Neoliberalism and its enemies

Part 2: The "old consensus" on China was wrong, but is the new consensus any better?

The first edition of this series on Neoliberalism and Its Enemies looked at how the Hewlett Foundation has characterized the neoliberal era in its grant-making. I got some pushback from people who accused me of using a straw man rather than any of the more sophisticated definitions one can find in the extensive academic work on neoliberalism.

I’m absolutely aware that vast tomes have been written on this subject. But my point in highlighting Hewlett’s crusade against a mythical era of growth-at-any-cost is that this definition is the basis of a years-long, multi-million dollar grant campaign, one that has influenced a large share of progressive nonprofits and media outlets. If Hewlett’s grant-making does not reflect the best ideas of left-wing scholarship on the topic of neoliberalism, that’s a problem with their grant-making, not a problem with my article.

Today, though, I want to talk about a real consensus that really has flipped — a consensus about trade in general and about China in particular.

The effort to integrate China and the United States of America into a single global trading framework has always been controversial. The other day, I read a 1999 article about Nancy Pelosi fighting with George H.W. Bush about this 30 years ago. But even though the idea was controversial, it was also the subject of bipartisan consensus. Pelosi fought with Bush, then with Clinton, and then with George W. Bush. Barack Obama continued some aspects of this policy and pivoted away from others. But then Donald Trump articulated a hard break with it, so forcefully as to almost travel back in time and erase longstanding skepticism among congressional Democrats. And while Joe Biden’s approach has not been the same as Trump’s, he has certainly not attempted to restore the old consensus, or even Obama’s effort to create a modified version of it.

On this one, the anti-neoliberals have:

• Identified a genuine point of prior consensus.

• Correctly argued against something the old consensus was wrong about.

• Successfully overthrown the old consensus.

Job well done! The problem is that they have not yet forged a new consensus, in part because they can’t quite seem to decide amongst themselves if the flaw in the old consensus had to do with China or with the economics of trade.

Free trade beyond neoliberalism

It’s worth saying that the consensus in favor of lower trade barriers long predates the neoliberal era. Franklin Roosevelt signed the Reciprocal Trade Act back in 1934, giving the president the authority to negotiate bilateral trade deals, and it was extended in 1937, 1940, 1943, 1945, and 1948. Democrats had traditionally been the party more open to trade, and blamed the Smoot-Hawley tariff hikes for exacerbating the Great Depression. Working to lower global trade barriers was part of New Deal liberalism, and that goal was reaffirmed in the Democratic Party platforms of 1944 (“we shall uphold the good-neighbor policy, and extend the trade policies initiated by the present administration”) and 1948 (“we pledge ourselves to restore the Reciprocal Trade Agreements program formulated in 1934 by Secretary of State Cordell Hull and operated successfully for 14 years—until crippled by the Republican 80th Congress”).

Then in the 1950s, the Eisenhower administration joined the New Deal pro-trade consensus.

As far as I know, no president between Roosevelt and Trump was a completely dogmatic free trader, but they were all broadly favorable to the idea of negotiating deals to lower trade barriers. The foundation of the consensus was that trade is essentially a political economy question. Protection has concentrated benefits (for the protected industry) and diffuse costs (for everyone else), so the best way to defeat protection is to centralize authority over trade (which is how Trump came to have such dangerous tariff power) and to promote trade via bilateral and multilateral agreements. That way, in a trade deal you not only have diffuse beneficiaries (American consumers) but also concentrated beneficiaries in the form of American exporters.

In the context of this overall push for liberalization, trade wars would occasionally happen. At the very height of the 1990s neoliberal consensus, for example, the United States and European Union had a vicious trade war over charges that a European program to promote the banana industry in Caribbean islands was discriminating against Central American banana growers. We also saw huge overt departures from the concept of free trade, like American sanctions against Cuba and Iran. Crucially, though, the disputes over this were not disputes about the economics of free trade. The US didn’t sanction Iran because it questioned the economic value of trade, we sanctioned Iran because we wanted to deliberately hurt the Iranian economy by cutting them off from trade. And the Banana War was fought to uphold the concept of reciprocity, non-discrimination, and open markets. In all cases, of course, bad faith and special interest politics and narrow protectionist interests also mattered, in practice. But there was, theoretically, consensus on the economics.

