Reconceptualizing Economic Security: Globalization Has Failed
Washington is abuzz today with a new political vernacular designed to capture the urgency of a new political moment. Terms like “decoupling,” “deglobalization,” and “reshoring” are now commonplace within national security and economic circles. The popularity of these terms suggests that something akin to a regression is taking place. A few short decades ago, the dream that global economic integration would dampen the prospects for future conflict was a universal one. Today, that presumption has been turned on its head as the present administration embarks on an effort to realign America’s trading relations abroad, using national security as both justification and cudgel. But are these actions truly as capricious and erratic as they seem?
The backlash that elevated Donald Trump to the White House, and may yet keep him there, stems in no small part from structural transformations in the nature and practice of economics itself.
To understand this inflection point, we must grasp how we arrived at it. Deglobalization, decoupling, and reshoring could not take place without globalization, economic coupling, and offshoring. The backlash that elevated Donald Trump to the White House, and may yet keep him there, stems in no small part from structural transformations in the nature and practice of economics itself. During the Cold War, a national economic strategy was deemed vital to the defense of the state in the age of superpower competition. Public-private partnerships, in which the national government subsidized select private enterprises to bolster America’s technological edge, produced some of the most profound accomplishments of the past century. Large firms like IBM, General Electric, and RCA rose to prominence, securing vast amounts of market power while also performing research and development, typically contracted by the national government. These firms would pave the way for innovations in telecommunication, aeronautic, and semiconductor technologies. This growing economic and military-industrial base proved invaluable in providing a social benefit in the form of high-wage jobs that could support single-income families and households. The lifeblood of many industrial towns was to be found in the factories and plants that sprung up in the heyday of national development. This state of affairs was complemented by a trading regime that stressed reciprocal trade.
Despite the General Agreement on Tariffs and Trade (GATT) established in the aftermath of World War II, high import tariffs remained the norm in the United States. The nature of the trading regime agreed upon is paramount. The United States would only agree to lower its economic barriers if a trading partner agreed to match its reductions. Mutual lowering of trade protections ensured that the agreements were bilateral and reciprocal. The United States would maintain access to foreign markets and its ability to export goods would continue to bring in wealth. In addition, a balanced amount of imports arriving at its harbors would guarantee a minimal trading deficit. Until 1970, the last consecutive year that the US maintained a positive trade balance with the rest of the world in the post-war era, this system of internal national development and external reciprocal trade worked uninterrupted and largely to the benefit of domestic producers and consumers. Powerful labor unions solidified the wage gains made by workers through collective bargaining tactics and negotiation. The government’s commitment to winning the Cold War guaranteed a steady stream of federal funding for private enterprises concerned with research and development. The state demonstrated its willingness to deploy public power in order to maintain a competitive edge by negotiating reciprocal trade agreements and directing funds towards the creation of federal agencies that, through the ingenuity of its well-subsidized participants, would innovate their way to victory over the Soviet Union.
It was the launch of Sputnik that spurred the American government to declare space exploration a matter of the “general welfare and security of the United States” and which sanctioned the newly founded National Aeronautics and Space Administration’s entrance into “such contracts, leases, cooperative agreements, or other transactions” with private and public entities in order to deliver the technological breakthroughs needed to supersede the Soviet Union’s space program. Tens of billions of federal dollars were funneled into private firms assisting the Apollo Program. The value of this public-private model was made clear by the success of Apollo 11’s manned mission. Man would not have walked on the Moon without this strategy.
This strategy of national economic development, despite the shrill and fanatical revisionism of “movement conservatism,” is deeply ingrained in American history, harkening all the way back to Alexander Hamilton, who in Federalist No.1 called for an embrace of “energetic and efficient government” and in his Report on Manufactures promoted a policy of import-substitution industrialization, in which the protection of infant industries would allow for the rapid industrialization of the United States in order to catch up with advanced foreign competitors.
Coupled with the development of a national bank to regulate the value of domestic currency and an infrastructure plan that oversaw wide-ranging “internal improvements” encompassing the construction of roads, tunnels, bridges, and canals, the “American School” of economics determined the country’s ability to compete successfully with the world and enabled it to eventually provide a nigh-unmatched quality of life and rising standard of living for its inhabitants.
There was nothing inevitable about globalization. It was a conscious decision pursued by policymakers with a concrete rationale, strategy, and goal in mind. If globalization is not inevitable, then deglobalization is not impossible.
What went wrong? The 1970s and 1980s saw a shift in economic policy for the United States. First, the Nixon administration chose to take the country off the gold standard and replace it fully with a fiat system unfixed to a material standard of currency, making it vulnerable to alterations in the value of foreign exchange. European states, having benefited greatly from the GATT and the Marshall Plan, had by this point recovered and begun to pose a serious economic threat to the United States. By 1987, four years before the end of the Cold War, West German exports had nudged out the United States’ for the second year in a row, with $294 billion compared to $250 billion for the United States. In imports, the gap was far graver: $424 billion for the United States compared with $228 billion for West Germany. Despite the ostensible violation to the GATT, policymakers invoked national security, declaring the imbalance a necessary evil to keep western European states in NATO. Simultaneous pressure from a surge of Japanese automobile imports led auto manufacturers to apply political pressure on the Reagan administration to impose quotas and tariffs. This short-lived trade war was ended by the Plaza Accords, which forced Japan to artificially inflate the value of its currency in order to handicap its exports. In retrospect this appears to have been the last time domestic producers exercised serious influence over US trade policy prior to 2016. The unraveling continued apace after the demise of the USSR.
