This article appears in the Spring 2018 issue of The American Prospect magazine. Subscribe here.
When it comes to grasping the dynamics of globalization and the backlash against it, the media depiction of Donald Trump’s tariff wars revealed that the trade mainstream is as crackpot in its own way as Trump is—and that Trump is the beneficiary of their myopia. Let me explain.
For three decades, the presidential wing of both U.S. parties, cheered on by orthodox economists and financial elites, has sponsored a brand of globalization that serves corporations and bankers but ignores the impact on regular people. This disparate impact is invariably swept aside with the usual platitudes about free trade being efficient and protectionism being narrow-minded and economically irrational. We were treated to those homilies, ad nauseam, after Trump imposed tariffs on steel and aluminum.
What’s forgotten is the fact that there is more than one form of globalism. In contrast to today’s brand, the global economic system devised at Bretton Woods in 1944 was a radical break with laissez-faire. The founders of the postwar system had vivid memories of the bitter fruits of rampant capitalism—depression, fascism, and war. They wanted to build a stable and egalitarian form of mixed economy, so that this history would never be repeated. But tragically, it is being repeated today, as global markets run riot and seed neo-fascist backlash.
It was no accident that the chief architect of Bretton Woods was John Maynard Keynes. The global architecture invented at Bretton Woods was intended to complement and bolster high-growth, full-employment economies at home. Private financial speculation was contained and reconstruction funds were substantially public. For three decades, the West combined high rates of growth with increasing equality and security for ordinary citizens.
But a major shift in both power and dominant ideology has turned the global marketplace back into something more like the pre-Roosevelt system. “Trade” deals have been deployed to dismantle managed capitalism. Working people have not only suffered; they have lost confidence in globalist elites—and worse, in government itself and even in democracy.
This is a system-wide pathology. That’s why the backlash, and the embrace of ultra-nationalist strongmen, looks so similar throughout the West. The more that bien pensants double down on globalization, the more defections they invite and the more leaders like Trump we get.
THIS HISTORY IS the subject of my recent book, Can Democracy Survive Global Capitalism? As I observe, the postwar social contract was unique in the history of capitalism—a combination of lucky accidents and power shifts. These included the disgrace of laissez-faire and the Republican Party in the Great Crash; the radicalism of Franklin Roosevelt; the enhanced prestige of government in surmounting depression and winning World War II (in a country normally suspicious of the state); the legacy of wartime planning; the enhanced power of organized labor and the regulatory repression of organized capital; the role of the dollar in a fixed–exchange rate system; and the threat of Bolshevism, which made America urgently supportive of European reconstruction using substantial state-led planning.
The postwar experience demonstrated that a mixed economy can be more socially just and more economically efficient than a laissez-faire one. We assumed that this revolution in economic theory and policy was permanent and the new normal. But we overlooked the latent power of capital in an economy that remains fundamentally capitalist. When bankers and corporations regained their usual political power in the aftermath of the economic turmoil of the 1970s, they were able to overturn much of managed capitalism.
The new globalism—the use of “trade” deals to undermine domestic regulation and worker protections—became a key instrument. Policy elites were oblivious to the slowly building political consequences, which culminated in the election of Trump and his counterparts. Marxists used to assume that the excesses of capitalism would unite workers of the world. History shows that the result is more typically an embrace of fascism.
In short, the entire paradigm of “free trade” as optimum is wrong. No sane progressive has ever pursued the freest possible market as an end in itself.
The diatribes against “protectionism” are oblivious to economic history in another respect. Every major industrial power, including 19th-century America, has used flagrant departures from laissez-faire—protection—to develop its industrial base. These include subsidies, public investments, preferential procurement, and of course tariffs. The idea that a tariff is inefficient relies on a static snapshot, rather than an appreciation of the dynamic value of gaining industrial proficiency over time.
If Japan had followed the advice of free-traders in the 1950s, and exported products in which it then had an advantage (such as cheap toys) while purchasing industrial goods that it didn’t produce from the United States, Japan never would have developed its prodigious success in cars, steel, semiconductors, machine tools, and the entire range of advanced producer and consumer goods. All of these required protection. Japan used a system of cartels, subsidy of exports, restriction of imports and other devices to make it just about impossible for major U.S. producers to sell in Japan. But when Congressman Dick Gephardt complained about Japan’s protected economy, he was vilified as the protectionist.
What’s true of Japan (and to varying degrees Brazil, Korea, France, Germany, the United States, and even Britain) is true, in spades, of China. Beijing uses a system of state capitalism, also known as neo-mercantilism, that defies everything Western elites hold dear about the superiority of free markets. The Chinese government, working with friendly industrialists, provides cheap capital. It protects against imports, and subsidizes exports. Western rivals are offered partnerships with Chinese counterparts, but on coercive terms that defy normal commerce.