For most of the postwar period, the idea was to negotiate trade deals with friendly countries. But in the geopolitical reverie of the 1990s, American elites moved away from viewing the world as divided into blocs, and reconceived of it as divided between an “international community” and a handful of “rogue states.” And part of that was the idea that the People’s Republic of China, with its market-oriented reforms, should be integrated into the set of international trade institutions that were originally created to serve the needs of the anti-Communist bloc in the Cold War.

An erroneous China consensus

In elite circles, the major arguments about this were geopolitical.

Pelosi’s aforementioned 1990s arguments against Most Favored Nation status for China related to human rights and the desirability of sanctioning them for the Tiananmen Square massacre. In 1996, Thomas Friedman outlined the “Golden Arches Theory of Conflict Prevention” in a New York Times column, noting that no two countries with a McDonald’s had ever gone to war with each other. That was always meant as a joke, not a belief that Big Macs literally prevent war. But Friedman was serious in his view that commercial integration would be both a cause and a consequence of placid geopolitical relations. He was aware that Norman Angell had made similar arguments before World War I, and invoked McDonald’s because he thought the cultural aspects of deep globalization and brand identity would make a difference.

When Bill Clinton signed bipartisan legislation paving the way for Chinese entry into the WTO, then-Speaker Dennis Hastert said, “We open it up so that we can exchange ideas and values and culture. And that's an important thing.” Clinton forecast that joining international trading organizations would promote political liberalization in China:

Of course, opening trade with China will not, in and of itself, lead China to make all the choices we believe it should. But clearly, the more China opens it markets, the more it unleashes the power of economic freedom, the more likely it will be to more fully liberate the human potential of its people. As tariffs fall, competition will rise, speeding the demise of huge state enterprises. Private firms will take their place, and reduce the role of government in people's daily lives. Open markets will accelerate the information revolution in China, giving more people more access to more sources of knowledge. That will strengthen those in China who fight for decent labor standards, a cleaner environment, human rights and the rule of law.

Suffice it to say, this did not happen. I’ve spoken to people affiliated with union-aligned advocacy organizations who tell me it’s naive to think anyone ever believed this, that it was always an argument made in bad faith and advanced by people who were just fronting for American business interests. I do not think that is true. And at the time, people on the pro-trade side of the argument told me that those raising human rights and national security arguments against deep economic integration with China were the ones acting in bad faith in order to front for narrow protectionist interests.

Time has proven the optimists wrong, and (perhaps providing evidence that policy arguments are more good-faith than people sometimes think) it’s now broadly accepted that US-China trade policy needs to reflect a competitive international environment and deviate significantly from a textbook free trade regime.

But the question remains: Is this a question of economics or of geopolitics?

Is protection a cost or a benefit?

Another way of framing this is that adjusting trade policy to account for strategic competition with China is an economic cost to the United States. Deciding that we need a domestic semiconductor industry, in other words, is perfectly reasonable, but it’s similar to the calculation that we need aircraft carriers and ballistic missile submarines. There are jobs to be had building military equipment, but the existence of the defense-industrial complex is not an economic benefit to the United States — it’s a cost we bear for national security purposes.

Similarly, if we need targeted protection to create a battery supply chain that does not depend on Chinese factories or Chinese inputs, that’s a cost. The benefits of improved batteries, which are incredibly real, are the benefits to consumers of getting better and cheaper batteries. The way to maximize those benefits is to get them from the cheapest possible source, while allowing American capital and labor to focus on its comparative advantage.

To be clear, I am not saying we should behave that way. I think the old consensus about the geopolitical aspects of trade with China was wrong. But I think the traditional economic analysis of trade remains clear and compelling.

Donald Trump explicitly disagrees with that. He talks a lot about China, but he also wants 10 percent taxes on imports from all countries. He revised NAFTA to make the American market less open to imports from Mexico. Trump’s stated view of international economics is zero-sum, and frankly mercantilist. At a time when the prime-age labor force participation rate is higher than it was at any point during his presidency, but people are worried about inflation, he is still giving convention speeches complaining that foreigners are taking our jobs. If you have that kind of blanket mercantilist worldview, then the national security concern about China is convenient happenstance. But it’s not a real reason. Trump wants protection from indisputably friendly countries, too.

