Losing industries to China was not an “unintended consequence” of liberal trade and financial policies; it was very often the goal. It required an assumption that middle-class American families would be better off with cheaper imported goods and better financing terms on consumer debt. It required the assumption that the American economy would be better off with financial services as its comparative advantage. The reason these assumptions are wrong is not because the changes they brought weren’t managed properly, or not pursued consistently enough, but because the underlying belief about what makes for a good society is not true.
Re-read that paragraph and substitute for China “Uber” or “Walmart” or “the Internet.”
And when you read about “financing terms” and “financial services” think about what sector is running up debt at an insane pace.
As you can tell, reading the interview got my libertarian hackles up. In my view, Washington does more damage to the American economy than China, by far.
And this perhaps is the key issue that separates classical liberals and libertarians from other philosophies of political economy. Adam Smith didn’t just promote free trade, he promoted unilateral free trade for nations in an unequal position of economic power.
All the Asian Tigers and now China took a path of authoritarian protectionism. As they become economic powerhouses, the path dependencies resulting from this course may prove to be the greatest obstacle in sustaining future flourishing.
In reality, I find the Japan Inc. economic slowdown since 1990 to be a lot more interesting than the relatively sudden collapse of the Soviet Union in early 1990s. In terms of the Rubio quote, from 1978 – 1995 you could replace Japan with China and still sound the same. (And look up any Ross Perot speech from 1992.) And in fact Japan Inc. 1980s probably had a lot more effective than China manufacturing boom because they did out-compete the US. However, since 1990 stock market crash we have had low growth for a variety of reasons.
1) My take is the Post WW2 economic boom end in 1973 with the Oil Embargo, The Black Swan Event, but it was Japan Inc. that delivered the biggest blow to US manufacturing middle class union wages and benefits. The reality was Japan manufacturing methods and quality were many better than the US. If you don’t believe me, when the US needed smaller cars with higher MPG, the Corolla and Civic were quality small cars and the domestics were releasing the notorious lemons ever like the Gremlin and Pinto.
2) Arnold wants local institutions to play a role in solving local community problems and wonders why they have lost impact compared to Post WW2 boom. Why? This decline of local factory communities started in late 70s when the factories shut down due to workers being PSST. The boomers from 1970s and 1980s had to uproot and move which broke some of their local institution trust that younger generations never learned to trust them. (And Americans during 1980s were moving across state lines at highest rates in history.)
3) (I think who trusted and built the local institutions were the Depression & WW1 generations and these institutions after 1960 they were already having trouble getting new members. I am thinking local fraternal groups and I believe Silent Generation started moving away from them.)
As always, Collin, I love the historical context you bring to the conversation. I too see Japan Inc and Japanese Stagnation as infinitely interesting case studies but I think I see them fitting perfectly with my world view while you see these events as acting through different levers.
I think about Innovation and Growth a bit differently. If you do a search for “Wikipedia Dominion Tire Plant” (avoiding multi-link moderation limbo) you will find the following summary:
The story of this plant is a long intertwined history of labour unions, corporate structure, cities, and nation-states (Canada, UK, U.S.). This plant has been “closed” a number of times with the laments of government officials and union leaders echoed in the Canadian press each time (search “Kitchener tire plant closing”). Yet it remains the “largest independent rubber mixing plant in North America” and a good stock for a Canadians to hold in their retirement portfolio since its high dividend payouts work well for Fixed Income needs. Dividend vs Growth stocks are also fantastic examples of where a company sits in their Gaussian Growth curve. The “Dominion Tire” => Uniroyal rebranding phase represents the high-growth and high-tech stage of the plant that served the U.K. during The Great War and the U.K./U.S. during the even greater war that followed and the even greater U.S. growth that occurred post WWII (Uniroyal’s main market).
Japanese cars and tires had a small role to play throughout this history and, more recently, the South Korean tire industry did a magnificent job of stealing Japan Inc’s customer base. Ultimately, North American Uniroyal/BFGoodrich/Michelin plants are all about the unions rather than the competition. The unions doubled down on previous gains that were ultimately unsustainable on the global stage. Yet the jobs are still there.
