Economic Nationalism vs. Economic Globalism: Who is right?

With the events this past week in Charlottesville, there certainly is no shortage of conversation regarding the Nationalist movement. If you were to turn on the news right now, there is a high chance that some pundit would be discussing these matters through the lens of race relations in the USA. This is an important discussion to have, but what often gets overlooked is the catalyst that has energized this movement. You see, nobody could be elected off of a purely “White Nationalist” platform. What you see today is a result of an “Economic Nationalism” that has been adopted by those who adhere to the White Nationalist ideology. I do not believe that the president is more racially biased than any other 70 year old, and I do not believe that he ran for President with the intention of suppressing minorities. Rather, I believe that he saw a portion of his base was made up of these individuals, and he has tried his best not to alienate them for political reasons. The current administration’s “America First” slogan represents their populist, nationalist economic platform. An unfortunate side effect of this nationalist economic agenda is that it has given ways to uglier, more malicious aspects of the nationalist movement- and while the President should have been able to predict this, I do not believe that this was his intention. Anyway, as a result of this you’ve witnessed the unintentional marrying of Economic and White Nationalism. This piece will not discuss race, instead, it will discuss the deep flaws of a nationalist worldview from a strictly economic perspective. As we will see, the “America First” policies that are being pushed by the current administration are deeply damaging to our economy and our global standing.

The America First trade policy claims that the trade deficits our country holds with other countries are unfair and harmful. In order to remedy this issue, the administration has begun laying out a vision that would increase tariffs on goods such as steel, lumber, and other manufacturing goods. Doing so would, in their calculation: even out the trade deficit with these countries, make manufacturers in the USA more competitive since imports would become too expensive, and lead to greater American prosperity. This seems straightforward enough, however the only issue with this stance is that it flies directly in the face of both history as well as factual evidence.

This leads us to the big question: should we pursue globalist or nationalist economic policy?  In order to answer this question properly, the following piece will be broken down into two segments. Segment one will focus on how we got to the global trade system we are in today, and segment two will discuss the problems with the current administration’s stance on trade.

 

Segment 1: How We Got Here

One of the centerpieces of this discussion will revolve around trade and tariffs, so in order to get started, we should first get a brief history on global trade and tariffs:

Tariffs are a tax imposed on certain imports and exports, for example a tariff on Chinese steel imports would levy a tax on steel goods from China, making them more expensive to US consumers. Because of this, consumers would now opt to purchase American steel, which because of the new tariffs, is cheaper than Chinese steel. This is the underlying logic behind tariffs, and the logic itself is actually sound. However, one can never use one line of thinking when making global economic policy decisions, and it is dangerous not to consider the myriad of other factors.

Now that we all have the same understanding of tariffs, we can get into a more historical discussion, how fun! To begin, tariffs are not a fundamentally bad policy option, in fact, tariffs are actually critical for developing economies. To understand this fact, let’s get into some history.

In the Civil War area, the United States relied heavily on tariffs for two main reasons:

  1. Tariffs, not income tax, were the predominant source of tax revenue.
  2. Tariffs were needed to protect the nascent American manufacturing industry that would have been entirely shut out of business by more developed European countries like Great Britain and France if trade was completely unrestricted.

For a while, these policies were both necessary and properly executed. This is because when a country’s economy is still developing, they need to be protected from the world’s more developed economies that can offer the same goods for far less.  The only problem with that now is the fact that we are no longer in the Civil War era and the United State’s economy has fully developed since then.

Now, when the United States manufacturing industry matured and economized, we began to steer away from protectionism, as all countries should when their economies become developed. This trend started in 1913, when President Woodrow Wilson made tariff reduction a massive part of his economic platform. This policy of low tariffs and more trade became a staple of the US’ economic platform for about 20 years. With reduced tariffs, the price of goods fell for consumers, giving them more disposable income and leading to the “Roaring Twenties”, a time of great prosperity in the US. However, this prosperity was short lived, and it all came crashing down during the Great Depression.

So what happened? Why did this globalist stance end during the Great Depression, and what were the effects?

Well, during the Great Depression it is no secret that just about every business on earth was hurting – bigly. So during the height of the depression, the United States made an effort to help domestic businesses by signing into law the Smoot- Hawley Tariff Act of 1930. This tariff act brought the United States back into the era of high tariffs and protectionism, making foreign businesses completely uncompetitive in the US. Remember the example about Chinese steel we used earlier? That was pretty much the logic behind signing this act. In other words, by limiting foreign competition, we thought that we could pull ourselves from the Great Depression.

However, this law actually had the exact opposite effect, prolonging the depression and leading to even tougher times for American businesses. In fact, once we signed this bill into law, Canada, Great Britain, Germany and France all enacted similar laws against us, and this had the effect of making goods more expensive and less available for everybody. So in the end, everybody grew even poorer after this legislation was enacted. This strife lasted through the 1930s and into the 1940’s, until the end of World War II. It was after the war concluded that the modern day global system was established, and that is how we got to where we are today.

