I have agreed to talk on the question “Are New Trade Wars Looming?” The answer is yes, but I must also tell you that I think this is the wrong question. What we are really interested in is why trade wars occur and where the economic philosophy we call protectionism comes from. A major cause of the worldwide war and depression that crippled much of the first half of the twentieth century was imperialism and the rivalry of nations for trade, commodities, raw materials, and labor—this produced protectionism. I want to suggest the special importance of finance capital in this process, both earlier in the twentieth century and now. Rather than worrying about trade wars, we should concentrate on the power of capital’s control over our political economy, especially the role of international financiers.
We need to look at the parallels to the situation leading to the Great Depression, the adoption of the Smoot-Hawley Tariff in the United States, and the dramatic decline of world trade as a result of protectionism in the 1930s, but also the important differences between the situation then and now. As Charlene Bershefsky, the U.S. Trade Representative, said in a speech on January 29, 1999, “despite a shock nearly as great as the one that brought the Smoot-Hawley tariff, with 40 percent of the world in recession and six major economies suffering contraction of 6 percent or more, we as yet see no broad reversion to protectionism.”
Trade conflicts today range from the so-called “banana war” between the United States and the European Union to the demand by the U.S. steel industry for protection from unfair foreign competition. The banana war reminds us that much of what is called protectionism has little to do with the needs of U.S. labor which, after all, does not produce bananas. The dispute arises because a major donor to the Democratic Party runs a company that wants to sell more bananas (produced in Central America) in Europe, where preference is given to bananas from Europe’s former colonies. The steel dispute is more the sort of conflict that people have in mind when they worry about protectionism and trade wars.
The U.S. steel industry is facing what it sees as a deluge of imports from Japan, Russia, Brazil, and Indonesia which, it is alleged, are selling steel below cost in the United States. Steel is the focal point, but there are lots of other industries in which there is excess capacity on a global scale. Industries with high fixed costs come out ahead, selling at a loss so long as revenues cover their variable costs, and so are likely to export below cost, even if this produces protectionist responses and even trade wars.
But notice two things: First, the list of offending steel exporters—Japan, which has had a stagnant economy for much of the decade (having overinvested in the 1980s and become stuck with excess capacity), and then the three large troubled economies: Russia, Indonesia, and Brazil (which have liberalized capital flows, received vast capital inflows, and then seen their economies undermined by speculative excesses, unsustainable debt levels, capital flight, dramatic currency depreciation, and economic crisis). These countries, despite U.S. and International Monetary Fund (IMF) “rescues,” find it difficult or impossible to balance their budgets and pay their debts. They also find that the austerity forced upon them by the agents of international finance means that domestic recession-depression deepens. How did they get into the messes they are in?
Second, how did the excess capacity develop (not only in steel but in everything from hogs to autos) and why the cycle of speculative lending and default, which has produced financial crisis? While there are particular answers, like anticipation of perpetual growth of Asian markets (the so-called Pacific Century, with Asia as the engine of global growth); financial deregulation in the absence of adequate safeguards and ill-conceived loan policies (the presumption being that there can be adequate safeguards); and crony capitalism (the fact that elites ripped off innocent foreign investors and then maximized short-term gain at the expense of long-term stability), these are only pieces of a larger equation. It is important to note that such manias, panics, and crises have always been part of the way capitalism works. They are regular occurrences, even if they are unpredictable in terms of exact timing, seriousness, and duration. They arise as part of the uneven nature of capitalist development, in which innovations unleash rapid growth, producing overinvestment, causing firms to overreach (in terms of the expectations they have concerning the future realization of profitable sales) and then become unable to service debt. As overinvestment reaches its peak, speculation in equity and property markets reaches unsustainable proportions, and these bubbles burst. These cycles are superimposed on the secular development of capitalism—a process in which all parts of the world are brought into a single market and a universalization of the properties of capitalist social relations occurs. Some historical discussion can help clarify the essential features of such cycles, and the role financial orthodoxy has played in the misinterpretation of their nature, and in the advancement of punitive (and finally counterproductive) solutions—harmful to the vast majority but in the immediate self-interest of the international financiers.