The end of the USSR ushered in an era of US dominance. The existential national-security threat posed by the Soviet Union disappeared, leaving policymakers to embark upon a journey to liberalize politics and economics worldwide. The creation of international institutions like the World Trade Organization (WTO) and the passage of the North American Free Trade Agreement (NAFTA) was designed to aid in this effort. Even here, it is possible to discern the important linkages policymakers were making between political and economic liberalization. Nowhere is this more apparent than in their embrace of China. Clinton-era officials and economists, while debating the merits of normalizing permanent trading relations with China and admitting them into the WTO, assured wary observers that economic integration and liberalization of trading relations with one of the world’s most populous nations would set it on the path to political freedom at minimal cost to wages and employment. In truth, China’s integration precipitated a monumental economic shift, subjecting the United States to an unprecedented influx of foreign imports. This led to a rapid rise in the trade deficit, the devastation of its industrial base through the sudden loss of millions of manufacturing jobs, and the consequent outsourcing of large swathes of Middle American industry. The high-wage manufacturing jobs and labor union protections that supported millions of high-school educated Americans vanished.
Multinational corporations, freed from social and legal obligations, abandoned the hinterlands that once enjoyed an unprecedented compression in wages between high and low skilled labor, and thus the rich and the poor, with brain-drain only worsening the blight.
The results speak for themselves. Over the subsequent decade and a half, “deaths of despair” rose dramatically in economically-depressed communities. Inflexible labor markets produced broken homes and families, widespread opioid and alcohol addiction, suicides, depressed wages and declining employment opportunities. Multinational corporations, freed from social and legal obligations, abandoned the hinterlands that once enjoyed an unprecedented compression in wages between high and low skilled labor, and thus the rich and the poor, with brain-drain only worsening the blight. This was, of course, cheered on by a bipartisan “Washington” consensus, whose idealistic adherents saw the world anew as one great “pacific union” in the Kantian mold. The American people were led to believe by policymakers that these transformations were inevitable and impersonal. Globalization was a world-historical force that would bring shared prosperity to the globe, lift tens of millions from poverty, benefit the consumer through the reduction of prices, and render the era of competing national blocs redundant via mutually beneficial economic arrangements. Those who resisted were deemed provincial and anachronistic, not fit to live in this new and enlightened era. Those who lost out in the new order of things would be compensated through retraining. The service economy was the future. This seemingly universal sentiment was purportedly summed up by Michael J. Boskin, who served on the economic advisory board of George H.W. Bush’s administration: “It doesn’t make any difference whether a country makes computer chips or potato chips!”
Despite the objections of the free trader, both they and protectionists ultimately rely on the conceptual linkage between economic and national security. Political security can only be achieved through economic strategy. For the free trader, this is an international strategy. For the protectionist, a national one.
Recent events have forced us, however reluctantly, to rethink these presumptions. China has not liberalized politically, imports continue to impoverish long-suffering communities unable to compete, thereby widening domestic geographic inequalities. Tens of thousands of American citizens overdose on fentanyl imports from China and Mexico every year, theft of American intellectual property is rampant, Chinese state subsidies distort the international market and make it impossible to compete. China has made great strides in developing advanced technologies like quantum computing, 5G, and artificial intelligence while we lack the ability to pave our roads. Multinational corporations continue to engage in global labor arbitrage. Political shocks have predictably followed. The areas of greatest economic and social devastation correspond to those areas of strongest support achieved by Donald Trump in the Republican primary race, concentrated primarily in the Appalachians and the middle west of the country. Beyond the sound and fury of the Trump presidency, there is a growing consensus that new thinking is needed to reverse the mistakes of yore. The administration’s shift in focus towards strategic competition with China is a welcome change from the policy of “strategic accommodation” adhered to by every administration, Republican and Democrat, from Bill Clinton to Barack Obama. But the implementation of scattershot tariffs, while a positive symbolic signal, is no substitute for a concerted program of economic protectionism designed to restore an industrial base to America that once supported a high-wage, high-productivity manufacturing economy.
While the outlines of this kind of economic program are just now beginning to take shape, it is important to examine the key presumptions that underlay the continued defense of a globalized economy. Ironically, the free-traders who now claim that the Section 232 tariffs imposed by Donald Trump on Europe and China under the Trade Expansion Act of 1962, which cedes to the president the power to levy tariffs on import surges deemed a threat to “national security,” rely on an egregiously expansive definition of national security in fact cripple themselves by using the same fundamental presumptions as the protectionist. In their telling, a politically secure world is one which is economically integrated; it is a world whose shared interests will preclude the possibility of conflict. In the protectionist case, a politically secure world is one that is economically unintegrated, one in which national economic units look out for their own interests by minimizing the opportunity for others to take advantage of them through a zero-sum game of mercantilist competition. Despite the objections of the free trader, both they and protectionists ultimately rely on the conceptual linkage between economic and national security. Political security can only be achieved through economic strategy. For the free trader, this is an international strategy. For the protectionist, a national one.
