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During the recent U.S. presidential campaign, railing against trade became a popular pastime. But it is nothing new. Today on the podcast, we’re looking how efforts to weaken trade have played out in the past, and whether Trump’s proposed trade policies will do what he promises.
Featuring interviews with Edoardo Campanella, a Eurozone economist, discussing mercantilism in the past and Marc Levinson, author of An Extraordinary Time: The End of the Postwar Boom and the Return of the Ordinary Economy, on the outlook for Trump’s trade restrictionism.
This podcast has been edited and condensed. A rush transcript is below.
HOST: During the recent U.S. presidential campaign, railing against trade became a popular pastime. But it is nothing new. Today on the podcast, we’re looking how efforts to weaken trade have played out in the past, and whether Trump’s proposed trade policies will do what he promises.
First, Foreign Affairs’ Rebecca Chao spoke with Eduardo Campanella, a Eurozone economist, to learn more about mercantilism in the past. Later, we’ll hear from Marc Levinson, author of An Extraordinary Time: The End of the Postwar Boom and the Return of the Ordinary Economy, on the outlook for Trump’s trade restrictionism.
CHAO: You write in your piece for foreign affairs that mercantilism is not new. Can you give us a brief history of anti-trade sentiment and what the consequences were?
CAMPANELLA: Between the 16th and the 19th century, it was a common practice among rulers to put up trade barriers to boost domestic production and to weaken rival powers. The goal was to increase global power at the expenses of other countries. Then, over time, the attitudes towards trade has changed, and in the years before World War I, there was a more positive attitude towards free trade. Clearly, between the two World Wars, the situation changed, and after World War II, we started to have again a lot of emphasis on removing trade barriers, because the idea was everyone would be better off in a world of free trade. When you increase tariffs or quotas to restrict trade, you create huge political tension among countries. That's why, in the past, very often wars originated from trade tensions.
CHAO: The argument goes, is the blue collar workers saying that, even if overall statistically the benefits of trade are spread out all over the world, they themselves haven't benefited. Do you think? Has trade been beneficial over all, or has it hurt people without addressing deeply felt concerns?
CAMPANELLA: Trade has the potential to increase the size of the economic pie. The problem is that the free market per se is not that good at spreading evenly the benefits of free trade. And the US is a clear example, but also we had the similar dynamics in other countries, including in Europe. You see that the many people have been left behind. The reason is simple. In a highly globalized world, only the highly skilled worker truly benefits from the system, so you need to find a way either to make sure that also those who are left behind can benefit from it, either through redistributional policies, or through educational policies, or in the most extreme case, and this is the situation in the US right now with Trump, through protectionist policies.
CHAO: Do you think that these protectionist policies are going to work in bringing back jobs?
CAMPANELLA: I don't think so. And the reason is simple. The situation is a bit more complicated than Donald Trump but also Hillary Clinton depicted in their campaigns. You have basically two forces that are reinforcing each other. On the one hand you have globalization, on the other hand you have technological progress. When it comes to manufacturing, the shortage of blue collar jobs is mostly due to technological progress. And globalization is only reinforcing this dynamic. What we see in manufacturing is something similar. What is happening now in manufacturing happened a century ago in agriculture. You have technological progress that brings in productivity gains, and so, to produce the same amount of goods, you need less labor, so you need fewer workers. So, protectionism never work.
Of the two forces that are at play now, technological progress and globalization, the only one that the policy maker can tame in a way, is globalization. Innovation is out of control, in a way. You can put up some trade barriers in order to give time, for instance to workers to adapt. But I think in the case of Trump, his strategy would not work, because the jobs that are gone are gone forever. You will not create them anymore.
CHAO: What about the big infrastructure plan that Trump wants to roll out? He wants to spend trillions of dollars in rebuilding our bridges and our roads.
CAMPANELLA: I think, as many economists in the US, and for sure, Larry Summers is one of the most prominent in that sense, I think the infrastructure project strategy is certainly more helpful than protectionism, for one reason. You invest money in low-skilled jobs that cannot be taken away from workers living abroad.
If the goal is to create job opportunities for the least qualified workers, I think the infrastructure project, the strategy that Trump has in mind, is more effective than a protectionism. In
CHAO: Is there a relationship between big infrastructure projects, though, and trade? How much would the US need to import materials in order to build those roads and bridges?
CAMPANELLA: Well for sure the trade relationship, the link, might be huge. Think about the steel you might need to certain kind of constructions, and you get a lot of steel from China, for instance. So the link is very strong. That's why it's better not to compromise your trade relation with an important trading partner like China, especially if you want to adopt an effective infrastructure program, like the one Trump has in mind.
CHAO: Do you think that the trade relationship with China has already been damaged by Trump?
CAMPANELLA: They are afraid, but they don't think their relationship has been compromised. It's not, to be fair with Trump, this is not the first time a prominent American politician have tried to label China a currency manipulator. I don't think, in that sense, that he has damaged the relationship with China.
CHAO: What are some ways that Trump could damage the relationship with China in the coming years?
