The Free Trade Era is Over
By: Derek Thompson (The Atlantic)
Free trade is symptomatic of the threats that have been posed by neoliberalism, in general. The failures of neoliberalism have become so stark that liberal-speak can no longer gloss over the damage caused with promises of peace and prosperity. Neoliberalism has not created a better world.
Many demand definitions - what is neoliberalism? Here goes. A fundamental tenet of neoliberalism is to create a rule-based system of interdependence where self interest is motivated to maintain that system of interdependence. What is good for one is good for all; what harms one harms all. Good or bad would reverberate throughout the system and self interest would be motivated to stabilize the system.
It's not a new idea. The creation of trusts, conglomerates, and cartels in the 19th century resulted in a a flurry of anti-trust laws; the threats and dangers were known. But I contend that what caused neoliberal ideas to snowball was the energy crisis of the 1970s when OPEC (an economic cartel) exerted control over geopolitics. OPEC demonstrated that finance could become a stateless global authority with power to control governments. The energy crisis of the1970s ushered in the era of finance based diplomacy. Economic aid and economic development were the tools utilized to create a global system of interdependence where self interest was motivation to follow the rules. Finance ministries held the power to punish rule-breakers in any facet of foreign affairs.
Of course the problem with a system of interdependence is that it is no stronger than its weakest part. Maintaining the system requires redistributing resources to the weakest parts of the system to avoid collapse. Adversaries attacking the weakest parts of the system reverberates throughout that system and threatens the entire system. That's why terrorists, stateless actors, rogue regimes, and brush wars are an existential threat requiring systemic cooperation that consumes inordinate amounts of resources to maintain stability of the rule based system of interdependence.
The rule based system of global interdependence created by neoliberalism has strengthened the weak by weakening the strong. Every perturbation in the system has become an existential crisis. There isn't enough strength remaining in the system to deal with those perturbations. The self interested motivations to maintain the system are being overwhelmed by desire for self preservation. Neoliberalism over the last half century really has been a race to the bottom.
S E E D E D C O N T E N T
The free-trade era in America is over. Industrial policy is the new rage. After decades of trade with China and declining manufacturing employment, the U.S. is embracing a new economic theory: Build more, and build it all here.
President Joe Biden has signed historic laws to make more bridges, wind turbines, and computer chips in the U.S. In his State of the Union address yesterday, Biden announced a deeper "Buy American" policy that calls for "American-made lumber, glass, drywall, fiber optic cables."
Part of me is thrilled by this idea. The U.S. desperately needs sharper focus on the supply side of the economy. It's not enough to erect signs on our front lawns proclaiming that housing is a human right; we also need policies for our backyards to allow housing that's ample and affordable. But although I support an abundance agenda, I'm concerned that an all-American abundance agenda might be two alliterations too many.
Before we get to my anxieties about Buy American rules, let me try to make an honest case for it. Fundamentally, the government wants to ensure that the U.S. doesn't rely on flimsy supply chains for key materials, especially those that pass through our adversaries' borders—specifically, China's. In the past decade or so, we've awakened to two different "China shocks." The first shock was economic: the lesson that free trade with China had a devastating and concentrated effect on manufacturing employment. This shock contributed not only to a Great Lakes mini-recession but also, perhaps, to the election of Donald Trump. The second shock was ideological: the realization that economic growth in China did not lead inexorably to cultural liberalism, as it had in the West. The Chinese economy grew alongside the authoritarian behavior and rhetoric of the Communist Party of China.
Buy American provisions can have several advantages. They funnel money to domestic businesses in important industries, theoretically raise the wages of workers in those sectors, and let the government support the development of crucial technology and infrastructure. For example, if the U.S. wants to build an all-electric economy, we probably need to be much more deliberate about creating a stable and thriving market for inputs such as lithium and copper.
But the Buy American philosophy has at least four problems that the White House, Democrats, and all policy makers should think about as they engineer a new industrial policy for the 21st century.
B.A. typically raises costs. The U.S. should be concerned about building more and building faster. To take one example: A disgraceful new report on New York's Metropolitan Transit Authority found that it spent $4.5 billion on the first leg of the Second Avenue subway line. Reducing America's complex system of construction bottlenecks to high material costs is wildly unfair; in fact, the MTA spent most of those billions on design, engineering, and construction of the tunnel. But building certainly won't get any cheaper or easier if our policies increase the cost of essential materials by making foreign purchases of them illegal. All things equal, buying American might make building in America more expensive at a time when we should be obsessed with reducing costs rather than raising them.
