An Outward-Looking Economic Nationalism

"...O ye, the wise who think, the wise who reign, From growing commerce loose her latest chain, And let the fair white-winged peacemaker fly To happy heavens under all the sky, And mix the seasons, and the golden hours, Till each man finds his own in all men's good, And all men work in noble brotherhood."

-- Alfred Tennyson, "Ode for the Opening of the International Exhibition in London," 1862

The debate grows louder and more strident with each passing trade statistic: On the one side, neo-mercantilists, comprising a growing coalition of American firms and trade unions, urge that government advance American enterprise -- even at the expense of others around the globe. In this view, unless we become more assertive, foreigners will continue to increase market shares at America's expense in industry after industry -- exploiting our openness, gaining competitive advantage over us, ultimately robbing us of control over our destinies. On the other side, laissez-faire cosmopolitans, comprising most Wall Street bankers, professional economists, and officials at the highest reaches of the Bush Administration, argue that government should stay out. In their view, profit-seeking individuals and enterprises are far better able to decide what gets produced where. Governments only mess things up. Free movement of all factors of production across national boundaries will ultimately improve everyone's lot -- ours and theirs.

Which side has the better case? Neither. What's being lost from the debate is a third position superior to both: outward-looking economic nationalism, in which each nation takes responsibility for improving the wealth-creating capacities of its citizens, but works with other nations to ensure that these improvements not come at others' expense. The third position is not laissez-faire, because governments actively encourage new technologies and industries, smooth the transition from older industries, educate their work forces, invest in infrastructure, and create international rules of fair play for accomplishing all these things. But neither is it neo-mercantilist, because the overarching goal is to enhance global welfare rather than to advance one nation's well-being by reducing another's.

First, a typical debate. No doubt you have heard parts of it before, but in order to define the third position it is necessary to set out what the other two are arguing about.

The unsophisticated laissez-faire cosmopolitan's opening gambit: Don't you realize that every nation will be better off if each specializes in what it does best, and then can trade with others? The English economist David Ricardo discovered the law of comparative advantage almost two centuries ago when he showed that England and Portugal would each benefit from sticking to natural endowments, textiles and wine respectively. History has shown that attempts to meddle with this logic only deprive citizens in both nations of potential improvements in their welfare.

The unsophisticated neo-mercantilist's reply: The law of comparative advantage is nice in theory, but it doesn't describe the modern world. Nations are wealthy to the extent that they have advanced industries and well-paying jobs. Other nations subsidize their industries. We can't just afford to let industries like steel and autos go down the drain, even if some other countries price their cars and their steel more cheaply than ours.

The slightly more sophisticated laissez-faire cosmopolitan's rejoinder: Stop and think. Steel-making jobs may pay well, but if foreigners can make steel more efficiently than American steel makers, it's crazy for the rest of us to pay extra by blocking foreign steel imports. By doing that we're merely transferring our hard-earned cash to American steel makers. Why are they so special that they deserve to be subsidized by the rest of us? What about all the American producers of cars, appliances, and machine tools that would become more profitable and competitive if they could buy cheaper foreign steel? These industries provide good jobs, too. And by the way, don't forget about Third World nations that might otherwise become the lowest-cost steel producers of all if we don't protect our markets. With earnings from steel they could buy our cars, appliances, and machine tools -- and any other products we make more efficiently than steel. Incidentally, some of these Third World nations borrow money from us and would find repayment considerably easier if we allowed them to sell us their steel.

The slightly more sophisticated neo-mercantilist's answer: You don't get it. Let's say we agree that free trade really is the best of all worlds. But it isn't the world we live in. Most other countries don't believe in free trade, or practice it. We have to play hardball in order to get a level playing field. If they don't open their markets to us, we shouldn't give them a free ride in the American market. I'd like to be a free trader, too. But in the real world, sometimes you have to use mercantilist means to obtain cosmopolitan ends. In the modem world, nations acquire comparative advantage when their engineers, entrepreneurs, and workers learn by doing. What kind of "factor endowments" does Japan have other than an industrial policy? Private industry doesn't invest enough in learning-by-doing. The gap between private and social needs has to be filled in by the state.