In the second half of the nineteenth century, important innovations in transportation and communication (the railroad and the telegraph, iron-hulled coal powered ships and transatlantic cable) reduced the cost of doing business over great distances. Developments in metallurgy and chemistry in the latter part of the century produced manufacturing capacity to match the increased extent of the market, leading to imperialist rivalries and the First World War. In the interwar period, efforts to re-establish gold parities at pre-war levels and to extract reparations from the war’s losers and war loans from allies contributed to a severe balance of payment crisis, slow growth, high unemployment, and an inability to address the various imbalances produced by an attempted return to normalcy, leading to a desire for protection from forces seemingly beyond the control of national policymakers. As Broadus Mitchell, a historian who has chronicled the period, notes: “Overproduction of raw materials was matched by surplus output, or surplus capacity, in important industrial fields. High tariffs and other expressions of economic nationalism were the consequences …. Debtor countries that could get no more loans felt they must expand their exports and contract their imports. Invasion of others’ markets and defense of their own alternated in speeding restrictions on world trade.”
Protectionism comes close to the end of the story, not the beginning. To say trade wars are bad and to be avoided ignores the more crucial matter of the difficulties that create the conditions out of which trade wars become likely, if not inevitable. The end of the First World War found the global economy with excess capacities stimulated by the needs of wartime, a peace which redrew the map of Europe (creating small, new states that attempted to protect their autonomy), and a situation in which established powers (that had experienced differential productivity growth) gained or lost economic capacity as a result of war, and disordered exchange rates produced disequilibria that proved difficult to set right. Any stability that existed in the 1920s depended on a particular balance of international capital flows. When the Fed raised interest rates in the United States, this balance was disrupted, and the prevalent view since the end of the First World War (that the United States neither understood nor was very interested in the global financial fragility of the period) was confirmed. The Great Depression can be understood as the outcome of an inability to produce a financial regime capable of sustaining economic growth and stability. The same troubling processes are underway in our own time.
Another historian and close student of the interwar period, Max Gideonse, writes: “From the enactment of the emergency tariff of 1921 to the dollar devaluation program of late 1933, American leadership in world affairs lacked even the rudiments of effectiveness, and was, for the most part, a depressing mixture of incompetence, irresponsibility, and inertia.” Self-interest is a powerful blinder and justifier of intellectual argument and policy certitude. Today, as in the interwar years, financial orthodoxy is blind to the causes of economic crisis. In part, this is because the class interests it defends benefitted and benefit from the damage it inflicts on others.
Did U.S. policies—from its response to the Latin American debt crisis in the early 1980s to the policy advice to the new Russian state (in its transition from communism) and the East Asian financial crisis (starting in 1997)—all equally demonstrate a self-serving stance that did incalculable harm to the economies involved and to the world economy more generally? I will make the case that this is in fact the proper interpretation, and that those concerned with the possibilities of coming trade wars would do well to consider the preconditions in policies demanded by the American Treasury Department on behalf of U.S. financial institutions and enforced by the IMF and other agencies. Many of the particular policies in question are the same in the last part of the twentieth century as they were in its early decades.
Orthodoxy argues for the automaticity and efficiency of free capital markets. The major difference is that, in the earlier period, this was presented in terms of the presumed benefits of the gold standard. Even today, some analysts look back at the era in which the gold standard regime dominated as the golden age of international finance. They see the failure to properly restore the gold standard after the First World War as responsible for the Great Depression. But the gold standard itself was the principal threat to financial stability and economic prosperity between the wars. It was a large part of the problem and not the solution. Adherence to the gold standard forced contractionary policies, which turned recession into depression.