B.A. can make key supply chains less resilient. Last spring, a bacteria outbreak at a Michigan plant that makes infant formula created a scary shortage. It also offered a lesson on the downsides of protectionism. The U.S. government makes the legal importation of otherwise-safe European formula almost impossible, going so far as to seize shipments at the border. The government also awards contracts to only a small number of approved formula makers, which means three companies account for practically all U.S. formula sales. These restrictions make us more vulnerable to emergencies, such as a bacteria-infested plant in Michigan. Compare this story with one about the COVID shots: When a Baltimore facility that made Johnson & Johnson vaccines reported a catastrophic failure, the company could rely on a global network of factories that picked up the slack. The U.S. should consider "friend-shoring" the production of certain materials—that is, working with our allies to create many nodes around the world so that if one fails, no catastrophe ensues.
B.A. policies can hurt innovation, even if just by accident. If your local transit authority takes federal money, odds are it's historically been required to buy public buses from domestic bus makers. What's wrong with that? A 2014 study from economists at Cornell University and UCLA found that these transit authorities tended to buy more expensive buses that were less fuel efficient because they cared more about securing a subsidy than about the bottom line or even performance. One lesson of this paper is that Buy American provisions might send a strong signal to buyers—whatever you do, just buy from one of these few domestic suppliers!—that overwhelms other signals, such as price and quality. As a result, domestic suppliers don't have to keep up with any innovative wave, and Buy American policies lock parts of the economy into being less innovative.
B.A. hurts global alliances that we should be nurturing. If the U.S. really is on the cusp of a second cold war with China, we should be focused on building alliances rather than frustrating our allies and trading partners. "In the first Cold War, we wisely realized that when allies like South Korea and Japan and France got rich, it made the U.S. and the world more secure," said the economics writer Noah Smith. "We realized that every dollar of goods manufactured in South Korea and Japan and France represented a win for the free world. We should realize that again now."
Protectionism pushes us in the other direction. When the U.S. imposes Buy American rules, other countries may copy us and impose their own restrictions on global trade. This is why too much protectionism can punish the very people it's meant to help. Under President Trump, the U.S. imposed import tariffs to protect manufacturing workers who built washing machines and made steel and aluminum. These jobs happened to be disproportionately located in GOP counties. But the policy backfired, triggering retaliatory tariffs in other countries. Suddenly our washing machines weren't priced competitively for foreign buyers, leading to a sharp decline in U.S. exports. A 2019 analysis by several economists found that the U.S. companies that lost the most business were heavily concentrated in the very same GOP-leaning counties that Trump was theoretically trying to assist.
I don't want to suggest that any attempt to onshore production will doom America to runaway costs, supply-chain catastrophes, and frayed global alliances. In many cases, I'm sure there are brilliant reasons to bring back more advanced manufacturing, clean-energy construction, and resource production. But in this molten moment for economic policy, as we're sliding from a neoliberal era into something else, we should be explicit about the trade-offs that come from explicitly protectionist policies. We already know the downsides of a laissez-faire, "build wherever it's cheapest" regime. Twenty years from now, I don't want to have to write that the U.S. overreacted to the China shocks by forcibly onshoring the production of goods in a way that made those goods less resilient and ample.
What do we actually want from our economic regime? What are the political and human outcomes that our policy makers should be trying to deliver? If, for example, we're aiming for plentiful, cheap, low-emission electricity produced by more clean-energy infrastructure in an economy with full employment and rising real wages, we don't need harsh rules against importing affordable solar-energy parts from a resilient network of trading partners who are also our political allies. On the contrary, we need a political message that welcomes our allies: To win an abundance of well-being, America needs abundant help.
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Neoliberalism has not created a better world. When the strongest parts of the global system of interdependence become beggars unable to deal with their own problems then the neoliberal system, itself, becomes an existential threat.
The rule based system of interdependence has never been stronger than its weakest parts. Yes, the weak have become stronger but that has required weakening the strongest parts of the system. The world has raced to the bottom and its going to be a long climb out of that hole.
What hasn't these days ... the phrase has become overused by the nitwits of negativism trying to sound intelligent.
In the United States, at least, the government has begun operating in constant crisis mode. Every problem becomes a threat to the entire system that requires drawing resources from across the system to manage problems.
Student loan forgiveness is an example. Defaults on student debt threatens the financial underpinning of the entire education system. The education system would collapse if that student debt is allowed to default -- an existential threat. To avoid that collapse it is necessary to draw resources from other parts of the system. To strengthen that weakness it is necessary to weaken the stronger parts of the system.
That is because since the 90s our retard politicians have catered more and more to the most extreme elements in their parties and the result has been our idiot congress not being able to perform even its most basic tasks due to the fear of extremists. This is far more evident on the right, Fucking Marjorie Tylor Greene is the face of the GOP in the house, but is also present to a degree for the Dems. Regardless, our problems stem from tribalism, gerrymandering, and the way elections are funded.