And here's where they're beating us. Through tariffs and non-tariff barriers (like industrial standards, health and safety regulations, and complex distribution systems) and outright subsidies, they're nurturing on-the-job skills that will allow them to dominate the next generations of industry and technology. So not only are we failing to get as much of this knowledge and experience as we would if government were filling in the gap between private and social returns -- we're not even gaining the private returns! American companies see no point to investing in such industries and technologies as long as foreign markets are closed and foreign exports are subsidized. There's no other choice: We either beat them at this game or get beaten by them. We should close our markets until we get reciprocity, subsidize our firms, and stop foreigners from grabbing our technologies and buying our companies.

The sophisticated laissez-faire cosmopolitan's response: Who are you kidding? I understand politics as well as you do. Once these protectionist measures are in place, they're almost never rescinded. Protected industries become dependent on them, and gain the political clout to keep them. Meanwhile, our so-called retaliation prompts the other nation to counter-retaliate, and before you know it protectionist barriers are higher than ever. "Cosmopolitan ends" my foot.

The sophisticated neo-mercantilist's coup de grace: Other countries manage to use mercantilist strategies effectively, without making their industries sheltered and lazy Maybe they have a comparative advantage in mercantilism. Japan kept out American steel in the fifties, but they used that period of protection to create the world's most dynamic steel industry. You and David Ricardo are ignoring one key fact. In the modern world, comparative advantage can be created. Just consider Japan's surge into auto, micro-electronics, and other forms of advanced manufacturing. Look at South Korea, Taiwan, Hong Kong and Singapore. You think the invisible hand did this?

The exasperated laissez-faire cosmopolitan's conversation stopper: What century are you living in anyway? You talk as if nations still counted. But today, national markets are collapsing into one giant world market. Since money crosses borders at the speed of an electronic impulse, the cost of capital is rapidly converging. Technologies move from computers in one nation to satellites and then down to computers in another, so everyone gains access to new technological insights at about the same time. And global companies are doing everything everywhere.

If the Japanese people want to work their fannies off making complex gadgets that never fall apart and selling them to us at bargain-basement prices, taking our IOUs in return, let them go ahead and we'll enjoy the benefits. You see, my friend, national economies no longer exist. There's no such thing as national economic interest.

The Zero-Sum Fallacy
Both of these standard positions, even in their most sophisticated versions, are wrongheaded. To begin, the neo-mercantilist's zero-sum premise either they win or we win-is simply incorrect. As one nation's workers become more insightful about new technologies they are able to add more wealth to the world. To this limited extent the cosmopolitan is right: Everyone on the planet benefits from smaller and more powerful semiconductor chips regardless of who makes them, and the knowledge of how to make them inevitably migrates to other workers in other nations.

Of course, the nation whose workers first gain the insights may benefit disproportionately That advantage may cause other nations' citizens to experience a relative decline in wealth, notwithstanding their absolute gain. Sociologists have long known of "relative deprivation" whereby people evaluate their wellbeing relative to the wealth of others. There is also the political reality that power flows to those nations that gain large economic leads over others. For both these reasons, nations may be willing to forego absolute gains in welfare to prevent their rivals from enjoying even larger gains. While understandable, such zero-sum impulses are hardly to be commended as a principle of international economic behavior. Since economic advances rarely benefit all nations in equal proportion, such an approach, if widely adapted, would legitimize the blocking of most efforts to enhance global wealth.

In any event, economic interdependence now runs so deep that any zero-sum strategy is likely to boomerang, as the members of OPEC discovered in the 1970s when their sky-high oil prices plunged the world into recession and reduced the demand for oil. Today no nation's central bank can control its money supply or the value of its currency without the help of other nations' central banks, nor can a nation unilaterally raise its interest rates or run large budget surpluses or deficits without others' cooperation or acquiescence. These days, every advanced nation depends on others as a market for, and source of, its goods. The Japanese need a strong and prosperous America as a market for their goods and a place to invest their money. Any step they took that precipitated a steep economic decline in America would have disastrous results for them.