It was no accident that the chief architect of Bretton Woods was John Maynard Keynes. Here, Keynes and the Harry Dexter White, the International Monetary Fund's first director, speak at the inaugural meeting of the IMF's Board of Governors in 1946.
Western companies get subsidized factories and cheap, competent, repressed Chinese labor. But the Western partner is often prohibited from selling in the domestic Chinese market, and is restricted to producing for export. China openly coerces or covertly steals sensitive trade secrets from its partners.
With this system, China has gained commercial leadership in industry after industry, often using subsidies to underprice Western rivals and put them out of business. Just to be sure of its export success, China for prolonged periods intervened in money markets to keep its currency undervalued.
As a matter of economics, such a system is not supposed to work. For one thing, it flagrantly violates market pricing mechanisms. For another, by relying on deals between a non-democratic Chinese state and Chinese entrepreneurs, the system invites corruption. But whatever its impossibility in theory, the system works in practice, well enough to have propelled China to world economic leadership.
Unlike the Soviets, whose system of state enterprise produced shoddy goods in short supply, or the Argentines, whose efforts at protection resulted in non-competitive products, the Chinese got mercantilism right. Indeed, in just two decades, China has become the dominant producer not just in catch-up industries but in pioneering new technologies. It will soon be the leader in electric vehicles and 5G internet, and it runs a chronic trade surplus with the rest of the world.
China rapidly turned its economic gains into geopolitical strength, becoming the dominant economic partner with much of the developing world. As an autocracy, it has begun flexing its economic muscles geopolitically.
THE RISE OF CHINA has created a crisis of ideology and policy for the American governing elite. The abject failure of America’s China policy was a blend of ideological blinders and conflicts of interest. Political leaders, seconded by orthodox economists, convinced themselves that by allowing China into the global system via the WTO, they would move China in the direction of liberal free-market democracy. Key people on Wall Street, notably inhabitants of the revolving door such as Robert Rubin, may have had ideological qualms or geopolitical anxieties about the rise of still-communist China. But their firms were making a fortune brokering the deals. In the academy, to be an apologist for Beijing was to get nice lecture fees and generous support for research centers.
The claims of leading figures of that era are embarrassments. George W. Bush could insist: “Economic freedom creates habits of liberty. And habits of liberty create expectations of democracy. … Trade freely with China, and time is on our side.” Tom Friedman flatly predicted, in his book The Lexus and the Olive Tree: “China’s going to have a free press. Globalization will drive it.”
The rise of China has created a crisis of ideology and policy for the American governing elite. Here, Chinese President Xi Jinping raises a glass for a toast during a state dinner with President Donald Trump at the Great Hall of the People in Beijing.
None of these worthies seemed to notice that China’s state-led, semi-market economy was practicing something other than free trade. But it was convenient to believe that it was, and that challenges to China’s protection were somehow themselves protectionist.
In the March/April issue of Foreign Affairs, flagship of the foreign policy establishment, two notables very belatedly admit that people such as themselves got China totally wrong. Kurt Campbell, former assistant secretary of state for East Asian and Pacific affairs and Ely Ratner, a senior China expert, both serving under Barack Obama, write:
Diplomatic and commercial engagement have not brought political and economic openness. Neither U.S. military power nor regional balancing has stopped Beijing from seeking to displace core components of the U.S.-led system. And the liberal international order has failed to lure or bind China as powerfully as expected.
Better late than never, I suppose, but massive damage has already been done. And if illusions about China are belatedly being shed, illusions about “free trade” are not.
Those knowledgeable about China who took a dissenting view were a tiny group. Writing in the Prospect in 2007, James Mann, former Beijing correspondent for the Los Angeles Times, warned:
The fundamental problem with this strategy of integration is that it raises the obvious question: Who's integrating whom? Is the United States now integrating China into a new international economic order based upon free-market principles? Or is China now integrating the United States into a new international political order where democracy is no longer favored, and where a government's continuing eradication of all organized political opposition is accepted or ignored?
But people who held such views were simply not admitted to the foreign policy establishment. The U.S.-China Economic and Security Review Commission, a body created by an act of Congress in 2000, has assembled encyclopedic evidence on the details of China’s state capitalism and the consequences for U.S. industry. Its work has been widely ignored.
The failure to address China’s mercantilism was only part of the myopia surrounding the brand of globalism constructed by and for economic elites. There was a fundamental disconnect between the knee-jerk support for deregulated international commerce and the acceptance by even mainstream economists that markets are far from perfectly efficient. Labor markets need to be regulated to prevent exploitation of workers; capital markets need to be regulated to prevent financial fraud and periodic depressions; the environment needs to be regulated to prevent industry from treating it as a free sink; and government needs public investment to bridge over shortfalls of demand and to develop regional economies. So if markets are far from perfect at home, why do they suddenly snap back to perfect efficiency just because commerce crosses borders? Obviously, they don’t.