This makes it possible to dismiss the superficial peans to “inevitability” and “necessity”. There was nothing inevitable about globalization. It was a conscious decision pursued by policymakers with a concrete rationale, strategy, and goal in mind. If globalization is not inevitable, then deglobalization is not impossible. The only political and economic justifications for US trade policy from 1990 to 2016 were lowering the cost of consumer goods and providing political security through economic interdependence with strategic competitors. The last 30 years should be enough to dispel these notions as harmful fantasies.
Supply chains whose most vital components have been outsourced to low-wage economies must be forcibly repatriated in the name of economic security.
Linking economic and political security around a concerted program of trade protection will require a Copernican shift in how we approach the world. To highlight one particular case of serious conceptual error, a recent Foreign Policy article quotes certain “experts” as lamenting the subordination of national security concerns to trade issues in the US relationship with India. In their telling, the Trump administration’s concerns over “niggling” trade issues are overshadowing efforts to enlist India as a strategic partner. But if national security issues are in fact economic issues, then this distinction becomes moot. India has a long-term developmental strategy that takes advantage of our concessions on trade, just as West Germany and Japan did before them, and as China does now.
Norms may have once called for bilateral economic arrangements, but the norm today has largely been focused on the construction of multilateral institutions and trade agreements. These have been made with little regard for the danger that a widening trade deficit poses to domestic industries already displaced by free trade. Many of these agreements have been justified in the name of a mistaken conception of national security, the Trans-Pacific Partnership being one notable example. It is true that the agreement may have been partially formulated with Chinese influence in mind, but the Obama administration fell victim to a typical confusion by disregarding the threat to the national interest in making the US a party to Investor-State-Dispute-Settlements (ISDS), which allow private investors to sue national governments for “discriminatory practices” in international courts, weak provisions on currency manipulation, and leaving the US open to an even greater degree of outsourcing. Empowering Asian competitors at the expense of ourselves exposes the dangers of this multilateral approach. Even if TPP had been successful in diminishing Chinese geopolitical power, it would have been accomplished at our own expense. A belated emphasis on the “strategic” component of “strategic accommodation” would do little more than accommodate future rivals, for whom we have mistaken as allies in our peculiar inability to truly parse the economic dimensions of national security.
This is why it is not enough to merely shift supply chains from the Chinese mainland to neighboring countries. Shifting the offshoring to Vietnam or Thailand does nothing to solve the problem of deindustrialization at home, however much it may inconvenience Chinese industry. Supply chains whose most vital components have been outsourced to low-wage economies must be forcibly repatriated in the name of economic security. The production process must be returned to our shores lest we find ourselves, as we do now, dependent upon the goodwill of strategic adversaries to provide us with vital goods like pharmaceuticals and masks in the midst of global health catastrophes or other crises. A return to bilateral “fair trade” may be a good start, and this is a trade strategy the current administration has aggressively pursued. But the United States must look beyond even this and attempt to maximize gains in future trade deals at the expense of its trading partners to ensure its supply chains are made immune to exogenous shocks. Recent “Buy American” orders are a welcome change in this regard.
The Trump administration’s detractors bemoan the imposition of national security tariffs on putative “allies” like Canada and Germany, but so long as those countries continue to allow harmful import surges into the US, whether produced in those states or shipped through the “backdoor” from China, then the US must use all available means at its disposal to keep those surges from harming its citizens, domestic manufacturers and economic security. The TPP agreement would have fallen far short of its alleged goals if it deprived American workers of their livelihood while benefiting ostensible allies. The USMCA trade agreement with its country-of-origin rules for automobile manufacturing, minimum wage requirements, and tighter restrictions on ISDS regimes is a marked improvement over NAFTA and a step in the right direction. Future trade deals must take note.
Reshoring manufacturing to the United States will not be simple. It will require incentives, and failing that, coercion to force multinational corporations to return home. It will require using the power of the state to manage our economic relations abroad. It will require us to embrace the techniques of economic organization utilized by China and adopt mercantilist practices to pry open foreign markets while protecting our own, at least until an industrial base is built up to enable self-sufficiency. Furthermore, ideologues on both sides of the political spectrum will have to reassess their values and shake off their dogmatic approaches to political economy. On the establishment left, this means refocusing on class-based politics that puts the interests of workers first. On the establishment right, this means surrendering qualms about the role of the state in economic planning.
Defending economic security will demand a reprioritization of the producer, perhaps at the expense of certain benefits currently enjoyed by the consumer. If this is to be seen as a regression, then it is a regression to the mean. After all, as Irving Kristol once rightly pointed out: “Where is it written that the welfare of consumers takes precedence over that of producers?”
Keiton Grundfast is a first-year GGPS major in the School of International Service.
Image: Claude Lorrain, "Port Scene with the Villa Medici" (1637, oil on canvas), Creative Commons