The "America first" premises of neo-mercantilism, moreover, are uncomfortably close to the "America first" premises of Cold War militarism, and, if implemented, would be likely to have similar consequences. History offers ample evidence of the danger: zero-sum nationalism in whatever form tends to corrode public values to the point where citizens support policies that marginally improve their welfare while harming everyone else on the planet, and thus invite other nations to do the same. Whether the issue is global warming, immigration and refugees, the drug trade, Third World debt, population control, energy use, management of the macroeconomy, the spread of nuclear weapons, or any number of other things linked to species survival, global cooperation is essential. But zero-sum habits and attitudes render it all the more difficult to achieve.

But what if foreigners dominate a major technology, as the Japanese are on the way to doing in advanced semiconductors, high-definition television, and a dozen other gadgets? What if they freeze us out? Their mastery of particular technologies won't freeze us out of technological progress. Technologies aren't like commodities for which world demand is finite, nor do they come in fixed quantities that either they get or we get. Technologies are domains of knowledge. They are like the outer branches of a giant bush on which countless other branches are growing all the time. While it's true that the American work force needs direct experience in designing and fabricating technologies on outer branches if it will share in their future growth, they need not be exactly the same branches as occupied by the Japanese or any other nation's work force. We already occupy branches they don't: complex software, airframes, cinematography, and biotechnology, to name only a few.

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It should also be noted that they are here, training American workers to be more productive in the branches that foreigners already occupy. Ten percent of American manufacturing workers are employed by foreign-owned firms. Those firms are now creating more jobs in the United States than are American manufacturers and at higher average wages (in 1986, $32,887, as compared to an American average of $28,954). Foreign firms come here not just because American assets are now so cheap, but because the foreign firms can be more productive in the United States than can their American-owned rivals. (The wave of foreign investment in the United States began in the mid-1970s rather than from the start of the current-account deficit in 1982, and the two leading foreign investors have been the British and the Dutch rather than the trade-surplus rich Japanese and West Germans.) After Bridgestone Tire took over Firestone, productivity soared. The same thing happened at the General Motors-Toyota joint venture in Fremont, California, where Toyota transformed what had been a troubled GM plant into a model facility through retooling and retraining.

Given the choice of either foreign managers and the financial capital that comes with them, or American managers and capital that accompanies them, American workers in many industries do better making foreign-engineered and managed products. Japanese and Western European managers, for example, take lower salaries and benefits for themselves relative to their workers, encourage substantially more worker participation, and provide workers with greater job security, than do their American counterparts. Wall Street demands faster paybacks -- and thus tolerates less experimentation, long-term research, worker training, and product development -- than do many foreign sources of capital.

The specter of foreign management and ownership nevertheless frightens many Americans, who believe that foreign executives will be less sensitive to national needs than are American executives. Even if foreign firms are now retooling their American plants and training their American workers to be more productive, some fear that they might nonetheless bias their strategies to reduce American competitiveness. They might even withdraw their investments from the United States and leave us stranded.

This line of reasoning assumes that American executives and American owned firms will, by contrast, put national interests ahead of the interests of their shareholders. Yet, apart from wartime or other periods of national emergency, this is hardly the case. In fact, American owned and managed firms are setting up shop abroad at as fast a pace as foreign firms are coming here. American companies increased their foreign capital spending by 24 percent in 1988,13 percent in 1989 -- far above their domestic levels of capital investments (11 and 8 percent, respectively). Much of this foreign investment abroad went for high value added production. In fact, American firms increased their overseas research and development spending by 33 percent between 1986 and 1988, compared with a 6 percent increase in R&D spending in the United States. They are going wherever they must to maximize profits.