The gold standard was part of an ideological stance toward laissez-faire capitalism, which was hegemonic and insisted that any government interference with market forces was bound to do more harm than good. As a result, nations were held back from taking actions that might have averted or reduced the impact of crisis. The political power of finance led to economic outcomes favored by bankers but harmful to societies at large. The same may be said of the current period. The self-interested actions of national governments and the false belief in the gold standard’s automaticity led to a failure to reach agreement on the need for (and the specifics of) central bank cooperation. The globalization of finance from the 1970s, like the effort to reimpose the international gold standard or gold exchange standard in the interwar years, constrained national policymakers and led to the demand for protectionism.
After the Great Depression and the carnage of the Second World War (a conflict which owed much to Germany’s inability to recover in the interwar years—the result, in significant measure, of the demand for reparations that perpetuated economic suffering in Germany and paved the way for Hitler), it was widely understood that avoiding a replay when peace was restored would involve a very different international financial regime. After the postwar era of national Keynesianism, the forces of transnational capital have once again gained an upper hand. The return to pre-Keynesian orthodoxy under the prompting of the U.S. Treasury and IMF officials has forced counterproductive policies on Russia, Indonesia, and Brazil, among others, and produced fear of a global crisis of the dimension of the Great Depression.
The tension between free capital movements and free trade was well understood by the architects of the post-Second World War Bretton Woods regime who saw free trade, economic growth, and full employment as dependent on the control of capital. It was understood, in the 1940s and 1950s, that abolishing exchange controls would make it exceedingly difficult, if not impossible, for any government which might come to power to pursue full employment and welfare state redistributive policies without provoking capital flight. Industrial capital, which dominated in the early postwar years, understood this and, sold on the need for Keynesian policies, favored continued capital controls. As the financial sector recovered, and multinational corporations came to hold a more globalist view, the establishment in the United States moved to more greatly favor free capital mobility. England, seeing its future as a financial center, supported the United States in this resolve. In the 1940s, bankers arguing along these lines for a more open financial order made the case that the move would prevent governments from meddling with market forces, but they were overruled by industrial capital, which saw merit in Keynesian stimulus that needed capital controls to be effective. Internationalization was followed by policy changes that favored greater freedom for international speculators.
The United States and Britain, by creating the Euromarket, undermined the Bretton Woods system, unilaterally offering mobile financial traders the ability to operate without regulation. Thus, they forced other financial centers to liberalize markets or see their business and capital migrate—a process of competitive deregulation that parallels the competitive devaluation policies of the 1930s. It was the political choice of the United States, most significantly in its irresponsibility in the 1960s, to unleash inflation and make others bear its cost, and then unilaterally to change the rules at the expense of foreign central banks and others who believed the U.S. commitment to its fixed exchange rate. It was also the opportunist choice of Great Britain to pursue a deregulation strategy that would solidify its position as a global financial center.
The Contemporary Situation
In the 1990s, these forces have become even stronger under New Democrat Bill Clinton and New Labour leader Tony Blair, both of whom favor policies of financial openness and a deregulated international monetary regime. Clinton’s ability to win the decisive backing of Democratic Party supporters among Wall Street investment bankers was crucial to his bid for president. The head of Goldman Sachs & Company, Robert E. Rubin (one of these Wall Street supporters), became his treasury secretary and the most important figure in his administration. Clinton, it should be noted, followed up the policies of the Republican Bush and Reagan Administrations with impressive enthusiasm.
Under the Clinton Administration, there was an expansion of such priorities. Clinton’s Secretary of Commerce Ron Brown and his successors were almost continuously on the road, pushing American exports and demanding financial market liberalization. Clinton created the National Economic Council as a counterpart to the National Security Council. Mr. Rubin, as its head, guided the global ideological shift to unrestricted financial flows to the great profit of financial service firms such as Goldman Sachs. Asia was a particular target for this full-court press. Continued access to U.S. markets was held hostage to liberalization of financial markets. Korea, for example, was sponsored by the United States for membership in the Organization for Economic Cooperation and Development (OECD), the rich nations club, in exchange for accelerated liberalization of its financial markets. The Koreans let their companies borrow abroad even though such loans might (and, as it turned out, did) make their corporations vulnerable to a panic-driven outflow (which occurred at the end of 1997). The cost of the business won by U.S. banks and brokerage firms was paid by the Asian economies. Secretary Rubin and his assistant (and then his successor as Treasury Secretary), Laurence Summers, also pressed the IMF to amend its charter to make free capital movements a central goal in IMF negotiations with member countries forced to seek balance of payments assistance.