This is not a diatribe against unions, this is a diatribe against mismatched expectations. Intel nearly died at the hands of Japan Inc as it decimated Intel’s cash cow, memory chips. Andy Grove tells the story of how the executives pained over an obvious decision to pivot away from memory chips and into microchips (CPU integrated circuits). Japan Inc failed to see this innovation as important since it was too early in its Gaussian Growth curve. Intel made the same mistake with power efficient CPUs, ironically at a time when they owned the largest ARM manufacturing plants (StrongARM, plants they were forced to buy from DEC as part of a legal settlement) and had the experience of supplying the parts for RIM Inter@ctive pagers (i.e. early Blackberrys). Japan’s stagnation is an example of faith in the “Ponzi Scheme” of growth in the face of demographic evidence that a large part of this growth is ending. If Japanese economists were smart enough to separate population growth from innovation growth the fiscal dilemma could have been averted. Most of the modern affluent world is making the same mistake.
Regarding unilateral free trade, do you oppose economic sanctions?
It seems that often even the most vocal free trade advocates support economic sanctions, which is the opposite of free trade. Then, it’s not simply that free trade is always good, but free trade is generally good unless there is some overriding foreign policy concern.
It seems likely to me, that particularly around China and trade, there is a much more complicated foreign policy dimension, than simple textbook economics. Would you agree with that?
Golden Rule + Positive Sum Analysis
As long as people or nation-states follow the Golden Rule then there should never be a need for war or economic sanctions. The question is what to do with people and nation-states that violate the Golden Rule. In the face of violations I think an imperfect Positive Sum Analysis is required on a case by case basis. Even calling it Positive Sum may be overly optimistic as the best you can probably hope for is an estimate of the least Negative Sum course of action.
The troubling Chinese international policies, for me, involve the insistence that Taiwan be treated as anything but an independent nation-state (and vice versa), its troubling interference with silicon and telecommunications equipment (but less troubling than the U.S.’s history including the NSA capturing Angela Merkel’s cell phone conversations), and its zero-sum view on the policing of free shipping lanes.
The only case for reciprocal tariffs without Golden Rule violations is the case when it is highly likely that the action will result in long term reciprocal free trade.
That’s one heck of a disclaimer. Clearly, nation states like China do not “follow the Golden Rule”, which makes policy related to China much messier and more complex than simple textbook economic theory.
We have to judge politicians and living political administrations based on the reality that they exist in. It’s unfair to make such a giant conditional disclaimer and proceed to cast judgement as if we lived in some unrealistic hypothetical scenario.
The Golden Rule between independent sovereign nation-states includes allowing them to make horrendous Golden Rule violations internally; it is the external violations made against other nation-states that I’m focused on in this discussion. Making a case for R2P (Responsibility to Protect) is a separate discussion as is the efficacy of intervening/sanctioning in cases such as Tibet and the Crimea.
I think it is very hard to make a case that China has violated the Golden Rule with respect to the United States or its close allies, or vice versa. The Golden Rule doesn’t mean following identical policy it means allowing others the same leeway to make decisions as you expect of others.
No, it’s not hard. That’s really exactly the argument that Tyler Cowen and many other free trade pundits make in supporting or not opposing trade sanctions against China.
China has violated the Golden Rule in actions of territorial encroachment towards Taiwan and the South China Sea, and also with regards to Huawei.
Niko, Taiwan is a war of words played out in the U.N. General Assembly. Words used to influence the political policies of sovereign states are not a Golden Rule violation. Greece is not violating the Golden Rule with all its verbal rage about the name “Macedonia”. The U.S. has long assumed the role of defender of Taiwan against external military aggression. Regardless of the original logic, the current situation is what it is and the Taiwanese and the Chinese should start acting like adults.
The South China Sea “encroachments” are the geopolitical echoes of Sea Powers. Or perhaps the cosplay of geopolitical actors as I’m assuming the impact on world events will be negligible unless egos get ruffled.
Egos are the only important factor at play. Cowen’s article is an opinion piece about a battle between overinflated egos who only see victory in the humiliation in their alter-ego. Thus, the U.S. has won “credibility”. Oh brother.
