America’s China Policy Is Not Working
The Dangers of a Broad Decoupling
THE classical economists of the eighteenth and early nineteenth centuries rightly regarded international trade as the international form of the division of labor. Adam Smith, who began the "Wealth of Nations" with his famous chapter on the division of labor as the source of the increase of wealth in modern societies, went on explicitly to treat of international trade as simply the extension of the same principle to cover the whole world market. Just as within each country exchange would be beneficial between one area and another, because different areas have different natural or acquired suitabilities for the production of different types of goods, so international commerce would be profitable to importer and exporter alike because of corresponding differences in national aptitudes for the various branches of production. International trade, like internal trade, was, in the view of the classical economists, essentially a process which would benefit both parties to the transaction and enable the sum total of wealth produced over the world as a whole to be greatly increased.
Of course the classical economists combined with this view of the beneficial consequences of international commerce the strong opinion that it ought to be left utterly unplanned and uncontrolled. Intent chiefly on breaking down the barriers which had been put in the way of the free development of both internal production and exchange and international commerce under the mercantile system, they stood for the freedom of production and trade in both the national and the international sphere, trusting to the enlightened self-interest of the individual entrepreneur to serve, better than any planned system possibly could serve, the interests of mankind as a whole.
Their views, accepted by Great Britain as the basis of her free trade commercial policy, and echoed by later British economists, were never similarly received without question in other countries. List set up against the cosmopolitanism of Adam Smith's outlook his "national system" of political economy; and, while some continental economists, notably in France and Austria, went even beyond their British mentors in devotion to the principles of laissez-faire, in most continental countries economists were divided, and the actual policy pursued was that of tariff protection for the domestic producer. Nevertheless, even those economists who favored protection in the sphere of international trade were usually strong advocates of laissez-faire in the sphere of domestic production; and List, equally with the free traders, was a strong advocate of international commerce and the international division of labor, holding that protectionism was only the right policy for a country adapted for the development of advanced manufacturing industries, and even so was appropriate only until such a country had reached the stage, already existing in England, at which it could afford to throw down its tariff barriers and trust for its place in the world market to its productive efficiency alone. List is in fact the father of the "infant industries" argument, and by no means of any form of economic nationalism which sets forth protection as in the long run a sound basis for economic policy.
The free trade economists, however, formulated their doctrines when the economic development of the world was far less advanced than it is today. Within each country they thought in terms of a system of independent entrepreneurs competing vigorously one with another for a share in the market; and they conceived of this system as reproducing itself through the intermediacy of competing merchants in the sphere of international commerce. The first question that arises in considering the future of international trade is how far their conclusions have to be modified in the light of the enormous change which has taken place in the actual structure of capitalist industry during the past fifty years. For nowadays within each country trusts, combines and cartels have come to be in many industries a recognized feature of the productive system, often encouraged by the action of the state, whereas a generation ago they were ostracized or even on occasion suppressed. Nor has capitalist combination stopped short at national frontiers; a great many of the most important combines of today are international, in the sense that their operations extend beyond a single country, and sometimes even cover the greater part of the world market.
It is generally recognized that within any single economic system the growth of combination profoundly affects the working of the free market, by making prices no longer the result of a large number of separate bargains between individual producers and consumers, but rather the outcome of a deliberate policy pursued in the light of intelligent anticipation of demand by organizations powerful enough to control the volume of production and to set upon commodities their own prices within the limits of what consumers are prepared to pay. These limits even the most highly combined industry cannot of course escape; for whether it attempts to regulate prices or output it must in effect regulate them both in accordance with the conditions of consumers' demand. To fix a higher price for a commodity is necessarily in all normal cases to restrict sales, while to limit output is to enable a higher price to be charged. But whichever policy a combine pursues, where it is in effective operation the free market no longer exists, and the levels of prices and sales are the results of deliberate choice by the producing groups between a number of possible alternatives, and not of the uninfluenced higgling of the market. This applies even more forcibly in the sphere of international trade. For whereas there are often considerable difficulties even for strongly organized combines in the way of fixing differential prices to different buyers within the national market, combines can to a far greater extent differentiate in the prices which they charge between one national market and another. The international combine carries furthest of all the denial of the free market and the substitution of a regulated system adjusting both supply and demand to the anticipated conditions of each particular section of the world market.
