Global Glut

Document 1 of 1.

November 16, 1997, Sunday, Late Edition - Final

SECTION: Section 4; Page 3; Column 1; Week in Review Desk

LENGTH: 1293 words

HEADLINE: The World;
Global Good Times, Meet the Global Glut

BYLINE: By LOUIS UCHITELLE

BODY:
PRESIDENT CLINTON'S failure last week to persuade Congress to give him freedom to negotiate trade deals reflected
skepticism among Americans about the benefits of a global economy -- not only free trade, but an entire system that allows
money, factories and jobs to move anywhere.

Domestic politics, of course, played a big role in the President's decision to retreat when he failed to muster enough votes for
passage. But the skepticism is not limited to politicians jockeying for the next election, or union officials charging that jobs are
going south. The worriers are often the very business executives and international investors who built today's global economy
and now fear that it might backfire.

There is something to worry about. The Asian financial turmoil may be the first stage of a developing worldwide crisis driven
mainly by a phenomenon called overcapacity: the tendency of the unfettered global economy to produce more cars, toys,
shoes, airplanes, steel, paper, appliances, film, clothing and electronic devices than people will buy at high enough prices.

"There is excess global capacity in almost every industry," Jack Welch, chairman of General Electric, said in a recent interview
in The Financial Times of London.

The problem arises because the global economy sucks businesses into building too many factories. Allied Signal, for example, a
multinational corporation based in Morristown, N.J., built a polyester plant in Longlaville, France, in 1993 and expanded it last
year. The polyester, used in nylon carpets and tire cords, is sold in France and shipped across open borders to customers
everywhere in the region.

The Danger of Price Wars

But a group in South Korea, an emerging industrial nation seeking to be a big player in many major industries, opened a
polyester plant in Korea recently. Taking advantage of open borders, the Koreans are shipping their polyester into Europe and
other countries, grabbing away customers and market share by offering lower prices. And the customers, offered more
polyester than they need, have encouraged a price war.

Price wars, up to a point, are good for consumers. The inflation rate in the United States has fallen in part because of global
overcapacity, and business people everywhere complain that they can't raise prices. "That is what overcapacity means," said
Peter L. Bernstein, an economic consultant.

The danger is that at some point this house of cards must tumble down. In an open-border global economy nearly every car
manufacturer, for example, is trying to have a presence in every market. But when all the factories crank out more cars than
people can buy, down come car prices. Down go the profits of car companies. Out go the workers. And down go the number
of people who can afford to buy cars. Economies can spiral downward toward recession, or worse. That is what is beginning
to happen in Asia now.

East Asia has been the main source of the world's overcapacity in recent years. Since 1991, countries like Thailand, South
Korea, Indonesia, Malaysia and the Philippines have accounted for half the growth in world output, primarily manufacturing,
according to David Hale, chief global economist for the Zurich Insurance Group.

Dominoes

The financing for this new production often came from international investors moving huge sums across borders. They
frequently borrowed the money at low interest rates in Japan and the United States and then invested in booming Asia in
expectation of earning a high return. Money borrowed at 1 or 2 percent a year in Japan might typically pay 8 to 10 percent
invested in Asia.

Chunks of this money inevitably went not into factories but into speculation. Borrowers defaulted. And as the hoped-for big
returns failed to materialize, fear grew, first in Thailand, that money invested in that country's currency, the baht, would not earn
enough to pay debts incurred in dollars or yen. There was a run on the baht last summer, which spread to stock prices and to
other Asian financial markets.

The factories -- the new capacity -- remained intact, but the millions of Asians counted on to be customers pulled back. In their
place, the energetic consumers in the world's richest country, the United States, have become the targeted buyers for much of
the unsold Asian output. And as imports from the region rise (they have risen only slightly so far) there is downward pressure
on prices in the United States and on the wages of workers who make products that compete with the imports. Just the threat
of an Asian alternative produces this downward pressure, some economists argue.

The global economy appears, in effect, to be capable of self-destruction. That is the view of William Greider, a journalist who
writes extensively on economics and whose recent book, "One World, Ready Or Not" (Simon & Schuster), has made him a
principal voice among those who point to the dangers of an unregulated global economy.

"It produces more and more goods even as it suppresses wages at both ends of the world, in industrial as well as developing
countries," he said. "You cannot do that forever -- producing more and cutting the wages of those who buy -- without some
collapse."

That view has been attacked by several influential economists, particularly Paul Krugman of the Massachusetts Institute of
Technology. The American economy, he says, is still mostly self-contained; global trade has not made that much of an inroad.
What's more, he says, workers will eventually share in the earnings from rising production. And finally, Mr. Krugman maintains,
overcapacity is not a question of too much supply, but a faltering of demand.

The Krugman solution is to turn up the demand; central banks do this by cutting interest rates so companies and consumers can
borrow money less expensively. "There is no shortage of things on which people want to spend money," Mr. Krugman said.
"You would have to have a worldwide depression to shock them into not buying, into sitting on their money."

That seems unlikely, but in the end it could happen. Already central banks in Asia, instead of lowering interest rates to
encourage spending, as Mr. Krugman suggests, have raised them in an effort to strengthen their currencies, among other
reasons.

Pressure on America

South Korea could be the next country in trouble, analysts say, hurting Japan in the process. Some of the huge sums invested in
Korea were borrowed from Japanese banks. A loan default in Korea could bring down a Japanese bank already weakened by
the recession in that country. And with its own consumers already balking, the fresh blow of a bank default would make Japan
even more eager to export its unsold goods -- its overcapacity -- to the United States. With that in mind, Treasury Secretary
Robert E. Rubin publicly urged the Japanese Government last week to spur domestic consumption.

Mr. Rubin's concern is understandable, given that the United States is the alternative if the Japanese don't buy enough --
Americans being the world's consumers of last resort. The United States trade deficit keeps rising as imports grow, forcing
American manufacturers to cut back. Just last week Eastman Kodak announced 10,000 job cuts, in part to accommodate
overcapacity in film manufacturing, especially competition from Fuji of Japan.

But the American trade deficit would have to quintuple before the economy gets into trouble, said David Wyss, research
director at DRI/McGraw-Hill, an economic forecasting service.

"There is the possibility," he said, "that you can bring in so many low-priced imports that businesses in this country would have
to cut back and unemployment would rise. But that sure is not happening now."

GRAPHIC: Photos: Autos, autos, everywhere: Hyundai automobiles from South Korea sitting in a storage yard in Newark,
N.J. (Associated Press); Whether it's Airbus jets in Germany (Reuters) or sneakers in the United States (Associated Press),
goods have a tendency to pile up in today's global economy.

LANGUAGE: ENGLISH

LOAD-DATE: November 16, 1997