed trade and outright protectionism. Needed is a deliberate and active policy that gives the demands of the external economy priority over domestic policy demands and problems. Integration is the only basis for an international trade policy that can work and the only way to rapidly revive a domestic economy.

Peter F. Drucker is Clarke Professor of Social Science and Management at the Claremont Graduate School in Claremont, California.

ALL ECONOMICS IS INTERNATIONAL

In recent years the economies of all developed nations have been stagnant, yet the world economy has still expanded at a good clip. And it has been growing faster for the past 40 years than at any time since modern economies and the discipline of economics emerged in the eighteenth century. From this seeming paradox there are lessons to be learned, and they are quite different from what practically everyone asserts, whether they be free traders, managed traders or protectionists. Too many economists, politicians and segments of the public treat the external economy as something separate and safely ignored when they make policy for the domestic economy. Contrary lessons emerge from a proper understanding of the profound changes in four areas--the structure of the world economy, the changed meaning of trade and investment, the relationship between world and domestic economies, and the difference between workable and unworkable trade policies.

The segments that comprise the world economy--the flows of money and information on the one hand, and trade and investment on the other--are rapidly merging into one transaction. They increasingly represent different dimensions of cross?border alliances, the strongest integrating force of the world economy. Both of these segments are growing fast. The center of 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 investment. Similarly, the trades during one day on the main currency markets of 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.

Today?s money flows are vastly larger than traditional portfolio investments made for the sake of short?term income from dividends and interest. Portfolio money flows were once the stabilizers of the international economy, flowing from countries of low short?term returns to countries of higher short?term returns, thus maintaining an equilibrium. They reacted to a country?s financial policy or economic condition. Driven by the expectation of speculative profits, today?s world money flows have become the great destabilizers, forcing countries into precipitous interest rate hikes that throttle business activity, or into overnight devaluations that drag a currency below its trade parity or purchasing?power parity, thus generating inflationary pressures. These money flows are a pathological phenomenon. They underline the fact that neither fixed nor flexible foreign exchange rates (the only two known systems) really work. Contemporary money flows do not respond to attempted government restrictions such as taxes on money?flow profits; the trading just moves elsewhere. All that can be done as part of an effective trade policy is to build resistance into the economy against the impact of the flows.

Information flows in the world economy are probably growing faster than any category of transactions in history. Consisting of meetings, software, magazines, books, movies, videos, telecommunications and a host of new technologies, information flows may already exceed money flows in the fees, royalties and profits they ...

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