International combines, however, belong to two main types; and these two types of combine differ materially in their method of operation. The first type is that of a single centrally controlled business which is international in its sphere of operations, and sometimes but not always in the essential composition of its controlling body as well. But in practice combines of this kind tend to be far less international, in any cosmopolitan sense of the term, than imperialistic. They tend, like the great oil trusts, to radiate outwards from one of the great industrial countries, establishing subsidiaries and connections in other countries without losing the essentially nationalistic or imperialistic character of their controlling agency. Thus in cases of this type it is common to find one great international combine, closely associated with one great country, in keen competition with a second combine no less closely associated with another country, or perhaps with several others of the same type. Combines of this sort may come to agreements one with another limiting the forms of competition in which they will engage, or even sharing particular markets; but they remain essentially competing bodies, aiming at expanding their sales one against another, and also commonly in sharp rivalry for the control of new sources of raw material supply.
The second type of international combine, best typified by the Continental Steel Cartel, is on the surface far more international than the great imperialist trusts. But combines of this second type, while their composition and control are international, are commonly made up of national units, each of which retains its independence within the wider body. They are, moreover, usually terminable cartels and not fully organized financial unities, and it is quite possible for them to fall asunder on account of a quarrel between the national groups of which they are made up. They are, indeed, less bodies for the establishment of industry upon a cosmopolitan basis than economic treaty-making bodies, which aim at the regulation and limitation of competition, on terms, between rival national groups.
It is important to realize that, in spite of all that has been said about the progressive internationalization of modern business methods, neither of these types of combine really makes for internationalism in any sense calculated to remove or diminish the effect of rivalries between national economic groups. It is not really true that capitalism is tending to become more international in any sense in which internationalism implies the diminution of the strength of nationalist forces. Indeed, the very opposite is the case; for the tendency is all towards the closer linking up of nationally or imperially organized producing and trading units with the governments of the states with which they are chiefly connected. Economic nationalism has often been written about in the post-war world as if it were a special vice of the newly created small post-war states; but in fact it goes far deeper than this, and is intimately connected with the imperialist phase upon which capitalist civilization has decisively entered during the past fifty years. The economic nationalism which exists in the smaller states is, indeed, the more disastrous in its effects upon wealth in that a small state is necessarily ill-equipped for developing within its borders a wide range of industries in such a way as to take advantage of the economies of large-scale production. Economic nationalism in a small state impoverishes the people of that state; but economic nationalism writ large as imperialism in the policies of the great states, while it is directly destructive of the opportunities for wealth-making only in a less degree, may be far more disastrous if it is the cause of imperialist world wars.
In a world organized economically and politically as is the world of today, there is plainly no prospect at all of a reversion to the freedom of international commerce, in the sense in which it was advocated by Adam Smith and his successors of the classical school. Arm-chair economists may continue to dream of the superior advantages of a free trade world; but there is no more chance of their dreams coming true than there is that Europe will return to the localized economic system of the Middle Ages. The old free trade era has definitely gone, and can never be restored.
Nor can we reasonably wish for its restoration. For the old free trade case in international commerce rested on the assumption that domestic trade and production would be left to the higgling of the market between individual consumers and individual competing entrepreneurs. But in these days every country recognizes within its own national economy the need for a large measure of planned control. Even the most capitalistically-minded countries have moved with enormous rapidity in this direction during the past few years. Germany, the pioneer in this field, was the first to turn from the discouragement to the positive encouragement of national forms of combination; and other countries, more permeated by the free trade tradition, were only slower to realize that their national capitalist systems were speedily passing out of the phase of competition into one of growingly close national combination. Nowadays "trust-busting" is an obsolete sport, and even the United States, under its National Recovery Act, has suddenly reversed its entire policy, and turned from an insistence on domestic laissez-faire to a highly developed system of national industrial regulation.
At present, when countries turn from laissez-faire ideas to the attempt to regulate their national industrial systems, they commonly do this in the first instance largely by means of tariffs or analogous forms of control over imports. Tariffs are increasingly supplemented by quotas, prohibitions and systems of importation only under license; but the common feature among all these policies is that they are endeavoring to guide and regulate national production chiefly by imposing restrictive measures on international trade.
Why does this happen far more readily than the direct regulation of the internal productive system? The answer is that it happens mainly because tariffs and to a less extent the various forms of non-tariff protection are known and familiar devices which can be used not only without creating an outcry from the property-owning classes, but with the support of large sections among them; whereas any attempt directly to control production is at once met with the cry of "bureaucracy," and often with the allegation that such plans are in their essence "socialistic" and therefore fatal to the rights of property. This is exceedingly unfortunate, for it means that where the recognized need for national planning impinges on international trade, it does so practically always in a restrictive fashion, and hardly ever so as to encourage desirable forms of international exchange. Yet clearly if there is to be national planning, there ought to be international planning as well, and international planning ought to take the form not mainly of restricting the movement of goods from one country to another, but rather of encouraging large-scale bargains for the exchange of goods wherever these are of such a nature as to be of benefit to both parties to the transaction.