The leaders of Asia, Latin America, and even continental Europe have become increasingly willing to articulate the view that recent financial crises have been caused by unregulated cross-border financial trading. Financial liberalization, in the words of Mahathir Mohamad, Malaysia’s Prime Minister, has driven forces resulting in the demise of the East Asian miracle. “The great Asian Tigers are no more. Reduced to whimpering and begging, they are but a former shadow of themselves …. From being miracle economies we have now become impoverished nations.” And who can disagree? Percival Patterson, Prime Minister of Jamaica, is not alone in criticizing the way the IMF has handled the crisis. “As a lender of last resort, the IMF remains unsuited to that role …. within its limited resources, it did bail out the creditors, which leaves the debtors in the lurch.” Resentment at U.S. policies and the gains the United States has reaped from its own and IMF policies has led increasingly to a backlash against the U.S. model, which saves Wall Street speculators while sacrificing the people of the third world. If they now desperately increase exports and there is talk of “trade wars,” we need to understand the larger context. It is not so very different today than what it was in the early decades of the twentieth century, when similar policies of orthodoxy (which benefitted finance capital at the expense of global economic growth and stability) were dominant. It appears that we have learned little from these earlier experiences and, in many ways, we appear to be replicating the conditions and policies which produced the Great Depression. This does not mean that history will be repeated or repeated in the same way, but the earlier patterns and the power of orthodoxy have returned. And they are doing grave damage.
Increasingly, this is recognized—not only by third-world leaders such as the prime ministers of Malaysia and Jamaica, but even by many U.S. policymakers and former officials now free to speak frankly to the press. As Kristof and Sanger write in an important New York Times series summarizing interviews with administration and former administration officials: In retrospect, the United States was “insufficiently aware of the kind of chaos that financial liberalization could provoke.” Mickey Kantor, the former trade representative and commerce secretary, is quoted in this 1999 series as saying that “[i]t would be a legitimate criticism to say that we should have been more nuanced, more foresighted that this could happen.” Such rapid liberalization without proper regulation and legal rules, in his view, was like “building a skyscraper with no foundation.”
It may be argued that when the buildings began to crumble and fall, the United States and the IMF demanded policies that made conditions worse. The austerity they demanded, as well as the high interest rates and the continued currency convertibility, enabled foreign investors to get their funds out, while locals in the affected countries bore the disproportionate burden of the devastating adjustments that followed. The Indonesians, Koreans, and others lost their businesses, workers lost their jobs, and foreign banks were rewarded with sharply higher interest rates and government guarantees against default, which came at taxpayer expense. As Milton Friedman commented, “The United States does give foreign aid. But it is a different kind of foreign aid. It only goes through countries like Thailand to Bankers Trust.”
Currently, with the remarkable performance of the U.S. economy (compared to that of the rest of the world), Mr. Rubin, who knew enough to quit while ahead, enjoys a domestic reputation as one of the best treasury secretaries the United States has had. Internationally, he is widely criticized as responsible for encouraging policies that have produced instability and economic crisis by forcing financial liberalization. Rubin stood virtually alone in opposing efforts to curb the volatility of capital markets (his only significant support coming from the British). It is also widely understood that, until now, the financial centers of Wall Street and its counterpart, the City of London, have profited substantially from this turmoil. The Europeans, Japanese, and third world countries (which favor some form of international agreement on new modes of managing international financial markets) have been unable to budge the United States or to successfully oppose its will. Should Anglo-American financial markets collapse as well, this stance will be seen even in the United States, as the self-serving policies of what Columbia University economist Jagdish Bhagwati has called the Wall Street-Treasury-IMF complex and the financiers who run policy once again face universal criticism, as they did in the years preceding the Great Depression.