You are taking a contrarian view relative to most pundits I read. You seem to suggest that China’s actions regarding the South China Sea and Taiwan are very minor… I don’t find that convincing, but I honestly don’t know much about those issues myself.
I can’t speak for RAD but personally I think economic sanctions are on average worse than useless (something I think is empirically well evidenced). If they affect the behavior of target governments, it’s usually in a way that galvanizes them.
Until I see evidence contrary, you can speak for me anytime Mark Z.
The Asian models appear to work better than the US model.
If what the US has done in the last 40 years has worked, why are American voters prepared to put a socialist or a populist in the White House in 2020 (despite tsunamis of propaganda against Bernie Sanders or Donald Trump).
We have Detroitified the heartland in Hong Kongified the coasts. The establishment solution? Open borders for immigration and more “free trade.”
David Ricardo! Adam Smith! The gold standard! David Hume! Do you ever get the impression that macroeconomics was embalmed 200 years ago?
We have Detroitified the heartland
No, we haven’t. The overall unemployment rate in the Midwest is 3.5%. The problems of the city of Detroit aren’t even shared by the rest of the Detroit metro area, let alone by Michigan generally or the entire ‘heartland’. I live in Michigan in a city 40 miles west of Detroit that’s having its own coastal-style affordability issues (and driven by some the same familiar factors — excessive development restrictions including a ‘green belt’ created to prevent development of surrounding farmland and open space)
Why are American voters prepared to put a socialist or a populist in the White House in 2020?
People are rationally ignorant when it comes to politics, are subject to mass delusions, and demagoguery often works?
But the current situation is really not that novel. There has long been a strong anti-free trade segment of the voting public, and there probably always will be (what percent of people are ever going to grasp the concept of comparative advantage or understand what is wrong with ‘buy local’ and ‘broken windows’ thinking?) Before China, everybody was freaking out about Japan. Even Republicans like Reagan and GW Bush felt compelled to impose tariffs for political reasons. Vernon Smith recounted when he gave Bush a hard time about steel tariffs and Bush said something like “You just worry about economics, I’ll take care of the politics”. Protectionism is popular, but so are economic growth and low prices. So politicians play games — trying to impose just enough in the way of tariffs to get a political boost without tanking the economy (and their election chances along with it).
I agree with you on property zoning issues, would like to see property zoning abolished in its entirety.
I have different views from you on what is called “free trade” and its impact on the industrial robustness of any particular developed nation, as well as income stratification, but a comment section is not really the platform….
But remember, when the theory is sacralized it becomes a theology.
And the worst damage Washington DC does is subsidize the clerisy. The great and excellent Joel Kotkin has a discerning and insightful piece at Quillette distinguishing the tax-exempt First Estate clerisy middle class whose job it is to tell others how to live their lives from the tax-paying Third Estate bourgeois middle class that actually contributes to human flourishing. I had naive hopes for a while after Dierdre McCloskey’s success with her bourgeois trilogy that libertarians might find it within their hearts to make common cause with the latter, but no, libertarians are all about soaking up all the tax exempt benefits their sinecures at universities and 501(c)(3) “charities.” If the USA did not have punitive rates of corporate taxation and ridiculous over-regulation, the trade issue would be insignificant, but as it is, it is the straw that broke the camel’s back. The clerisy is too large to allow progress and the government feeds it too much of working people’s money. Tax the clerisy, cut their subsidies, and respect the working bourgeois again and watch the USA flourish.
That very recent Kotkin article is fantastic. It is worth reading and re-reading.
“The two middle classes”
https://quillette.com/2020/02/27/the-two-middle-classes/
I fully agree with Kling bashing Rubio for bashing free trade and financial services. Middle class American families are absolutely better off with cheaper goods. I presume Rubio is trying to rebrand himself as a populist to increase his appeal. This is the bad kind of populist.
Can Kling elaborate his view on why Washington damages the American economy? With debt + deficit spending? I don’t disagree, but I’d like to hear Kling offer a simple common-man explanation of that. I already understand how excess regulations notably in health + education hurt the economy, so I don’t need a rehash of that. The US is arguably less bad on that front than most other nations on Earth.
