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Sunday, November 27, 2016

It May Sound Good, But Economic Nationalism Will Not Make America Great


Following Donald Trump's presidential election victory, America may be headed in an economically-nationalist direction. I don't question the patriotism of those who advocate raising tariffs and quotas, subsidizing particular American businesses, boosting institutions like the Export-Import Bank, embarking upon "Buy American" campaigns, withdrawing from trade agreements, etc. I also understand why many support such policies. But they’re not in America's national interest.

Yes, maintaining an economy open to global competition has costs. In the short-term, some people lose -- and many of them voted for Trump. Nor can national interest be reduced to economic prosperity. Likewise, openness to global markets isn't an excuse to open our borders to all comers or to claim that free trade somehow guarantees a peaceful international order. Free trade's growing prevalence across the globe leading up to 1914 didn't prevent the catastrophe of World War I.

Still America would be much better off if it maintains a basic commitment to free trade. Economic nationalism, however good it may sound, does serious damage to countries that adopt it.

Why Economic Nationalism Won't Make America Great

Economic nationalism comes in many forms. It can range from a country shutting itself off from other national economies and striving for self-sufficiency (the formal expression for this is "autarchy"), to protectionist policies designed to shield some domestic industries and their workforces from foreign competition.

America would be much better off it it maintains a basic commitment to free trade.

Whatever the motivations for such policies, their costs vastly outweigh their benefits. In the first place, protectionism discourages American businesses and workers from focusing on producing those goods and services where they enjoy a comparative advantage vis-a-vis other nations. Not only does this undermine productivity, efficiency, and international competitiveness of American businesses. It also encourages American workers to enter industries that, no matter how much protection they enjoy, won't be able to compete in the long term.

Second, imposing import tariffs is basically a tax on many goods and services for American consumers. Wealthier Americans can easily afford these higher prices. Less well-off individuals and families aren't in as fortunate a position.

Yet another problem with economic nationalism is that it encourages a growing problem in American economic life: crony capitalism.

 Giving certain American businesses subsidies or lumbering foreign products with tariffs may seem like economic questions, but in practice they are ultimately political. Such policies encourage companies prefer to seek profits by lobbying legislators and bureaucrats rather than serving customers and creating value.

Subsidies and tariffs merely lull Americans into a sense of complacency, dulling our awareness that we may be losing our comparative advantage in different industries.

If you look, for instance, at America's official Harmonized Tariff Schedule, you quickly discover that it matches the tax-code in length and complexity: close to 3,000 pages and more than 10,000 tariff lines. There's no particular logic to all this. It simply reflects the businesses and industries that have the best lobbyists. Embracing economic nationalism will only exacerbate this problem by providing even more opportunities for lobbying for privileges.

Economic nationalism also distracts us from some of the real causes that have led to stagnation in parts of America. It's easier to blame China, Japan, and Mexico for layoffs in rust-belt states than to ask hard questions about the refusal of unions to contemplate labor-market reform, coupled with management's reluctance to force the issue. Both of these realities have undermined many American companies' ability to provide better products at lower prices.

Finally, economic nationalism can’t prevent the automation of many jobs previously held by humans. Companies can chose to resist or ignore technological change. But they -- and their employees -- will find themselves out of business as quickly as those horse-and-buggy companies that tried to ignore the development of the car.

Subsidies and tariffs can't fix these problems. Such measures merely lull Americans into a sense of complacency, dulling our awareness that we may be losing our comparative advantage in different industries and thus need to change.

Challenges for Free Traders

While economic nationalism isn't in America's long-term interests, free market advocates have to work much harder to persuade the rest of the country that they're not in the business of selling out America. This goes far beyond disassociating themselves from coastal urban progressives who can barely disguise their disdain for flyover-country.

In the first place, free marketers should acknowledge that not every American wins, at least in the short-term, from economic globalization. Free marketers aren't generally good at this. They don't seem to realize that citing statistics about the falling costs of goods and services isn't likely to impress people in rural Pennsylvania who have lost their jobs. However real such economic gains may be, they're effectively "invisible" to many workers and their families.

Free market advocates have much work to do in persuading the rest of the country that they're not in the business of selling out America.

Free marketers also need to show that a commitment to economic freedom doesn't mean that you refuse to help those who lose their jobs. This need not result in yet more dependency-creating, welfare programs. Instead the focus should be upon helping displaced workers transition to new private-sector jobs in market-friendly ways.

One way of realizing this goal is to remove labor-market inflexibilities, such as regulations that makes hiring and firing hard for businesses. Over time, this would enhance overly employment security -- which is quite different from the security of one particular job.

More generally, belief in and pursuit of free trade policies shouldn't be presented in quasi-religious terms. There's no better way to ensure that ordinary people think they're being sacrificed on an altar of globalization. We do not, and never will, live in a perfect world. Free markets won't save your soul, and free trade and economic liberty aren't universal cures for all America's problems. Maintaining and furthering a national economy's openness requires great political prudence -- especially if we want to avoid the type of backlash against economic globalization we're witnessing in America today.

Above all, free traders in America need to make it clear that they're just as patriotic as economic nationalists: that they advocate economic openness to the world not because they're out-of-touch bicoastal globalists, but precisely because they love America.

Patriotism is love of the true good of a nation. That's the ground upon which resurgent economic nationalism needs to be debated. The real question is whether American free marketers are up to such a challenge.


Samuel Gregg is Research Director at the Acton Institute and author of For God and Profit: How Banking and Finance Can Serve the Common Good (2016).

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