America first, China last: Trump’s strange new order of economic nationalism

by Adam Tooze – April 12, 2019

The Globe and Mail

The U.S. President’s trade policy isn’t a coherent response to globalization in the 21st century, but a scrambled mess of ideas recycled from the 20th.

America’s turn to economic nationalism has rocked the world. U.S. President Donald Trump promised “America first.” He has delivered. Within days of taking office he cancelled the laboriously negotiated Trans-Pacific Partnership and put trade talks with the European Union on ice. He then shook up NAFTA. He bullied the South Koreans into revising the trade treaty they had agreed to with the Obama administration. He slapped tariffs on steel and aluminum, triggering retaliation from the EU and announced an investigation into the import of motor vehicles under Section 301 authority. And to cap it all, the United States launched a trade war with China. Faced with this rampage, global markets are swinging up and down as fears of a global trade war ebb and flow. Every deal, it seems, is merely the prelude to another provocation.

Facing a situation of new and profound insecurity it is natural to seek orientation from the past. If we look back over the history, it can easily seem as though periods of globalization are followed by periods of backlash. We saw something similar in the early 20th century, when the free movement of people, goods and capital that knitted the world together in the Victorian age, was replaced in the 1920s and 1930s by protectionism and nativism.

The problem with this historical comparison, illuminating though it may be, is that the past may be too simple to contrast with our current situation. Mr. Trump’s trade policy is a strange mélange. It represents not one single coherent response to globalization, but a series of reactions superimposed one on top of the other. It is as though, in its 45th President, the United States is reliving all the shocks and stresses of half a century of globalization and postindustrial economic change, in a single scrambled mess.

In its vision of the economic identity of the United States, the Trump administration seems rooted in the bygone era of the mid-20th century. Mr. Trump appeals to the white, working-class man who in the 1950s made up the core of the work force, and promises to protect them from the demands of minorities, the competition of migrants, feminists and the threat of unfair foreign competition. The actual working class of the United States is now mostly minority and female. At the same time, the Trump administration advocates an energy policy based on coal and tariffs that protect steel mills and aluminum smelters, while in the United States today, only 140,000 people are employed making steel in comparison with the 6.3 million who are employed in using it. High-tech manufacturing not primary metals is the core of U.S industry in the 21st century.

The decline of industrial employment has transformed American society. For many communities, it has been traumatic. And in very visible ways, Americans consume more and more imported and foreign-badged consumer goods. But to put two and two together and conclude that globalization killed the American working man is profoundly misleading. The vast majority of the decline in industrial labour was driven by the same powerful logic of technological change that previously transformed agriculture. It wasn’t imports of food or cotton that reduced the need for farm labour – the United States is still today one of the world’s largest commodity exporters. It was U.S.-made combined harvesters and tractors. That same basic logic also applies to factory work. This is not to say that the successive waves of Japanese, Mexican and then Chinese imports have not cost jobs in manufacturing, particularly in sectors such as textiles. But those were shocks superimposed on a declining trend and the last of those really big shocks – the “China shock” – hit the U.S. economy more than 15 years ago. Since then both Chinese wages and the exchange rate have appreciated in relative terms, restoring a good measure of U.S. competitiveness.

Mr. Trump’s rhetoric, however, admits of no such distinctions. American jobs have been robbed by unfair foreign competition, enabled by the weak leadership of his predecessors, both Republicans and Democrats alike. He first joined the protectionist camp in the late 1970s and 1980s, the era of “Japan bashing.” He then made himself into one of the most outspoken critics of NAFTA, pandering to anti-Mexican prejudice. It is only logical that he has now added China to his rogues gallery. (Canada and South Korea, countries about which it is safe to assume that Mr. Trump has few settled views, were unfortunate to have been caught in this crossfire of clichés and racial stereotypes.)

If it had been up to Mr. Trump, there is little doubt that he would have scrapped NAFTA by presidential announcement in the first 100 days of his administration. What stopped him was backlash from mainstream administration officials and a massive wave of business lobbying. Whatever impact globalization has had on working people in the United States, as far as American business is concerned, it has been a boon. Instead of repudiating NAFTA, the Trump administration was forced to renegotiate. The most significant change has been in the title. NAFTA is dead. Long live the USMCA.

If Mr. Trump’s protectionism were to find its limit in the United States-Mexico-Canada Agreement, the no less undramatic renegotiation of the U.S.-Korea Free Trade Agreement and the aluminum and steel tariffs, one would have to say that it was much ado about nothing. But that is not all. In the spring of 2018, Mr. Trump made clear his impatience. “Bring me tariffs,” he ordered and his staff have set themselves to doing so. The most ominous initiative was the Section 301 inquiry into motor vehicle imports to the United States, which puts Europe in the crosshairs.

Of all Mr. Trump’s trade obsessions, picking a fight over European car imports is perhaps the most anachronistic. It was in the 1950s that Europe began to recover its competitiveness with the United States. One of the first iconic foreign products to enter North American consumer culture was the VW Beetle. Sixty years later, Mr. Trump is still not reconciled to Mercedes and BMWs on Park Avenue even if many of them are made in Alabama and South Carolina. BMW’s plant in Spartanburg, S.C., is not only the largest of the German firm’s plants worldwide, it is also the largest exporter of vehicles from the United States – many of them to China.

The United States’ homegrown auto industry is not what it once was. GM and Chrysler only survived 2008 due to funds diverted from the bank bailout. But unlike steel, aluminum and coal, the auto industry is a genuinely significant employer that depends for its competitiveness on managing complex transnational value chains. A transatlantic bust up over cars would be a reductio ad absurdum of Mr. Trump’s desire for a trade war at any price. It is clear that the industry’s future lies in e-mobility, which will require gigantic investments. If the United States, Europe and Japan are to maintain their lead in the industry, they will need to co-operate. Sanctions under Article 301 would cause vast disruption. According to inside reports, the President’s own team is deeply divided, with even the normally hawkish U.S. Trade Representative Robert Lighthizer urging caution.