Except itself. There have been moments that the U.S. has historically been more enlightened than present and, much worse, it has failed to recognize and embrace international examples of superior performance (e.g. New Zealand immigration, Australian fiscal responsibility, Canadian central bank system, Singapore health-care).
Of course…. The US doesn’t have the best policy, other countries have better systems as you mention that our political culture doesn’t recognize, voters often vote for terrible ideas. That’s the status quo. Still, for Kling to say that Washington has done more damage to the US economy than China, I was expecting more than the normal complaints of the status quo.
I think Kling is entirely correct. The flip-side is that Beijing has done more harm to the Chinese economy than has U.S. policy. If both nation-states followed the Golden Rule then the world would be much richer overall. Even without Chinese enlightenment, the best U.S. policy is unilateral free trade. Even without U.S. enlightenment, the best Chinese policy is unilateral free trade. The best international policy is reciprocal free trade.
No. The best response for us, and even for Kling, is to withold judgement.
The US relationship with China isn’t a narrow economic textbook issue. It’s a complex foreign policy one.
Foreign policy is very complex and involves lots of information we aren’t privvy to. That doesn’t mean the current US administration is making the best moves, but I feel that we just aren’t in a good position to judge.
What was Adam Smith’s position on China asserting dominion over Taiwan and the South China Sea or using Huawei to establish surveillance and control over global computer networks? Adam Smith’s ideas were great, but they aren’t the whole story here.
Earlier, you said, to paraphrase, if China was acting more like a typical economic actor, then… Your inference is probably true, but that’s a completely unreasonable condition to make.
I fully support Tyler Cowen on this one:
https://marginalrevolution.com/marginalrevolution/2020/01/what-to-make-of-the-new-u-s-china-trade-deal.html
This is very true, Niko, but I’m assuming that the Five Eyes are privy to nearly all the information the U.S. has, and Canada has been stuck right in the middle of the whole Huawei affair. I should add that the Canadians were put in a horrible position by the U.S. with the Meng Wanzhou extradition case and I’d be surprised if this doesn’t turn out to be a case of U.S. clearly violating my loosey-goosey definition of International Golden Rule. Following your advice, I’m withholding judgement but I’m expecting my low expectations to be proven too optimistic if/when more information is revealed. Your mileage may vary.
A study by Ball State University showed that 88% of job losses in manufacturing were due to automation. Of the remaining job losses, most came back through trade. Natural gas exports and the associated job gains in the gas fracking industry as one example.
Wait… the US exports natural gas to China?
Yes. The US exports soybeans to China. Soybeans require fertilizer of which the principal feedstock is ammonia. In ammonia, NH3, each nitrogen atom binds three hydrogen atoms. They get the nitrogen from the air and the hydrogen from natural gas. Soybeans embed natural gas and is how the US exports natural gas to China.
As an aside, aluminum has been described as “frozen electricity”. It’s how countries with cheap hydroelectric power export their electricity. Iceland for example.
Also, we have a joke up here in Canada that lettuce is California’s way of exporting water to Canada.
Australia, an island, is the largest international exporter of Liquid Natural Gas (LNG). Product-Market Fit applies as does the history of any large-scale industry.
Losing industries to China was not an “unintended consequence” of liberal trade and financial policies; it was very often the goal.
Sigh. Liberal trade and economic policies have the proven effect of making the nation better off. There was never a ‘plan’ to move industries here or there, but rather to let individual companies make whatever decisions made the most sense and thereby allow industries grow and thrive in whatever soil was most suitable. As a result, not only did hundreds of millions of people in Asia escape poverty and join the global middle class, but people in the U.S. became better off too.
Here is one candidate demonstrating Kling’s thesis: US Steel stock prices. Oddly under reported on (at least where I look) but the stock prices of US Steel and other US steel manufacturers have been dropping ever since the tariff, down to levels not seen since 2017. At the same time, rolled steel prices are below averages in 2018.
I am forced to conclude that the protectionist tariff on steel is at best doing nothing to save the industry, and at worst killing it faster. At the same time, the tariff raised prices of steel short term, forcing manufacturers to switch to other materials, which is presumably an inefficient switch. We seem to have borne the costs of a tariff as economic theory predicts, but have not gotten any of the benefits.