The Biden administration’s position is more ambiguous.

What I think they think is that the traditional textbook economics of trade are correct, but national security concerns about China are valid, but also that Bill Clinton and Barack Obama erred in their political judgment by not giving in to enough protectionist political demands.

And to be clear, it’s not like either of those guys were totally rigid free traders. Obama imposed anti-dumping tariffs on Chinese tires. But to the best I can tell from my reporting, the Biden team is also a house divided, between those with traditional economics views and a strikingly heterodox slate at the Council of Economic Advisors, with many allies scattered throughout the government. The result is they sometimes get tangled up when trying to explain why their approach to trade (targeted tariffs to protect strategic industries in key areas) is better than Trump’s (giant tariffs to foster inflation and corruption).

A neo-neoliberal approach to trade

I think a conceptually sounder approach to the problems with the old consensus is closer to where the Obama administration landed in its second term. The point of the Trans-Pacific Partnership was to deepen economic relations between the NAFTA countries, Japan, Australia, New Zealand, and a smattering of other states, including most notably Vietnam.

The basic thought behind it is that if trade is economically beneficial but the geopolitical bet on trade with China isn’t working out, then we should trade with other countries.

Another policy idea from Obama’s second term that didn’t get nearly as far was the Trans-Atlantic Trade and Investment Partnership (T-TIP) — basically an effort to create a sort of NAFTA/EU trade bloc focused largely on regulatory harmonization. T-TIP was always a stretch, because formal trade barriers between the US and EU are already very low. The issue is that while lots of small countries will basically just adopt either American or European product regulations (nobody is going to custom build a refrigerator to meet Jamaica-specific energy efficiency rules), the US and EU are so large that we are comfortable going our own way on regulatory matters. As a result, European cars are not street-legal in the United States and vice versa. Some drugs are available in Europe but not in the United States. American chicken is considered unsafe in Europe, even though as far as I can tell, when Europeans visit the United States they eat the chicken.

These ideas got blown up for various political reasons. Courting labor support in the 2016 primary, Hillary Clinton came out against TPP and T-TIP as well. And with Trump catching fire on the GOP side, the cause of expanding trade was totally dead.

Is this what people want?

I totally understand that nobody wants to listen to exponents of the old, incorrect consensus about economic integration with China.

At the same time, it’s still the case that mercantilist economics is wrong. If imposing tariffs on Korean washing machines results in the construction of new appliance factories in the United States, that is a cost of the policy, not a benefit. The labor and materials that go into building that factory could have been used to build houses or roads. If reliance on Korean washing machines is a national security threat to the United States (it isn’t), then that’s a problem we need to address. But addressing it is something that costs resources; it doesn’t make us richer.

I also think there’s been overcorrection on the politics of trade.

It’s true that opportunistic protectionism can sometimes win votes, which is why every administration has dabbled in it. But if there’s anything we’ve learned over the past few years, it’s that voters really do value low consumer prices! Protectionism pits a concentrated benefit (to a small number of factory owners or workers) against a diffuse cost (to everyone who buys stuff), which means it can sometimes be politically smart. But if you impose too many diffuse costs on people, you have a big political problem.

Centering the political upsides of trade protection also undermines the actual national security case. If it’s genuinely important to increase domestic semiconductor manufacturing capacity in the United States, that calls for not only protection and subsidies, but also regulatory favors. But the Biden administration has tended to pursue the opposite approach, trying to promise everyone “good jobs,” high wages, and strong environmental protection. I think it’s better to think of this as analogous to actual defense contracting. There is tons of political gamesmanship around the construction of tanks and warships and fighter planes, but in principle, we maximize national security by finding the cheapest and most efficient way to build ships. To the extent that political considerations compromise the cost-effectiveness of your defense manufacturing, that’s undermining national security.

Long story short, it’s better to treat the economic, national security, and political aspects of trade as separate considerations, each of which feature tradeoffs. Helping labor allies isn’t a crazy idea, but it’s a drag on economic growth and national security. Maximizing national security means incurring economic costs and making tough political calls. Striking the right balance is difficult, but denying the existence of tradeoffs doesn’t help anyone make good decisions.