CAMPANELLA: Well, something that I try to highlight in my article is that, as you know better than I do for sure, trade policy is prerogative of Congress. So what the President can do when it comes to tarfifs, for instance, is to impose a tariff that cannot be higher than 15%, so, much lower than 45%, that Trump promised during the campaign. And these tariff that is imposed unilaterally by the president has to be approved by Congress within 150 days. If Trump really wants to play tough with China, he could do something like that, he could decide to impose a tariff on China without asking for Congress' approval. And this, for sure, would comprise the relationship with Beijing. But I don't see it as a likely scenario, in my opinion.
CHAO: What's the likeliness, do you think, of a potential trade war between the United States and China?
CAMPANELLA: I think the likelihood right now is very low. Things can get out of control very easily, however, when it comes to politics, when it comes to trade relations. It's important that both Washington and Beijing find some common ground. What I think is very likely, however, is that Trump will try to step up the rhetoric against Beijing without taking action, but just to threaten to take some tough measures against Beijing.
CHAO: My last question is, if you were, say, on the economic advisor panel of the Trump administration, what kind of advice would you give him in this anti-trade climate?
CAMPANELLA: Politically, for him, if I am his advisor, I would tell him, "You should keep riding it, but you should understand that protectionism is not the solution. The solution is to invest in education, for instance, and re-training workers." But clearly, if you consider only the political game, it might make sense to keep riding a bit the anti-trade wave, only in order to get the best possible deal for the United States. But I would repeat him several times that protectionism would not make America great again, for sure.
HOST: That was Rebecca Chao talking to Eduardo Campanella. Next up, we turn to Marc Levinson, who talked to Foreign Affairs’ Park MacDougald.
MACDOUGALD: So I guess we can start off by asking you about your new book. It's called 'An Extraordinary Time' and it is about the 1970s, am I correct?
LEVINSON: That's right, I take a look at the post-war boom, the boom that the world enjoyed really from 1948 to 1973 and then its startling end and the economic consequences of what followed. 1973 really brought a down shifting to the world economy and people who had grown very accustomed to rapid economic growth and quickly rising living standards soon found themselves in a situation of really ____ growth, slow improvement in living standards, times didn't feel so good anymore, and I argue that that led to a great increase in distrust of the political class.
MACDOUGALD: Now, obviously, changes this big are never for just one reason, but what are the big... What's happening in the mid 1970s, 1973, '74, '75?
LEVINSON: One of the fascinating things about this is that at the time people were really focused on the wrong issue. To the extent that people remember the events of 1973, it was the oil crisis, that was the year of the Yom Kippur War, there was an oil embargo by the Arab producers against the United States and other countries, the price of oil went up a lot, there were gasoline lines and, all of the sudden, energy independence became the number one political topic in United States, but with much less attention something much more serious was going on than that.
The most serious economic problem that the United States and indeed the world faced was not an energy problem; it was a productivity problem. What we had seen in the post-war era was that productivity rose very quickly all over the world, and around 1972-1973 that really came to a stop in almost all the wealthy economies and that played itself out in much slower growth in people's incomes.
MACDOUGALD: And, in the title you, you refer to an 'Extraordinary Time' and I suppose that can partly refer to the 1970s themselves, but that's also part of the argument too, is that this post-war expansion is an extraordinary time, you have a lot converging factors that are maybe not to be repeated again in the future. Do you think that's what we're looking at?
LEVINSON: I think we take the post-war period as the norm, when in fact it was the exception. In the post war period between '48 and '73, it was very common in countries like the United States to have the economy growing by 4%, 5%, even 6% a year, and at rates like that, people's living standards can double in 12 or 13 years. People's living standards can quadruple in a quarter century. People can feel themselves getting rich quickly, and they assume that that's normal. I argue that actually across the broad sweep of world history, normal economic growth is about 1.5% to 2% a year in most countries at most times. It's not terrible, but it's also not fantastic. It's not fast enough to make you see things getting better from one year to a next. It doesn't leave you with the feeling that things are going great. I think we've tended to exaggerate for the public what it's possible to achieve here in terms of economic growth and improved living standards. We have taught people that governments are capable of producing a lot more than they're actually able to produce in terms of economic growth.
MACDOUGALD: This sort of thinking about what governments can do, this is also something that changes in the 1970s, correct?
LEVINSON: In the 50s and 60s, there was really a strong belief that economists had control of these things now. We had computers, we had linear programming. We knew how to collect information about the economy and use that so we could fine tune economic policy and put an end to recessions, put an end to the high unemployment. We could run the economy at full tilt continually. That was the fantasy, and that was really shown to be quite untrue in the 1970s, as growth slowed down very rapidly and the economists didn't know what to do about it. The political leaders didn't know what to do about it. I think what we saw was a resort to different things because the post-war program, if you will, with a growing welfare state with a government exercising a pretty heavy hand in terms of regulations and things like that was no longer able to produce economic growth the way people wanted it. And so you saw voters in one country after another turning to other models, ideas that had previously been fringe ideas, like deregulation of the economy, privatization was another one.