I would say that self inflicted damage is an example of Washington hurting the economy more than China.
Losing industries to China… a clear danger to many working class & middle class Americans. To the benefit of far more, and worse off, poor Chinese folk escaping poverty.
Losing industries :
to Uber — S&T creative destruction from one set of American workers to another.
to Walmart – S&T creative destruction from one set of American workers to another.
to Internet – S&T creative destruction from one set of American workers to another, tho also quite a bit to foreigners, along with a widening of choices.
(Specialization & Trade, S&T, seems far more catchy than PSST. Much easier to remember, too, tho inevitably less complete.)
Cheaper goods in stores DOES make Americans, as consumers, better off. But higher paying jobs also DOES make Americans, as producers, better off. Yet adjustments are asymptotically easier to change among very similar, slightly different cost goods as compared to far fewer, more specialized jobs. Most auto makers who lost a $45/hr (2020 equiv.) job did NOT find any similar paying jobs. Differences were often in the 40-50% lower range. Most folk buying a $22,000 car were able to easily find a 10% cheaper comparable car; similarly with T-shirts and other goods.
A strength of Arnold’s S&T is more than usual noting that specialists as producers can seldom change industries and start out making as much as in their prior industry; but as a factory closes, it usually represents reduced industry production, so the workers have to change factories. More than usual, but still not as much as the asymmetry deserves.
Washington handles taxes (too high), regulation (too many), and money/ interest rates (almost never just right). With Trump, there is also more handling of international trade, where tariffs on China have been deplored by Liber economists, along with Dems (who just oppose Trump on everything).
I’m sure it’s possible for the USA (gov’t) to “borrow too much”. But it’s also pretty clear that we’re not there yet. In almost any year, merely reducing the growth in gov’t spending to be less than the GNP growth would mean a fairly rapid “growing out of debt”. The unfunded liabilities are huge — but it’s not yet clear there’s been any real damage to the American economy.
The world has been made far better off by the USA allowing “working-class” jobs to be exported to commie China & Vietnam, and corrupt India. The rich company owning elite of the US, and the world, have also hugely benefitted, and the middle class consumers of the world, and the US, have benefitted. The US working class workers have been the big global losers, both relatively and, often, absolutely.
To Libers, 10 Chinese workers are about as valuable, as human beings, as 10 US workers, and usually more valuable than 5 US workers. But in US politics, the 10, or even only 5 US workers who had big global losses are more politically important than any number of better off Chinese workers. Whom Rubio doesn’t even mention, much less value.
One of the mostly Dem solutions – UBI. So the global losers get a more comfy poverty. Charles Murray seems to also favor this, if it goes with other changes. My experience with gov’t, including the Dutch gov’t restrictions on euthanasia, make it clear that any UBI which passes will be mostly additive to other programs, and thus UBI proponents should be arguing its benefits from that premise. Which raises my (somewhat ex-)Libertarian hackles.
I watched the movie “American Factory” on Netflix. It’s about a Chinese glass manufacturer that opens a factory in a closed auto plant in Ohio or some place like that.
People were happy when the factory first moved in because they were unemployed after the plant closure, but became dissatisfied with the situation after awhile.
The plant owners wanted the American workers to work up to the standards of the Chinese guest workers (unlimited overtime, no safety standards, etc). Chinese had to leave home for years away from family and live in dorms and didn’t even get extra pay or have a choice in the matter.
And they paid half what they used to make in the auto plant before it closed.
At a fundamental level there was just no getting around the fact that the Chinese workers were satisfied with such living standards because they were better then what they were used to, but the Americans were depressed by them because they were worse then what they were used to. How long will it take to bring a billion Chinese up to the American level? Longer than these peoples lifetimes.
“Free Trade” is the euphemism used by unregistered foreign agents to promote global Chinese industrial policy. They would have you believe that there is no difference between China’s campaign for world domination and Adam Smith era mercantilism.
‘Tis to be a slave in soul
And to hold no strong control
Over your own wills, but be
All that others make of ye.
