How to Save Democracy From Technology
Ending Big Tech’s Information Monopoly
Mercantilism has destabilized the world for centuries. Before the Industrial Revolution, rulers stifled imports through tariffs and quotas to boost domestic production, weaken rival powers, and increase global influence. Inevitably, these moves led to short-term gains but also to political tension, territorial expansion, and fatiguing wars. The consequences of President-elect Donald Trump’s neo-mercantilist attitudes, particularly toward China, are unlikely to be as catastrophic, but they are still concerning. They will bring little employment relief to the American working class while irreparably damaging the world economy.
Trump repeatedly railed against Beijing during his campaign. “China’s entrance into the World Trade Organization,” he bluntly argued during a speech in Pennsylvania, “has enabled the greatest jobs theft in history.” In his view, the $365 billion trade deficit with China is simply the result of unfair business practices that force U.S. manufacturers out of the market. This superficial analysis ignores that trade deficits also stem from a lack of thriftiness among Americans and implies that dollars would flow back home in the form of foreign investment. Trump is very clear on the issue: “We already have a trade war and we’re losing, badly.”
Declaring China a currency manipulator, bringing trade cases against Beijing at the WTO, and imposing new tariffs on Chinese goods top his electoral program. Peter Navarro, Trump’s economic adviser, believes that a 45 percent tariff on Chinese imports would compensate Americans for Beijing’s wrongdoings, from illegal export subsidies and currency manipulation to intellectual property theft and environmental wreckage. Like an old-fashioned mercantilist, Trump argues that curbing Chinese imports would reestablish fair competition, leading, in turn, to the resurgence of manufacturing in the United States.
But that line of thinking is delusional. Overall industrial output in the United States is at a historical high, while manufacturing employment is at a historical low. As it happened with agriculture more than a century ago, technological progress, which leads to productivity gains, is to be blamed for the dearth of blue-collar jobs in the United States. Globalization only reinforces the underlying dynamics. Moreover, in a world of global value chains, where production is sliced and diced across the world, several imports from China, such as auto parts, steel, semiconductors, and plastics, are actually intermediate goods or raw material for U.S. exporters, meaning that they contribute to the value of the final good. Paradoxically, a tariff on imports from China would be equivalent to a tax on U.S. exports, which would imply higher selling prices, a loss of competiveness for U.S. firms, and, in turn, fewer jobs.
For Trump to believe that his strategy will work, moreover, he must naively assume that Beijing will not retaliate. And he knows it will. Last January he said, “I would tax China on products coming in. I would do a tariff, yes—and they do it to us.” A highly confrontational stance would make a trade war nearly inevitable. When in 2009 Washington imposed a 35 percent tariff on Chinese tires, Beijing responded with a tariff on U.S. chicken products. But tariffs are only one of many policy tools that Beijing could use to scare Washington. Boycotting U.S. companies in China or denying key components to global value chains, such as the rare earths used in electronics or the assembly of intermediate components for the iPhone, would generate major losses for U.S. firms. General Motors, for instance, sold more cars in China than in the United States each year from 2010 to 2014—and those profits implied high dividends for GM shareholders, tax revenues for the federal government, and salaries for American blue-collar workers. Indeed, such tit-for-tat measures would put at risk the 900,000 jobs that depend directly on exports of goods and services to China.
China is too big a market for the United States to lose access to in the name of restoring a handful of jobs.
Although it may seem rather unthinkable, Beijing, if pushed to the corner, could even financially hijack the United States. For example, as a counterpart to its trade surplus, China has accumulated more than $1.2 trillion in Treasury bonds (about six percent of U.S. public debt). This has contributed to depressed interest rates in the United States, allowing both businesses and households to borrow cheaply. If China suddenly stopped buying this asset or, even more terrifying, sold part of its portfolio, interest rates in the United States would soar, equity prices would drop, and the dollar would free fall. This would depress the disposable income of the American middle class, and thus, consumption, while hurting business confidence, and thus, investment.
Tensions between China and the United States do not even have to get that vicious to dramatically shake the world economy. Even a mild trade war would derail the ongoing global economic recovery. And if frictions between the two superpowers were such to push one another into a severe recession, they could bring down with them the whole world. With limited growth prospects, the temptation to divert demand from imports to domestically produced goods would rise. Eventually, protectionism would spread globally, and political tensions and resentment, even among close allies, would likely escalate. According to the International Monetary Fund, a worldwide increase in protectionism would lower global GDP by two percent in the long term.
Such arguments may not be enough to persuade Trump to step back. Yet once he enters the Oval Office, he will likely be forced to revise many of his electoral promises anyway. Domestically, the U.S. Congress is in charge of the country’s trade policy. The president can only introduce a tariff of up to 15 percent for 150 days. Any more and he must seek congressional approval. With both the House and the Senate controlled by the GOP, Trump needs to reassemble his own party in order to live up to his electoral ambitions. But even Republicans’ backing may not be enough if Trump’s policies, as is very likely, violate WTO rules, such as the principle of Most Favored Nation—not discriminating against trading partners—or the agreed limits on the maximum tariffs that each country can impose. If the WTO found the United States guilty of violating trade rules, then Washington would be asked to promptly correct its fault or China would be allowed to adopt retaliatory measures against U.S. goods.
But, to be fair, Trump does have a point. Beijing’s transition to a free market economy is far from complete. Its interventionist policies distort competition in many areas, its cyberespionage of U.S. firms is widespread, its enforcement of intellectual property rights is poor, and its protections for workers and the environment are almost nonexistent. But tit-for-tat policies will be harmful for the global economy, bringing little employment relief to U.S. workers. Rather than undermining the U.S.-led, rules-based trading system, Trump should work to strengthen it.
China is too big a market for the United States to lose access to in the name of restoring a handful of jobs. With the support of the European Union, which is equally concerned about the opacity of the Chinese economy, Trump should find constructive ways to negotiate better trade deals with China, using protectionism simply as a threat, and not an actual policy strategy, to extract a credible commitment from Beijing. As it happened at the time of China’s WTO accession in 2001, external pressure could provide Beijing a good excuse for tackling China’s powerful interest groups, such as state-owned enterprises, which obstruct the transition to a more balanced economy. And cooperation on the trade front might be matched with more freedom of action in the South China Sea as a result of Trump’s partial disengagement from the region, which, of course, would be no good for the geopolitical stability of Southeast Asia.
History shows that mercantilism can only make everyone worse off. Let’s hope that we do not have to prove the point once again.