Has the U.S. Economy Really Been Globalized?

It is difficult to read an academic or popular analysis of the U.S. economy without encountering the "fact" that it has been globalized, with the clear implication that this country no longer has an independent national economy but instead is merely part of a single world entity. Debates occur as to whether this melding of the U.S. economy into a global economy is desirable or undesirable, but whether it has actually happened is seldom raised. In reality, the evidence of a globalized economy is quite weak, indicating instead that the U.S. economy retains a large part of its historic national independence.

This issue has become increasingly important because fear of the effects of globalization on the United States have become widespread. The World Trade Organization (WTO) meetings in Seattle were disrupted by groups opposing a globalized U.S. economy, Pat Buchanan and Ralph Nader ran for president largely on the basis of such fears, and congressional debates frequently revolve around this issue. Perhaps most important, opposition to the increasingly globalized U.S. economy was a major factor in the defeat of President William Clinton's request for fast-track authority to negotiate the expansion of the North American Free Trade Agreement (NAFTA) and to pursue other trade agreements. This is the first time that a president has been refused such authority, and this defeat represents Congress's movement away from its past willingness to liberalize international trade. As long as fears of the effects of globalization on our economy play a major role in debates over trade and other international economic issues, there is little prospect for the expansion of NAFTA or for U.S. participation in another multilateral WTO negotiating round. These fears presume, however, that the U.S. economy actually has been globalized. Four economic indicators are used here to show that these fears are largely groundless. As this becomes more widely understood, the international economic policy of the United States may return to its previous, and more productive, pattern.

The Criteria for Globalization

What statistics might measure the extent to which the U.S. economy is more integrated into the rest of the world than in the past? A number of indicators could be suggested, but this study relies on the following concepts:

1. The role of international trade in the economy

If the U.S. economy has actually been globalized, the share of trade in its gross domestic product (GDP) should be much higher than in the past. This share merely returning to, or moving slightly above, previous levels would not be evidence of global integration; the role of trade in the U.S. economy should be an order of magnitude greater than in the past.

2. Real interest rates

If capital markets are globalized, real interest rates in the major industrialized countries would have been arbitraged together and should now be quite similar. U.S. real yields should now be determined primarily in Europe, Canada, and Japan rather than exclusively in U.S. capital markets.

3. U.S. macroeconomic policies

If the U.S. economy is globalized, both U.S. fiscal and monetary policies should be constrained by policies in the other major industrialized countries. It should no longer be possible for the United States to pursue macroeconomic policies that differ significantly from those in other large countries of the Organization for Economic Cooperation and Development (OECD).

4. Business cycles

A globalized economy should mean a global business cycle, of which the United States is merely a part. The timing of U.S. business cycles should have become similar to the timing of cycles of other industrialized countries in recent decades. The close ties among markets here and abroad, both for goods and for financial assets, should make it impossible for the United States to avoid either the recessions or the macroeconomic expansions that occur in other major OECD countries.

History as a Yardstick...