One thing that is clear is that the future of the auto industry will be decided in Asia. China is already the largest car market in the world. GM sells more cars there than it does in the United States. Meanwhile, China itself has become a manufacturing powerhouse. As recently as the early 1990s, total trade between the United States and China ran to little more than US$20-billion. By 2018, it had surged to US$660-billion of which US$520-billion were exports from China to the United States.

From the 1970s, as the United States fostered its alliance with China against the former Soviet Union, U.S. policy was to encourage Chinese integration with the world economy. Although the Communist regime showed no sign of loosening its grip, through the beginning of the 21st century, Washington continued to hold to the liberal vision that trade would help to bring the rule of law, and ultimately democracy, to China. That, at least, was the political background music. The energy in the relationship was provided by self-interested business groups from the West – banks and manufacturers, European as well as American – who saw in China a spectacular opportunity for growth. Whilst jobs moved to East Asia, the benefits to shareholders were enormous. Meanwhile, the West’s consumers benefited from an abundance of cheap consumer goods, above all clothing and consumer durables.

The pro-China coalition in the United States was never monolithic. Concerned voices in Congress made repeated efforts to bring legislation to curb Chinese imports and to challenge Beijing’s currency manipulation. In the early 2000s, as the trade deficit swelled in line with the federal government budget deficit, there was much anxiety about the scale of Chinese purchases of American Treasuries. In George W. Bush’s administration it was the role of Hank Paulson, former Goldman Sachs CEO and China-hand, as Treasury Secretary to contain those pressures. And with China’s co-operation, he did so, even navigating the financial crisis of 2008 without a Chinese sell-off. The first real sign of a shift in American policy toward China came in 2011, with the “pivot to Asia” launched by Barack Obama and Hillary Clinton as secretary of state. But that proved to be a damp squib. The true novelty of policy under the Trump administration, is its relentless and multifaceted focus on China.

Mr. Trump’s views on China are no more sophisticated than his views on any other aspect of trade policy. He wants to be seen as strong. He wants to confront the Chinese and then he wants to cut a deal. But the President’s position is stiffened by some of his closest advisers. Whilst Peter Navarro, as assistant to the President for economic policy, is an exponent of cranky views about China’s secret war against the United States. Mr. Lighthizer is cut from a different cloth. He is a career trade hawk. As a young Republican lawyer, he was one of the key architects of the aggressive policy pursued by the Reagan administration towards Japan in the 1980s. Since then Mr. Lighthizer has become one of the United States’ most aggressive trade lawyers and has developed a fundamental critique of the adequacy of the World Trade Organization as a framework for dealing with the challenge of China’s authoritarian state capitalism.

As a champion of a radical policy toward China, Mr. Lighthizer has gathered some unlikely allies, including some among the American labour movement and left wing critics of globalization. More importantly, under Mr. Trump, Mr. Lighthizer’s aggressive structural approach is squarely aligned with the security policy agenda of the intelligence community and the Pentagon. In December, 2017, Mr. Trump’s national security strategy defined competition with China in the Indo-Pacific as the central challenge facing the United States. This breaks decisively with the vision of incorporating China as a responsible stakeholder by way of multilateral institutions and deepening trade.

It is this identification of China both as the main geopolitical challenge to the U.S. and as the main target of aggressive trade policy that is historically unprecedented. Europe, Japan and the NAFTA partners may be economic competitors. But they are also subordinate partners in the U.S. alliance system. China is not. Its Communist Party may no longer espouse world revolution, but it represents the ambition of nationalist sovereignty and self-determination that first erupted in China 100 years ago in May, 1919. And as China’s economic weight grows, so do its ambitions.

The risk is that, confronted with this genuinely novel situation, the American leadership will fall back into another anachronistic history. The history that the American intelligence services and national security apparatus are tempted to replay is the narrative of their victory in the Cold War. Like the Soviets in the 1980s, they believe that China may be vulnerable to pressure. The willingness of Beijing to come to the bargaining table over trade is seen as a vindication of the hard-line position. The United States must continue to probe both in economic and geopolitical terms.

Carrying this off will clearly take nerve and may involve some risk. But the advocates of Lighthizerism insist that it is not unreasonable to require Beijing to play fair, to respect intellectual property and abandon ruinous subsidies for industries with huge overcapacity. This may be true. But one can just as well turn the argument on its head. Much as Americans may hope for a fairer trading system with China, none of the United States’ serious domestic problems can actually be solved through a deal with China. Meanwhile, engaging in brinksmanship on trade only tends to endorse and empower a security policy discourse in which China is an inescapable rival that must be contained or brought to heel. It is a zero-sum conception that forecloses options for both sides. Above all it will make it far more difficult to find co-operative solutions on issues such as climate change that are truly decisive for the next generation. Given the timeline on global action against climate change, we cannot afford decades of new cold war. And perhaps salvation may arrive from an unlikely direction.

The worry among the supporters of the hard-line position is that Mr. Lighthizer and his ilk will be undercut from within. Mr. Trump is not a strategist. Despite his bluster, he plays for small stakes. Rather than push home a true shift in the strategic balance, the President will settle for a short-term stitch up with Beijing that allows him to present himself as the dealmaker-in-chief in time for the 2020 elections. In so doing he will snatch triviality from the jaws of what might be a truly consequential strategic shift. Those of us who do not share the agenda of the new hawks in Washington may count ourselves lucky if he does.

Originally posted on The Globe and Mail.