Even in the absence of such a meltdown, it should still be evident that it was the forced liberalization of financial markets that led to the crises—not only in Asia, but also in Russia and Latin America. Now it also produces the huge U.S. trade deficit, provoking protectionist demands. To expect trade wars as severe as those experienced in the first half of the twentieth century is, however, a mistake.
We need to understand that the world’s economies are now so interpenetrated by transnational control that Korea’s or Japan’s problems are more likely to lead to the takeover of their large (but weakened) corporate giants by U.S. capital than to trade wars between nationalist capitalist classes. The extent of foreign ownership is substantial. Foreign-owned enterprises in France, for example (which we tend to think of as so nationalistic), account for 25 percent of industrial production. 40 percent of the United Kingdom’s exports are by foreign firms. By the late 1980s, the flow of foreign direct investment into the United States was exceeding the outflow. Strategies for promoting national champions has given way to strategic alliances, if not outright merger with foreign rivals, to increase market power and to pursue economies of scale to offset the huge research and development costs, designing new products and marketing them on a global scale. By the early 1990s, the top twenty-five multinational corporations all had sales over twenty-five billion dollars. The largest, General Motors, had sales larger than the gross domestic product of all but twenty-one nations in 1992. Lists of countries by Gross Domestic Product (GDP) and companies by sales showed Toyota’s sales exceeding the GDP of Portugal and Poland, IBM exceeding Venezuela, and Unilever exceeding New Zealand. The growth of multinationals or transnationals, and of direct foreign investment, means that such firms operate in a very large number of countries and derive a high proportion of their assets (workers and profits) from locations beyond their home countries—so that trade wars become counterproductive for the dominant economic actors in the globalized economy.
Increasingly, the danger is not old-style trade wars but the greater dominance of these corporate giants over the economic lives of working people everywhere. With concentrated oligopolistic structure, a relatively small number of giants come to dominate world markets. There is growing awareness, as Jeffrey Garten, the dean of the Yale School of Management and former Clinton Administration official, writes: “Megacompanies are almost beyond the law.” They have the money to run legal circles around regulators and to intimidate smaller rivals. They can buy political influence, both with campaign contributions and by threatening job loss among electorates in jurisdictions in which labor, environmental, or tax law is not to their liking. They can demand subsidies and shift social cost to workers and governments.
This is not to say that there will not be demands for protectionism and even the adoption of protectionist policies. But such protectionism is less likely to lead to the devastating trade wars some now fear, and is likely to be exercised by the strong, who are able to get away with unilateral exercise of discriminatory policies. This is amply demonstrated in the case of the steel industry.
In late February 1998, an agreement was reached between the Clinton Administration and Russia to strictly control the growth of Russian steel exports to the United States. Russia will cut back to the level of sales before the sharp fall in the value of the ruble. That the Russians agreed to this when steel exports are such a huge source of (scarce) hard currency is a measure of the leverage the United States has over Russia. It does not really matter that World Trade Organization (WTO) rules forbid this kind of managed trade agreement or voluntary export restraint. Russia is not a member of the WTO, but if the United States had not forced such an agreement from the Russians, it could have levied a steep tariff on its steel exports, which could have stopped them. Russia, which is negotiating for more aid from the IMF, knows that it is in no position to anger the United States. Brazil and Japan are also unlikely to retaliate against the Commerce Department’s recent decision to impose huge tariffs on their hot-rolled steel sent to the United States.
If, as the balance of trade continues to widen, unemployment rises in the United States, we are likely to see more demands for protection by workers fearing job loss. Companies with their backs to the wall will blame unfair foreign competition. Such nationalist appeals will receive a sympathetic ear, especially if they are from a large, well-organized industry able to flex political muscle.
Freedom of capital without social regulation unleashes painful costs as governments, workers, and weaker competitors are forced into a painful deflation, and orthodox policymakers (and the financial interests that have such influence over their direction) dictate that the interests of speculative capital come before the needs of ordinary people and the stability of economies. The cost the world is currently paying for such policies is inordinately high and may grow more severe.