Elites of both parties won the policy debates on trade, but lost the people. By 2016, millions of working people whose families had once reliably supported Democrats had defected to the Tea Party and then to Trump. Across the Atlantic, their counterparts were deserting social democrats to support far-right nationalist parties. Conflicts over refugees and over identity compounded the backlash, but it was basically economic.
There was—and is—a different way of conducting trade. The original International Trade Organization proposed at Bretton Woods called for a regime that would promote commerce but also defend enforceable labor standards. A treaty creating the ITO was negotiated in 1947, but never ratified. We need to revisit that approach. A tax on financial transactions would slow down the global speculative financial casino. A much tougher stance on China would make it clear that if China does not play by market rules, it cannot expect free-market entry of its products. A different set of trade norms would leave plenty of room for national industrial policies. The overall goal should be to reclaim space for nations to protect social standards and restore a balanced social contract.
President Donald Trump meets with members of Congress to discuss trade issues in the Cabinet Room of the White House
This is economic nationalism of a kind, but the sort of benign nationalism that prevailed during the postwar boom, and a form of legitimate patriotism reminiscent of the solidarity of World War II. It has little in common with Trump’s version of nationalism. Many Democrats in Congress have tried to pursue this approach, but they get shouted down by the presidential wing of the party and ridiculed by the press.
THE BIPARTISAN EMBRACE of elite globalism, rejected on a gut level by tens of millions of citizens and contradicted by economic history, created a vacuum that was exploited by Donald Trump. The trouble is that Trump may be good at channeling the discontent, but he is a failure and a faker at providing real remedies.
The recent dust-up over tariffs on steel and aluminum perfectly illustrates what Trump gets right and what he gets wrong, and how the trade establishment misses the point. When Trump ordered the tariffs, the response was an almost universal chorus of jeers. The man, obviously, was ignorant of basic economics. The protection of a relatively small number of domestic jobs producing steel and aluminum would be dwarfed by the loss of far more jobs in industries that make products that use steel and aluminum—everything from cars to beer cans. Trump was setting off a trade war. Trump, impulsively, had announced these tariffs to the surprise of his closest advisers.
Most of this story was wrong. In fact, a voluminous technical report in January documented the worldwide glut in steel and aluminum, the existential threat to these two key domestic industries, and identified China as the prime culprit for its massive state-subsidized overproduction. U.S. steelmakers produce about 75 million metric tons a year. China’s overcapacity, which has grown from virtually nothing in two decades, is more than 300 million tons.
Nor did Trump order these tariffs impulsively or abruptly. His commerce secretary, Wilbur Ross, presented him with a decision memo offering several options, including more narrowly targeted actions. Trump, being Trump, simply went with the dumbest alternative—tariffs against everyone.
The likelihood of a “trade war,” the subject of much press hysteria, is also vanishingly improbable. By the second week in March, Robert Lighthizer, Trump’s top trade official, was already in Brussels, meeting with his European and Japanese counterparts. Lighthizer is a serious, well-informed trade expert. He served as one of Ronald Reagan’s top trade officials, in the last administration that appreciated the mercantilism of other nations as a potential national security threat. Lighthizer then went on to be a respected trade lawyer in private practice, representing victims of other nations’ mercantilism.
The recent history of tariffs is not trade wars but bargaining chips. We can expect that negotiations in coming weeks will walk back the risk of a general tariff war, and if Trump listens to his trade advisers, the target of tariffs and other retaliatory threats will shift to China. What’s needed is a general strategy in which the West will not tolerate China’s state capitalism as a tactic to dominate world production of key industries, even less so when economic mercantilism is weaponized as part of a geopolitical grand design.
In his initial tariff orders, Trump’s own ineptitude cut China far too much slack. But even Trump may stumble his way toward noticing the real problem. In March, the little-known Committee on Foreign Investment in the United States (CFIUS) issued a report recommending that the government block, on national security grounds, a proposed hostile takeover of chip-maker Qualcomm by Broadcom, a Singapore-based company close to the government of China. Trump duly vetoed the takeover.
Trump’s version of economic nationalism is a blend of mistaken tactics, oversimplified nostrums, and remedies that will not rebuild American industry. Occasionally, as in the CFIUS order, Trump gets something right. Even his tariffs, though misdirected, blew open the door to what should be a much broader reappraisal of American geo-economic theories, goals, and policies. If the mainstream does not take this challenge seriously, and especially if Democrats fail to define a constructive form of economic nationalism in service of reclaiming managed capitalism, we will be left with Trump’s version—one that is uglier, more demagogic and less effective—but the only one on offer to a frustrated populace.