-Shelley
Shooting ourselves in the foot to spite China doesn’t strike me as good foreign policy. You have to convince us that Chinese industrial policy actually helps China. The reasoning of protectionists always seems to take this for granted and deduce that US free trade is playing into their hands, but this is just begging the question. If free traders are right, then Chinese industrial policy is a net loss for them; they’re undervaluing their own labor and slowing their own development just to get some nice trade surplus statistics..
Never start from the assumption that governments – even (especially) foreign ones – know what they’re doing and have the interests of their country at heart.
Does: industrial policy actually help China?
All over the world there is competition to attract foreign investment. Thru gov’t action, NOT “free trade”. Investment helps the locality where the investment occurs, as well as the owners of the capital being invested.
Who is “China”? The billionaire commie Politburo members, not unlike US billionaires, are helped a lot by the unfree Chinese policies. Their production capacity hugely increased, faster than a free market would have done. Their workers were helped. Even if the total wealth of the world is slightly less, the wealth located in China is certainly more. Especially owners of the factories, Chinese commies often with some rich Americans or other foreigners, but also with higher wages of Chinese workers in highly productive assembly halls.
The rich decision makers don’t believe they would be better off without unfree gov’t industrial policy, and I believe they know more about their particular situation than any general theory. It might be that the rich are getting richer by taking more from the Chinese workers, but it might be that they are getting richer mostly by taking jobs from the American ex-workers.
It’s not at all clear that US “free trade” in response to Chinese unfree trade & industrial policies is better than a US anti-Chinese trade policy. The growth of US mfg under Trump seems to validate his Theory of tariffs as helping the USA.
Classical liberal industrial policy is to tax domestic industry thereby giving untaxed foreign imports a competitive advantage. In the pharmacy industry this has allowed Chinese government subsidies to their state owned firms to acquire 80 percent control of the supply of precursors used in manufacturing medications and vaccines. Whether you or I die from caronavirus May well turn on the whimsy of General Secretary Xi. Great game plan. Thank you Classical Liberals!
The common sense populist alternative approach would be to eliminate market distorting taxes and replace with an across-the-board consumption tax (VAT) so that domestic industry is not disadvantaged relative to foreign industry. Less distortion and less opportunity for clerisy rent-seeking.
Classical liberal industrial policy is to tax domestic industry thereby giving untaxed foreign imports a competitive advantage.
Simply not true. In fact, most classic liberals would favor “eliminat[ing] market distorting taxes and replac[ing] with an across-the-board consumption tax (VAT)”.
(By “classical liberal”, I assume you mean Milton Friedman types, not FDR types.)
I don’t know of anyone attempting to pass themself off as a classical liberal today who is not also a full-throated advocate of Pigouvian taxes. They all want to micromanage the economy with carbon taxes, research tax credits, and earned income tax credits, etc. Realizing this incongruity is why Tyler Cowen had to invent “state capacity libertarianism.” Trust us, they say, surrender your agency to our expert social design and you will be free. If there are any old school libertarians around anymore they are probably law professors. But the problem with law school libertarians is always they argue “trust wise judges, they will make the right decisions to keep you free.”
Jeez Louise Edgar, does every decision have to come down to a showdown between comic book characters? If we build a shared water well, is it that hard to understand that there are multiple ways to distribute the cost/work and we should just choose one and get on with it? Public Works and Public Institutions: start with the concept of a shared water well and extrapolate. Heroes and villains need not apply.
George Washington, Thomas Jefferson, and Abraham Lincoln all came to the same conclusion as you. That imports tariffs imposed consumption taxes in the best possible way compared to alternatives, protected nascent industry, and were critical to the development of domestic industry necessary for sovereign defense.
The “free trade” tariff hating American South meanwhile comparative advantaged themselves into a low growth agricultural slave economy with no future, and found themselves unable to provide their society with basic staples or war material when they were blockaded.
Prior to the ratification of the Sixteenth Amendment in 1913, all federal revenues were derived from tariffs on imports and excise (sales) taxes on particular goods. In the late 18th century most of the take was from tariffs, but a century later the excise taxes dominated. Today both reflect very small portions of total tax revenue, which is dominated by income and payroll taxes.