American executives who sacrificed profits for the sake of national goals would make themselves vulnerable to a takeover or liable for breach of fiduciary duty to their shareholders. Were American managers knowingly to sacrifice profits for the sake of presumed national goals, they would be acting without authority, on the basis of their own views of what such goals might be, and without accountability to shareholders or to the public. Obviously, American corporations have an incentive to display good "corporate citizenship" by making charitable contributions and investing in their communities, as long as such acts improve their corporations' image and thus contribute to higher profits in the future. But foreign-owned and managed firms can be expected to engage in similar eleemosynary activities for the same reason. Indeed, they are apt to be even more charitable than are American owned and managed firms, given their conspicuous need to build public trust. Meanwhile, American firms feel a similar compulsion to act as good citizens in their host countries. Robert W. Galvin, chairman of Motorola, noted recently that, should it become necessary for Motorola to close some of its factories, it would not close its Southeast Asian plants before it closed its American ones. "We need our Far Eastern customers," said Galvin, "and we cannot alienate the Malaysians. We must treat our employees all over the world equally."

Our national economic goal should be to increase the value of what American citizens add to the world economy-and thus to improve the American standard of living. To the extent that foreign-owned firms help us to accomplish this, they should be welcomed. By the same token, American-owned firms-rapidly becoming global entities -- should have no special claim on the nation's resources.

The Laissez-Faire Fallacy
The laissez-faire cosmopolitans are only half right, however. While they correctly disavow zero-sum objectives, they fail to comprehend the importance of public-sector involvement in the nation's economic development. To equate such involvement with zero-sum outcomes is simply wrong.

The American work force needs much more help than what can be supplied by foreign firms with superior technology, capital, or management skill. Because of the "public goods" nature of research and development, education, training and retraining, job search and relocation assistance (as well as infrastructure such as roads, ports, bridges, sewage treatment), public investment is critical. Indeed, the justification for public-sector expenditure is even more potent than the standard "public goods" observation that because the benefits of such investments can't be apportioned according to who pays for them, we can't rely on the market to do it. In an increasingly integrated world economy, the fruits of such investments aren't limited to American corporations, which, as I have stressed, are going global at a rapid pace. Nor for that matter are they limited to Americans. Again: new technologies inevitably leak out beyond national borders; educated and trained workers create new wealth that's shared with the rest of the world; modern transportation and communication systems increase the speed and efficiency with which goods and services can be shipped into and out of the nation from other nations. Everyone benefits from such investments, at least to a small degree -- even foreigners.

Thus a strong argument, in theory, for public sector investment. But the argument also presents a practical political dilemma. For if the benefits of such wealth creating investments are enjoyed in the first instance by an entire nation's work force, and then to an increasing extent by many foreigners, why should an individual taxpayer willingly pay for them? Why not seek to reduce taxes, then withdraw into a small enclave bounded by family and friends, paying only what's necessary to ensure that everyone within that enclave is well educated and has access to the infrastructure he or she needs?

Loyalty to place -- to one's city or region or nation -- once provided an answer to this question. Individual citizens supported taxes to pay for education, roads, and other civic improvements, even when the individual taxpayer was likely to enjoy but a fraction of what was paid out. He or she did so out of a sense of obligation to improve the well-being of everyone else within the same political and geographic unit. To be sure, such civic boosterism, pride, and patriotism were founded upon an enlightened self-interest. As Tocqueville noted, American patriotism was "confounded with the personal interest of the citizen. A man comprehends the influence which the prosperity of his country has upon his own welfare; he is aware that the laws authorize him to contribute his assistance to that prosperity, and he labors to promote it as a portion of his right." As our fellow citizens grew wealthier and more productive we benefited by their ability to give us more in exchange for what we offered them. We also benefited from the social tranquility induced in a population adequately clothed, housed, and fed.

Now that local, state, and even national economies are becoming regions of a global economy, however, their borders no longer clearly define areas of special economic interdependence. To take an extreme example, the American executive of a global corporation, linked to his worldwide operations by computer, modem, and fax, is far more dependent

on the firm's design engineers in Kuala Lumpur, fabricators in Taiwan, bankers in Bonn, and sales and marketing specialists in Paris, London, Frankfurt, and Tokyo than on his neighbors next door or on the workers in the factory on the other side of town. And the security guards that patrol his condominium (itself located within an enclave far removed from crime-ridden areas of the region) can assure him a reasonable degree of tranquility, even if people on the other side of town are starving. While this example is hardly typical, it does portray a growing segment of the population for whom there is no longer much enlightened self-interest in patriotism.