Suddenly those became fashionable and we had voters going for leaders like Margaret Thatcher and Ronald Reagan who promised to pay more attention to private enterprise and get the government out of the way of the private sector and let the private sector grow. Unfortunately, what we saw is that the conservative growth models that came around in the late 70s and early 80s were no better at producing productivity growth than the models that had been there before them. Productivity continued to grow slowly and it has continued to grow slowly pretty much to this day, with a brief exception in the late 90s.
MACDOUGALD: Is there anything that you think that governments and policymakers can do to address that or is this just a new reality that we live with?
LEVINSON: I think that while there are things that governments can do, certainly investment in research is important, investment in education is important, I totally agree with that, but the fact is that productivity growth ends up coming mostly out of the private sector and it comes at unexpected times. Let me give you an example. We spent a lot of money collectively in the 1940s and the 1950s developing a computer technology, improving semiconductors, heading ourselves towards the information economy, and that played itself out in productivity in the 1990s. It took a long time for organizations, businesses, governments to figure out how to take advantage of these technological advances in making their work more efficient.
This process is unpredictable, we don't know how long it will take until innovations work themselves into the economy, how big their effect will be, and so I think that makes it very hard for governments to claim to improve productivity growth.
MACDOUGALD: And what role is trade playing in this story? It's obviously something that's taken a lot of abuse recently in the US Presidential Election.
LEVINSON: Trade has a really important role in productivity growth, and that's played itself out in several ways. Let me give you an example or two. One is the trade tends to expand the markets for companies, so you've got a company that's producing for a local market, a small audience, if you will, now it can compete internationally, it can expand, it can take advantage of economies of scales to lower its costs, and that usually improves productivity. On the other side, trade forces companies to face up to more competition. If you have industries that don't have much competition, well, folks can get fat and lazy, they don't invest in the latest equipment, they don't worry about keeping their costs in line, and more competition brings discipline to that process, so trade has been very important in that.
MACDOUGALD: What about the political implications for all this? You mentioned earlier that voters, I would say especially in the West, or maybe elsewhere, have come to expect what might be regarded as an unrealistic level of growth and expect their politicians to be able to deliver that.
LEVINSON: I think that this is a problem for democracy going forward. We've got a world in which we're experiencing fairly ordinary economic growth, and it's leading to a great deal of discontent, not just in the United States, but in many, many countries.
Is there an exit? Is there a solution? On that score, I'm somewhat optimistic in the sense that, historically, we've seen that unexpected productivity advances do come along. Suddenly a new technology takes root and it changes the way that business does business and gives us a spurt of economic growth. We saw that in the 1990s, for example, with computers and the internet. It's entirely possible that five or 10 years from now, artificial intelligence or virtual reality or some other new technology all of a sudden starts to have major consequences for the economy, and that results in faster growth and higher incomes. I don't deny at all that that could occur, but I don't think it's gonna happen on a schedule that's planned by anybody in Washington.
MACDOUGALD: What your expectations are for the near future, if you feel like making any predictions.
LEVINSON: Well, we know that in any country, it's possible to create a spurt of economic growth for the short term. You can have a bunch of deficit spending, you can offer a big tax cut, or you can print a lot of money and lower interest rates. And for a little while, that will make people feel really good. It doesn't last very long. And the question then is, what is going to be the ability of government to provide faster economic growth in the long term? My own view is that ability is pretty limited.
MACDOUGALD: Do you see any positives to this? It's been an idea that's been floated by people in the environmentalist community, that perhaps, if not a zero growth economy, but having a lower average level of growth is actually a path that we need to be moving on anyway, in order to try and have a more environmentally sustainable form of social organization.
LEVINSON: We had that discussion back in the 1970s, too. There was a very famous book published called 'The Limits to Growth', which said that the world was outstripping its growth capacity, we were just using up resources and the world was gonna crash in very short order. Well, that hasn't really come true, and I would argue that economic growth now is probably a whole lot less damaging to the environment than it was then. But look, here's the problem. When the economy is growing rapidly, as was the case in the 50s and the 60s and the early 70s, then, it's likely that almost every individual in that economy is able to get a piece of the growing pie. Everybody is feeling better off. When the economy is growing slowly, as is the case now, and has been the case for most of the past 40 years, then it's much harder to make everybody better off. You've got some people who are better off and some people who are not. And that's the situation in which we're in. I think that's what you're seeing played out in the elections in many countries. And it's very, very difficult to address that situation in an atmosphere of slow economic growth.
MACDOUGALD: And final question, meant semi-seriously, but say you're called to testify in front of Congress, you're asked, "You have one policy wish to get us back on the path to growth". Obviously, there's a limited amount we can do, but if you could make one single intervention, what would that be?
LEVINSON: Probably the best single thing I think we could do is spend more money on our children. Our growth frankly depends on innovation, new ideas, a greater creativity, and that's gonna come from people who are entering the workforce and are coming up with new ideas and new ways of doing things. And so we need to have a highly skilled workforce to take advantage of the opportunities that the future will create.
HOST: That was Park MacDougald talking to Marc Levinson.