For, although to some extent the scope of international trade may be lastingly lessened by the rise in all the more advanced countries of much the same range of industries, and although the later developments of industrial technique have been such as largely to offset the national suitabilities of particular areas for the carrying on of particular branches of production, there remains an enormous sphere within which national specialization is still desirable, and indeed absolutely necessary if full advantage is to be taken of the economies of large-scale specialization and standardization of output. Probably international trade will not, in the twentieth century, bulk so largely in the total economy of any country as it bulked during the past century in that of the most developed industrial states, or in those agricultural states which had concentrated on specialized production for the markets of the industrial countries. But even if this is true, the scope that remains open for organized exchange between planned national economic systems is very large, and it will be a disaster for the world if the problem of international trade is regarded in the name of economic nationalism mainly from a restrictive standpoint.
It is, however, bound to be so regarded until countries deliberately and consciously take direct control of the volume and direction of national production. For as long as national production is left unregulated, or is regulated only indirectly by means of tariffs and similar devices, there is no possibility of economic collaboration between states in any form which is not principally restrictive in its effects. One country can of course agree to give tariff preference to another; or some form of customs union may be built up between neighboring states -- though this is for the moment to a great extent obstructed by the most-favored-nation clause, which appears in so many commercial treaties. There can be "Ottawa" Agreements and, if the most-favored-nation clause is modified by agreement, "Ouchy" Conventions, among states. But under present conditions states cannot, save in very exceptional cases, come to agreements designed positively to encourage trade between them except by taking measures definitely designed to exclude trade with some other country. Restrictive collaboration is possible, and does occur: direct planning for an increased volume of international trade is practically excluded under present conditions.
The prerequisite of constructive international planning is, we have said, national planning. If a state is to place itself in a position to make bargains with other countries for the definite admission of certain quantities of their goods, it must do this with full knowledge of the amount of these goods which it aims at producing within its own frontiers. It must therefore have a national plan of production under which the available resources of materials, machinery and man-power are definitely assigned to different branches of production, as they are under the planning system of the Soviet Union. Armed with such a plan, a country knows what it needs to import and is in a position to make constructive bargains with other countries for procuring these necessary imports in exchange for those commodities of which it is able to produce a surplus for export. It can modify its own production plan so as to fit in with bargains into which it enters with other countries, deciding to limit its activities in this industry so as to expand its production in some other sphere, or perhaps to give up producing certain types of goods altogether in order to buy them from a country better able, with the aid of its market, to make use of the full economies of large-scale production. Such a country can make a plan for the full utilization of its own productive resources in such a way as to fit in this plan with the largest volume of international exchange which national differences of productive efficiency make desirable, and which other countries can be induced to agree to. At present Russia is the only country which is in a position to make, with full knowledge, bargains of this sort; and Russia cannot in fact make them because there is no other country similarly equipped with which they can be made. But if the world is to advance at all effectively in the direction of a planned economy, it is only on this condition that the advance can be made. States, or national economic organizations acting with the full authority of the state, must be in a position to make collective bargains one with another in the light of a full knowledge of the use which is to be made of the national productive resources in accordance with an organized and approved national plan.
Any fully developed system of international planning thus demands not only national planning as its first prerequisite, but also unified control over its foreign trade. Where these two conditions are satisfied, tariffs and similar forms of protection, unless they are preserved merely for revenue purposes, become obviously irrelevant. For the tariff, like the other forms of protection now in vogue, is essentially an instrument for influencing forms of international trade which are not under the direct regulation and authority of the state. There can be no need on protectionist grounds for a state, or a national economic authority acting with the state's support, to have tariffs on the goods which are brought in under its own authority. For the extraordinarily uncertain and two-edged weapon of the tariff can be replaced by the absolutely certain instrument of the direct control of buying as a method of regulating the quantity of goods imported from abroad. Moreover, the controlling authority will be in a position not merely to limit or increase from day to day the quantities of foreign goods of any particular type that are allowed to cross the frontier, but also to make, well ahead, bulk contracts for the delivery of imports which are certain to be required on account of the nature of the allocation of domestic productive resources under the national plan.