In addition to shifts in the nature of how value is produced in the economy, there is a “seeing like a state” aspect to this history.
In the early days of the country the state lacked not just legal authority but arguably also the capacity to effectively measure and tax on an individual basis. It was much easier to collect taxes at a limited number of ports, and indeed the US Coast Guard has its origins in the service intended to enforce the collection of customs and import duties.
Another advantage of tariffs is that, of all the ways to collect taxes, it requires the least inquiry into and compulsory reporting of individual circumstances.
But that doesn’t mean that the state doesn’t want to see everything that everyone is doing, it’s a matter of bureaucratic, technological, and enforcement capability. No going back now.
All who support Human Rights should be condemning Chinese human rights abuses, and even hating such abuse. It’s not clear what the best response is to other country’s abuses of their own people.
Or in the 1950s northeast substitute the south and African-Americans. Only the scapegoat changes, the “argument” stays the same.
Textbook says unilateral free trade good.
In reality, all populous industrialized nations engaged in heavy protectionism during their industrialization phase. Every single one. This is a matter of historical record, not academic debate.
The given reason for this, from Abraham Lincoln to the Japanese MITI, is that if your comparative advantage is in low value add industries that are path dependent to low growth then you will never get richer. So you need to nurse nascent high productivity industries until they can scale up to a level to be economically viable. Is it possible to do this without protectionism? Academics say yes, but we are very short on practical real world examples at scale.
It also seems to be the case that large sustained trade imbalances seem to lead to fragile disequilibriums that frequently end in financial crisis and radical reconfiguration of specialization and trade. So I would be cautious about them rather than seeing it as “free money”.
Which is why we compare apples to apples. The U.S. has been a global economic superpower for a century. China has now become an economic bully to most of the world except the U.S. which in turn is now asserting its role as Big Dog under the Trump administration. The rest of the world has to put up with the smell of their territorial pissings.
One man’s sustained trade imbalance is another man’s sustained comparative advantage. It sounds, asdf, like you are arguing for equality of outcomes. Like social justice activism, the hubris is assuming that the perceived interventions will have the intended outcome. You nor I have the power to improve your perceived fragile disequilibrium but I think I have the power to not make it worse, that is, let it be.
I’m simply stating the fact that wherever there are large sustained trade imbalances there tend to be unsustainable patterns of specialization and trade along with asset bubbles that end in financial crisis. This is an empirical fact, not a theoretical assertion. A simple look at economic history will show this playing out quite often.
The closest thing we have to a theory is that capital should flow from developed nations to developing nations (because of their higher growth rate). Instead, as Peter Thiel notes, we have the opposite, which doesn’t make a lot of sense. We have poor Asians saving huge portions of their income to invest in WeWork. Sovereign wealth funds buying all the parking meter rights in Chicago.
I think we were able to absorb Japan doing it because it was 126 million people. China is 1.4 billion. That’s over 10x the lift. It’s a lot bigger pill to swallow.
In reality, all populous industrialized nations engaged in heavy protectionism during their industrialization phase.
As did lots of countries that failed to successfully industrialize. Protectionism doesn’t automatically “nurse nascent high productivity industries until they can scale up to a level to be economically viable”. Nor is it automatic that free trade will keep you in ” low value add industries that are path dependent to low growth”.
The postwar experience of much of the world was “import substitution” and policies assuming wise governments would correctly pick winners and losers. Across Asia and Africa and Latin America, the result generally wasn’t prosperity.
My point is simply that every single large populous industrialized nation engaged in substantial protectionism during its early growth stage. Britain did it in the first half of the 19th century. The USA and Germany did it during the second industrial revolution (as opposed to free trade Britain which fell behind). The Asian Tigers all did it during their growth phase. China is doing it now.
It may be that correlation does not equal causation. Nevertheless, it’s a very strong correlation. At a minimum, some degree of protectionism doesn’t appear to prohibit strong growth. This doesn’t necessarily make it a correct policy all, some, or any of the time, but it does mean “free trade” gets a lot more praise than it deserves as a causal factor of prosperity.
As to Africa and Latin America, I think there are other reasons for their failures.
This is a case of apples vs. oranges not causation vs. correlation. “Early growth” and “mature growth” are very different things.