It is in this setting that rootless cosmopolitanism is especially mischievous. We have little left but the sentiment of loyalty to inspire sacrifice for the greater good. A sense of national purpose -- of historic, cultural, and principled connection to a common political endeavor -- must transcend cosmopolitan economic ties if it is to elicit investment in the nation's future. Paradoxically, such nationalist sentiments result in greater global wealth than do cosmopolitan sentiments founded upon loyalty to no nation. Like the villagers whose diligence in tending to their own gardens results in a bounteous harvest for all, citizens that feel a special obligation to cultivate the talents and abilities of their compatriots end up contributing to the well-being of compatriots and non-compatriots alike.

Towards Outward-Looking Nationalism
Note, however, the difference between this kind of nationalist sentiment and the zero-sum nationalism that animates neo-mercantilism. Here, one nation's wellbeing is not contingent upon another's loss. To the contrary, national well-being depends upon its and every other nation's investments in the productive capacities of people. To extend the metaphor, while each garden-tender may feel competitive with every other, each also understands that the success of the total harvest requires cooperation. While each has primary responsibility to tend his own garden, each has a secondary responsibility to ensure that all gardens flourish.

Thus, outward-looking economic nationalism would eschew obstacles to the movement of goods, money, and technology across borders. Even were such obstacles enforceable (which is less and less the case), they would reduce the capacity of each nation's work force to enjoy the fruits of investments made in them, and in others. But not all government intervention would be eschewed. To the contrary, this approach would encourage public spending within each nation in any manner than enhanced the capacity of each work force to add more value to the world economy -- including pre-school care, education, training and retraining, infrastructure, and research and development.

Outward-looking economic nationalism also would tolerate -- even invite -- national subsidies to firms that undertook within their borders high value-added production (complex design engineering, production engineering, fabrication, systems integration, and so forth) so that the nation's work force could gain sophisticated on-the-job skills. But to ensure against zero-sum games in which nations bid against one another to attract the same set of global firms and related technologies, nations would negotiate over appropriate levels and targets of such subsidies.

The result would be a kind of "GATT for direct investment"-setting out the rules by which nations could bid for high value-added investments by global corporations. Barred would be threats to close the domestic market unless certain investments were undertaken within it, for such threats would likely degenerate into zero-sum contests. Instead, the rules would seek to define fair tactics, depending upon the characteristics of the national economy and the type of investment being sought. For example, the amount of permissible subsidy might be directly proportional to the size of the nation's work force but inversely proportional to its average skills. Thus nations with large and relatively unskilled work forces would be allowed greater leeway in bidding for global investment than nations with smaller and more highly-skilled workers.

Other subsidies would be pooled and parceled out to where they could do the most good, as the European Community has begun to do regionally. For example, nations would jointly fund basic research and development whose fruits were likely to travel almost immediately across international borders-projects such as the high-energy particle accelerator, the human genome, and the exploration of space. How such funds were apportioned, and toward what ends, would of course be a subject of negotiation.

Another example: Outward-looking economic nationalism would encourage subsidies designed to ease the transition of a work force out of older industries and technologies in which there was worldwide overcapacity. Such subsidies might take the form of severance payments, relocation assistance, extra training grants, extra unemployment insurance, regional economic aid, and funds for retooling or upgrading machinery toward higher value-added production. Since every nation benefits when overcapacity anywhere else is reduced, such subsidies might come from a common fund established by all nations. Payments could be apportioned according to how much of that particular industry's capacity lay within each nation's borders at the start.

Finally, outward-looking economic nationalism would seek to develop the capacities of the work force of the Third World -- not as a means of forestalling world communism or stabilizing Third World regimes so that global companies can safely extract raw materials and sell products within them -- but as a means of enhancing global wealth. To this end, the shift of high-volume, commodity industries to Third World nations would be welcomed, and markets in advanced economies would be open to them. The Third World's debt burden would be reduced, and new lending made available.