Of course if national planning does come to be the basis of the economic activities of a number of advanced states, it is not likely to arise in them all at once unless it comes as the consequence of a convulsion similar to that which tore up the roots of the old Russia in 1917. Whether national planning comes elsewhere as a consequence of a constitutional socialist victory or as an instrument devised for the restoration of prosperity in a country still under capitalist control, it is likely to be introduced by stages, and to be applied in the sphere of foreign trade not simultaneously to all industries, but gradually, starting with those industries which are most important in international exchange and most easily susceptible to methods of bulk control. Broadly, from a standpoint of international planning, the goods which pass in international exchange can be classified in three groups. The first group consists of those foodstuffs, raw materials and standardized semi-manufactures which are readily capable of quantitative and qualitative measurement, and therefore lend themselves fairly easily to processes of collective bargaining leading up to bulk contracts for sale. At the other extreme stand those finished commodities which are produced in relatively small quantities, or even individually, for the satisfaction of particular and limited demands. This second class of goods includes not only the more diversified types of consumption products, but also a high proportion of capital goods, and it is therefore of great importance in the exchange economy of the more highly developed countries. Between these two extreme types of product stands a third group, consisting of those manufactured commodities which, while they are produced under large-scale conditions, are widely diversified in quality and fashion, and therefore less easily regulated than the commodities belonging to the first type. Wheat and coal may be taken as outstanding examples in Group 1; ships and machinery and many luxury products as typical examples of Group 2, and most textile goods, boots and shoes and other consumers' bulk lines as typical of Group 3.
When international regulation is taken in hand, each country will be disposed, where it can, to begin by planning the production and exchange of the commodities which fall within Group 1; for this will be by far the least difficult part of the problem. Where countries can arrange for the bulk exchange between them of commodities falling within this group, it will be easiest to arrive at a system of internationally planned exchange. It will not, however, be possible to advance very far by this method alone, as to a great extent world trade consists not of the exchange of Group 1 products for Group 1 products, but rather of the exchange of Group 1 products for products falling within Groups 2 and 3. If, therefore, the exchange of goods between planned economies is to be advanced far, there will have to be arrangements for the organized buying and selling of products falling within the latter groups as well. The tendency will doubtless be in this case to concentrate first of all on Group 3 products rather than on Group 2, because the products in Group 3 are also to a large extent standardized and can therefore be made the subject matter of bulk systems of exchange. But there will arise also a special question relating to one important element falling within Group 2. For some countries which are in a position to export chiefly Group 1 products will desire to receive in exchange to a great extent capital goods. This, for example, is bound to be the position if the United States and the Soviet Union enter, after recognition, into any large-scale agreement for mutual trading.
The problem of organized international exchange, taken as a whole, has two main aspects, that of arranging for the exchange of goods, and that of arranging for the necessary payments across international frontiers. To the extent to which bulk contracts can be arranged on a bilateral basis, at prices agreed in advance, the need for monetary payment across national frontiers can be made to disappear by a system of crediting the value of the goods exchanged to the account of the seller in the currency of the buyer, and then using the money to pay for the goods exported under the corresponding bulk contract involving a reverse movement of goods. But where the exchange is not of bulk products under Group 1, or perhaps Group 3, but involves Group 2 products to any considerable extent, the financial part of the exchange will assume far greater importance, though it will have to be dealt with along the same lines. In this case the country selling bulk products in exchange for a more diversified range of Group 2 products will be able to know in advance how much of the currency of the purchasing country its exports will command; for it will be possible in the case of the bulk exports to fix the price in advance. But it will not be possible to have similar fore-knowledge of the exact quantity of Group 2 goods that this supply of currency can be used to acquire. Accordingly there will have to be a system of running credits for each country in the banks of the other, worked in such a way as to stabilize as far as possible the exchange rates between the two currencies, though not necessarily to fix them against the operation of major forces. This implies close collaboration between the banking systems of the countries as well as between their national trading organizations.
This whole problem is of course highly technical, and cannot be fully worked out until the nature of the proposed exchanges of goods has already been determined, at any rate approximately. It is, moreover, bound up with the question whether the exchange of products between the two countries is to be an exchange that balances in terms of commodity trade, or is to include a large or smaller export of capital from the one country to the other. Obviously the entire question of international lending for industrial purposes is closely bound up with the organization and planning of international trade, and countries entering into mutual trading agreements on a collective basis will have to include in these agreements any arrangements which they desire to make for the movement of capital from the one country to the other, since the failure to take account of this factor would speedily upset the financial aspects of their trading relationship. This means that international planning equally with national planning involves the control of capital investment. A country cannot have a national economic plan unless it is in a position to guide the investment of capital into those industries in which the plan requires the provision of additional capital resources, and to prevent the dissipation of investments in services not scheduled for development under the plan. Similarly, if a system of organized international exchange is to be worked out, the planning of the export and import of capital obviously forms an essential element which will have to be controlled in its proper relationship to the organized movement of commodities.