Lots of countries engaged in protectionism. Some industrialized. Some didn’t.
More than 99% of people who died in the opioid crisis drank milk when they were younger. That doesn’t make milk a “gateway drug” and it doesn’t mean that we can grow a population impervious to opioid abuse by prohibiting the production, sale, and drinking of milk.
Yes, it’s possible that people can industrialize without protectionism. And yet absolutely nobody did it. That could be unrelated or it could be related.
The people that defended protectionism as a growth strategy had stated reasons why they did that made logical sense and they produced empirical results in country after country.
That’s a much stronger case then “milk caused opioid abuse”.
It’s flippant to use such an analogy.
I’m stating an empirical fact about what happened in the real world. I consider an empirical track record important in evaluating ideas.
asdf: you need to consider the countries that didn’t have protectionist policies and how they did with regard to industrialization. So far as I know, there were roughly zero of those; protectionism has been the norm basically for ever. So there is no correlation between protectionism and growth in the data, because there is nothing to compare it against. Seeing that a country was protectionist does not help you predict whether or not it industrialized or grew, partially because protectionist countries did both, and partially because there are vanishingly few examples of free trade countries to compare them to.
Eric Hammer: I think Estonia is a pretty good modern example of non-protectionist policy in the wake of the collapse of the Soviet Union.
Eric Hammer put it much better than I did. Most all countries were protectionist, just like most everyone once drank milk.
Then let me propose something simpler.
Protectionism (at least some kinds of protectionism) doesn’t appear to greatly hinder explosive growth amongst industrializing nations. After all, many protectionist countries all were able to grew faster than non-protectionist countries.
So best case, Abraham Lincoln, Bismarck, and MITI were right about it helping growth.
Worse case they were all wrong, but it didn’t much hurt growth anyway.
At a minimum, this should downgrade how much kerflufle libertarians get into over issues of tariffs and trade.
After all, many protectionist countries all were able to grew faster than non-protectionist countries.
What non-protectionist countries?
RAD: True, although they were pretty industrialized before, at least by way of whatever passed as industrialized in the USSR. On the other hand, since leaving the USSR and implementing their own policies they have had pretty impressive growth of GDP per capita (PPP).
asdf: Again, the relevant question is “compared to what?” Since nearly every country in the world (so far as we know) had lots of protectionism before, during and after the industrial revolution, we don’t know if it hindered explosive growth or not. Relatively little growth or technological change happened in the west after the fall of Rome for about a thousand years, yet suddenly took off around 1600-1800. Would that have happened earlier without protectionism everywhere? Maybe. Would there have been fewer wars? Maybe. More money for the arts and sciences? Maybe.
Your argument analogous to this old Simpsons bit.
(I hope that works.)
It does seem likely that protectionism was a driver in the American Civil war. The south was pretty annoyed that they had to buy northern goods instead of importing, among other things. The northern factories might have benefited from protectionism, but the southern farmers did not, and then the whole country bled. Hard to say that was a win for protectionism I think.
*Note I said “farmers” not “plantation owners”. The latter were pissed too, but the expenses imposed on the owner/operator farms seems to be a large part of what made the non-slave owning southerners, the vast majority, willing to fight and die in the war.
aaand let’s close that tag. sorry. Sorry.
+1 to Homer’s specious reasoning and Lisa’s anti-tiger rock.
I now have a name for “asdf’s anti-tiger rock reasoning”.
You’re making a claim that protectionism is a terrible thing that destroys growth, and that it should be a big political concern that we don’t engage in any of it.
But it didn’t destroy growth. You say “compared to what”. I say right back to you were are these free trade countries that had better growth to substantiate your claim.
The UK took free trade seriously in the latter half of the 19th century. It grew slower than their protectionist American and Germany rivals during that period. In fact the second industrial revolution industries that most fueled growth in those countries are exactly the ones they protected. It’s almost like their strategy worked exactly like the authors of those protections said they would.
If you want to claim that some protectionism is good and some is bad, or that it works in some contexts but not others, then fine. But instead of buying UK steel forever and ever, the Germans and Americans learned to build their own Steel, to their long run betterment.