For the example of student loan forgiveness, Congress didn't require students to shoulder such large debt burdens. The threat of student loan default is not a crisis because of tribalism, gerrymandering, or election funding. Blaming Congress (and Republicans) won't absolve students from the consequences of borrowing so much money.
That money was borrowed and spent using promises of future income as collateral. There isn't anything of tangible value underpinning student debt. There isn't anything that lenders can foreclose to claw back any of the borrowed money. The money was created out of thin air through fractional banking and that money was redistributed from students to the system of education. So, now there is a large lump of cash circulating in the economy that isn't backed by anything with value; it's Monopoly money. And student loan forgiveness won't remove that Monopoly money from the economy. Money not backed by anything of value that is used to buy something of tangible value causes inflation. Student loan forgiveness will cause inflation of some amount.
Even cryptocurrency requires a 'proof of work' step to create a bitcoin. Bitcoins that are simply created out of thin air have no value and that decreases the value of bitcoins created by 'proof of work'. That's inflation. So, a root cause of inflation is dumping money not backed by anything of value into the economy. That's what Biden is going to do with student loan forgiveness. Biden is using inflation to forgive student loans which only shifts the consequences of borrowing that money onto everyone in the economy. Tribalism, gerrymandering, and election funding did not create the problem but Biden's politics is going to turn that problem into a worse crisis.
Does America think that instead of using imported products at a lesser price, they should be manufactured in the USA, inevitably costing more, it will help solve the problem of inflation? I suppose the benefit is that if all the parts necessary for a washing machine that is entirely American-assembled were "American-made" at least the washing machine won't be able to tell the Chinese the colour of your underwear, and that is a huge benefit, isn't it. (That's a statement, not a question.)
The short answer is 'yes'. The price (and cost) of commodities is determined in the global marketplace by global demand. We're beginning to see the same happen with technology. Wages, on the other hand, are not set by global factors. So, the cheaper prices (and costs) depends upon exploitation of labor.
The argument about costing more is just another iteration of wages are too high in the US. Of course, the counter argument is that wages are too low elsewhere. Haven't wages been rising in China to lessen poverty? Those rising wages in China really do cause inflation in the US. Since the price (and cost) of raw materials and technology cannot be exploited to lower prices (and costs), the motivation is to find cheaper labor.
Only where abject poverty existed the eradication of it did increase income, but that had no effect on the cost of goods here or for export.. The very poor were taught to be more productive in their farming so that they were able to make enough to assure a proper roof over their heads, decent food on the table, free education for their children up to high school graduation and sufficient health care. But because of increased food production and availability food prices have remained relatively stable, perhaps even cheaper. With respect to goods for both local purchase and export, at the same time, industries were moved from city suburbs into areas of abject poverty helping to create full employment there without the workers having to move to the big cities where living costs were greater, and that probably meant that wages in the poorer areas were LESS because living expenses were less. As perhaps you know, China did not experience the inflation that most of the rest of the world has suffered with.
The story we hear in the US is that the affluence of the Chinese population has been increasing and poverty has been decreasing. That's been touted as a neoliberal success brought about by free trade. But China doesn't possess a magic money tree. The money to provide that increasing affluence has to come from somewhere. Increasing affluence is an increasing cost in the free trade marketplace that contributes to inflation.
You cite the 'good' things for the Chinese people. But those 'good' things are a cost in global trade that inevitably inflates prices. Consumers in the global marketplace are paying for those costs. Consumers are having to pay more for the same goods and services to provide the money for that increased affluence. Increasing affluence in China (or anywhere else in the interdependent system) represents a loss of affluence in consuming countries. The neoliberal remedy is to demand that China buys (and imports) more to maintain the system of interdependence. Neoliberals will use the rule-based system to threaten China's increasing affluence; not to lower prices but to stabilize the system of interdependence. Neoliberals want China to import more but not export less to balance the free trade imbalance.
The increased competition for imported goods and services in the global marketplace also contributes to inflation. A consequence of the neoliberal rule based system of interdependence is that consumers around the world are competing with each other in the global marketplace. Commodities and raw materials have already been globalized by global competition for consumption. Technology is beginning to be globalized in the same manner. Neoliberals have deliberately avoided globalizing labor and wages as a sort of safety valve; local labor markets are utilized to balance the imbalances. However, the rise of economic migration is thwarting the neoliberal use of labor to balance the accounts. Exporting labor through economic migration circumvents neoliberal economic development. Labor is also gradually becoming a global commodity that neoliberals cannot control without imposing restrictions on that free trade.
Well, I never studied economics and really haven't a clue about the theories. When it comes to economic theory, I only know what I personally experience. What I wrote above was what I learned and personally experienced confirming it.