What are the chief obstacles at present in the way of the development of an organized system of international planning such as I have endeavored to foreshadow? First and most obviously, the absence in all countries except Russia of any real approach to a planned national economy; for, as we have seen, in the absence of this the relationships between countries in the economic sphere are bound to be mainly restrictive, and to aim rather at preventing than at developing international trade. What, then, are the obstacles to the development of national planning? First and most obviously, the individualism of business entrepreneurs, and their continued belief in the merits of a system which gives each possessor of productive assets the maximum opportunity for the display of his individual "enterprise." This individualist tradition is powerful in the minds of the business entrepreneurs in most of the more developed countries, and especially in the older industries of Great Britain, among the relatively small-scale industrialists of France, and almost everywhere in the United States. It is far less powerful in Germany, or indeed in any of those countries which have developed industrialization at a fairly late stage, and have thus entered upon large-scale production under conditions already dominated to a large extent by the growth of trusts and combines. But powerful as this individualist tradition is in the older industrial countries, it is being rapidly broken down by sheer force of economic circumstances; and it is safe to predict that, whether the world economic system is reconstructed mainly under socialist or under capitalist auspices, some considerable advance away from individualism and towards a planned economy is certain to be made. What is doubtful is whether a planned economy introduced under capitalist conditions can possibly so establish itself in face of the powerful vested interests with which it will have to deal as to exercise the degree of control over the use of national resources necessary to afford a sure foundation for a system of internally planned production and trade.
The danger is that, if a planned economy is introduced under capitalism, it will become the prey of powerful vested interests, which will thwart the intention of promoting a distribution of the national man power in the interests of the maximum welfare, and, instead of aiming at the conclusion with other national groups of agreements designed to encourage international exchange, will resume the imperialist policies characteristic of the later stages of capitalist development, and press these policies with the added strength derived from the closer relationship between the state and the economic order which national planning necessarily involves. If this happens, national planning, so far from serving as a force for the liberation of international exchange and the increase of world production, may easily turn into an instrument for the drastic restriction of both. For it may aim at maintaining in the home market a policy of high prices by the restriction both of domestic output and of permitted imports, and at the same time seek to expand its sales in the world market in order to offset the limitation of domestic demand which such a policy of high prices inevitably connotes. Under such conditions national planning will lead not to the régime of plenty which is now well within the world's grasp in view of its greatly expanded productive power, but to a perpetuation of scarcity, and to the shutting up of each developed country more and more behind a wall of economic nationalism, save to the extent to which the stronger countries are able by the methods of economic imperialism to force their way into the markets of the weaker and reduce the smaller countries to the position of satellites.
There was ample evidence at the World Economic Conference that many of the world's statesmen and leading business men, when their thoughts turned in the direction of planned national and international trade, considered this far more as a means of restricting output and so raising prices by the creation of artificial scarcity than as an instrument to be used for increasing the world's total wealth and prosperity. Fortunately, in most cases these plans for the perpetuation of scarcity came to nothing in face of national jealousies and rivalries too powerful to be overcome -- for it is possible to applaud the result even while one deplores the reason. The World Economic Conference was in fact a powerful object lesson in the existing force of national and imperial economic hostilities, and in the immense accession of strength which the sauve qui peut of the present crisis has given to the forces of economic nationalism. National planning in itself affords no way of escape from this régime of national isolation. It is an instrument which, like most instruments, can be used for good or ill according to the character and motives of the forces which control its operation. But national planning on a good or on a bad basis is bound to come; and it is for those who believe in international solidarity, and in the international division of labor as means of increasing the world's wealth, to use all their efforts to ensure that, when it does come, it shall come under the right auspices. This involves that it shall be controlled by those who mean to use it, not for the purpose of bottling up each nation within its own frontiers in a mistaken belief that it is somehow possible to sell more than one buys, and to take advantage of the economies of large-scale production within a nationally restricted market, but instead, for the liberation of the vast productive energy which is now lying unused all over the world by creating a system of organized international exchange on a basis of mutual advantage and superseding tariffs and other restrictive devices by large-scale arrangements for the collective interchange of complementary products.