 

Segment 2: Discussing the Trump stance on trade

After World War II ended, the General Agreement on Tariff and Taxes (GATT), which later became the World Trade Organization (WTO) was formed. This organization pulled all capitalist economies together and gave them a platform to negotiate trade deals with each other. The idea was that countries could negotiate mutually beneficial trade deals with one another, and that is exactly what happened. Because of these new agreements, we wound up with the current global trade system we enjoy today.

The following question is probably the most important one of this entire piece: How did we organize these agreements?

In short, the capitalist world agreed to enter a new phase of lower tariffs and international trade. The thought behind this was that the more countries relied upon each other, the less likely they were to engage in war due to the overwhelmingly negative impact it would have on their economy. This approach has worked exactly as planned, just look at France and Germany, who were constant enemies up until the end of WWII. By integrating their economies and becoming dependent on each other, they have gone from enemies to staunch allies. But in order to accomplish outcomes like the one seen in France and Germany, the world had to come to a consensus on how that idea would work out.

The result was an agreement that smaller, less developed countries like Uganda would be able to export goods to other nations with very little or no tariffs. Conversely, developed economies like the US’ would have larger tariffs slapped on their imports to small countries. This allowed each country to work out bilateral trade agreements on a level playing field, increasing economic interactions with one another. Over time, it was agreed that these tariffs would eventually even out, and once those countries became fully developed, they would gradually stop imposing tariffs.

So when the current administration talks about our “crippling” trade deficits, you now understand where they come from. Their argument is that these trade policies are crippling US growth. However, a look at the following graph tells a different story.

Screen Shot 2017-08-15 at 10.06.24 AM.png

 

In the graph above, the black line represents real US GDP growth per capita growth before the end of WWII, before the US economy had begun moving towards globalization. Conversely, the green line represents what happened after we began globalizing. The two vertical linesyou see represent the endings of a major military conflict (WWII and the Vietnamese War) that resulted in an upward kink in the growth rate. These are important, as they demonstrate that our economy grows significantly faster during times of peace and trade. Furthermore, if you’re up to date on your history, you’ll also notice how this rapid growth represented by the green line took place after the United States became an economy driven by innovation, where it had previously been driven by manufacturing.

But the fact that the current administration wants to revert back to a manufacturing economy is not even the most troubling aspect of their trade policy. What is actually concerning is the way it diminishes US global influence throughout the world. This is what I’ve actually wanted to get at this whole time.

It is only a matter of time before China is able to overtake the United States as the world’s largest economy, and most economists estimate that this will happen by 2030. This is nearly unavoidable, since China has three times the population as the United States and therefore a much higher ability to create economic output. So because of this, it is more important now than it has ever been to engage in free trade, because in the future we will only be as strong as our allies. The more countries we can create economic ties with, the more influence we will have with them. Cutting down on trade with other nations does not put “America First”, but rather, it seats America firmly behind China and the European Union.

If we were to cut down on trade with the European Union, they wouldn’t fuss and pout. Rather, they would simply look elsewhere to replace the goods that we were providing them with. How does this make America stronger?

Trade is a complicated subject, and trade deals are often times used more as instruments of geopolitics rather than economics. This is a point that the current administration is shockingly ignorant of. For example, look at the decision to pull out of the TPP, a deal between the United States and 11 Asian nations (China not being one of them), that would have made it easier for them to import goods to the USA.

Now, the United States did not stand to gain very much from this deal from an economic standpoint. Sure, the prices of some goods may have dropped, but some domestic industries would have been mildly impacted as well. However, this deal was never about economics, it was about strategy, and the fact that this administration failed to understand this is more “crippling” than any other trade deal we currently have. You see, if the these 11 Asian nations were able to further expand their presence the US market place, their economies would have become larger and more dependent on the US. This would have given us a significant leg up on China in the quest for global influence. This is because when push comes to shove, countries will pick sides based on economic implications. If we had stronger trade ties with these countries, they would be more receptive to our input on Asian affairs- making it easier to challenge China and preserve our interests in the region. However, now that we’ve left this agreement, we’ve allowed China to step in and exert their influence over those countries. This is a trend we are also seeing in Africa, where China is strengthening economic ties with many developing economies, positioning themselves ahead of the USA and hence mitigating our ability to defend our interests there. Once again, how has this made our country any stronger?

In order to explain their logic for curtailing US trade with the rest of the world, the current administration has claimed that our trade agreements have caused massive amounts of unemployment and have negatively impacted our economy. Don’t believe me? Take a look at these tweets (read from bottom up).

Screen Shot 2017-08-15 at 10.06.37 AM

Need more confirmation? Look no further.

Screen Shot 2017-08-15 at 10.06.45 AM.png

It’s odd though, because we all know that the current administration has yet to pass any sort of tax or business reform. That’s fine though, the administration is still young, so they shouldn’t be criticized for any lack of legislative accomplishments. However, the current economic system in the US is still the result of policy enacted by the previous administration, which makes it especially weird that the current president would tweet this:

Screen Shot 2017-08-15 at 10.07.08 AM.png

“Highest stock market EVER”

“Best economic numbers in years”

“unemployment lowest in 17 years”

Which one is it? Are our trade deals “very bad for the US”, or are they leading to “the best economic number in years”? It appears that even the president agrees with globalists on this one, even if he doesn’t know it yet.

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