A Global Mixed Economy
In the aftermath of the devastation of World War Two, the United States took the lead in creating a new international economic system to guide the growth of the world economy -- a system of fixed exchange rates to minimize currency fluctuations, an International Monetary Fund to ensure liquidity, a World Bank to aggregate and direct development finance, and a GATT to ensure an open trading system. In effect, these innovations were designed to reduce the likelihood of zero-sum contests and to enhance world trade and finance directed at growth for all. By almost any standard the system was a spectacular success. The years 1945 to 1970 witnessed the most dramatic and widely shared economic growth in the history of mankind. World GNP grew from $300 billion to over $2,000 billion. Even allowing for inflation, real income tripled; world trade quadrupled.

These innovations were not the products of laissez-faire thinking. They represented bold interventions into the market. Nor were they the products of zero-sum nationalistic impulse. They worked because it was in the interest of every participating nation to make them work. Thus a marriage of positive-sum cosmopolitanism with enlightened nationalism.

My purpose in these pages has been to suggest a further step along this same path. The world economy has evolved during the past forty-five years. In particular, the transition from basic industries to advanced technologies now requires huge capital investments, yet also demands cumulative knowledge and skills that easily leak out beyond the private sector firm making such investments. In addition, national corporations are rapidly becoming global entities, lacking any special connection or responsibility to particular nations. Thus most governments are assisting their economies, not by protecting "national" firms but by improving the quality of their work forces, luring direct investment by global corporations, easing the transition out of mature industries, nurturing new technologies. If such interventions are to enhance world wealth rather than merely rearrange it, new international rules to guide such interventions must be devised, and soon. Thus the case for outward-directed economic nationalism as an alternative both to zero-sum neo-mercantilism and to laissez-faire cosmopolitanism.

But unlike the economically and politically preeminent United States at the close of World War Two, which could justify to its citizens and foreigners alike the short-term sacrifices and dislocations that new international institutions would entail, there is no longer a single world leader capable of striking the deal. Nor is there a natural private constituency for this third approach, either here or abroad.

The pressures of sudden economic change have made neo-mercantilism attractive both to organized labor, threatened by cheaper foreign labor, and to domestic businesses, threatened by the superior scale and market power of global corporations. Their champions in the United States are politicians who view the new-found economic prowess of Japan, the "four tigers" of East Asia, and the potential prowess of a united Europe, as threats to America's security and autonomy. Their remedy: protection of the domestic market (often masquerading as "voluntary restraint agreements," anti-dumping levies, countervailing duties, agreements by other nations to import certain quantities of American goods, "Buy American" provisions within federal procurement regulations, and assorted obstacles to foreign direct investment).

Meanwhile the possibilities for large windfall gains have rendered laissez-faire cosmopolitanism especially attractive to global businesses headquartered in the United States, Wall Street bankers, and economists who inhabit the upper reaches of Republican administrations. Their champions are politicians who insist that the global market is best run by the "invisible hand."

In other words, organized economic interests threatened by global competition feel that they have much to lose and little to gain from an outward-looking approach that seeks to enhance world wealth. Organized economic interests already benefiting from the blurring of national borders, on the other hand, sense that they have much to lose and little to gain from government intervention intended to spread such benefits.

The trick -- both within the United States and within other advanced economies-will be to persuade each group that outward-directed economic nationalism is the best deal they can hope to extract from the other. A new generation of leaders here and abroad will have to point out to the neo-mercantilists that they will be more imperiled by laissez-faire cosmopolitanism, and to the cosmopolitans that they will be more disrupted by neo-mercantilism, than either will be by the outward-directed alternative.

Ideally, a compromise will work to the world's advantage. All of us stand to benefit more from nationalists with cosmopolitan vision than from either cosmopolitans or nationalists lacking global perspective. But in political economics, that we all stand to gain has rarely been reason enough. Perhaps in this new era of global possibility, we will find the imagination and the will to appreciate our common interests.

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