The return of economic nationalism

The Return of Economic Nationalism General Motors and Chrysler hover on death’s door. Meanwhile Treasury Secretary Tim Geithner urges the Chinese to not to devalue their currency. Most would describe the connection between these events as purely economic, caused by the dislocations of the current financial crisis. But this ignores the deeper meaning of these events, both of which are laden with nationalistic freight. Nationalism is difficult to measure, and therefore ignored by economists. Yet its effects on the economy, especially in the long-term, can be profound. In fact, even when the current crisis blows over, the underlying collision between societies like China, where economic nationalism is strong, and those like America, where it is weak, will intensify. Geithner noted that China’s chronic trade surpluses with the United States played an important part in speeding the American economy toward its current crisis. Why? When China exports goods to the United States, it can do only two things with the US dollars it gets: buy American goods or buy American capital. Like Japan and several other developed economies, it has consistently chosen to accumulate American assets. Normally the dollar would fall until American exporters can become more competitive, but the dollar’s status as a reserve currency and the deliberate actions of governments like China’s have artificially propped it up. The result was a flood of cheap capital into the US, preventing the Fed from raising interest rates to control asset prices. The United States has had a negative trade balance since 1960, but its trade deficits have been ballooning sharply since 1997. This trade imbalance, if unchecked, will lead to an increasing proportion of the country falling under foreign ownership, leading eventually to a crisis that will shift the world’s center of economic and political power. Nationalism plays an important part in this process. National governments like to see healthy trade surpluses and undertake open-market operations to weaken their currency and help their exporters. They also protect high-tech and infant industries for the same symbolic reasons. Meanwhile nationalist consumers prefer national brands, and national networks freeze out exporters. My father’s experience running the Japanese office of a Canadian forest products company in the early 1980s was an eye-opener. He tried to introduce Apple computers in the office but this was resisted tooth-and-nail by employees. Their enthusiasm mysteriously materialized when he brought in machines made by NEC, a Japanese manufacturer. Among many similar stories is a tale of trying to penetrate the Japanese newsprint market. Local Japanese agents asked him to hide in doorways to prevent them being seen by their colleagues as working on behalf of a foreigner. Time and again, bidders bypassed the Canadian product despite its superior price and quality. The Japanese preferred to see Canadian provide raw pulp which could then be processed by local manufacturers. Much of this was motivated by nihonjinron, a form of cultural nationalism that took pride in Japan’s export performance. In China, exporters who seek to penetrate the local market must also contend with corruption and other barriers. Not every country can succeed with economic nationalism. The dark days of socialist self-sufficiency and import substitution were a failure in countries such as Brazil where economic nationalism had shallow roots. In East Asia, by contrast, there is a widespread sense of ethnic homogeneity and consensus which enables economic nationalism to thrive. Overall, economic nationalists sacrifice material consumption for the national pride that comes with being a creditor nation which owns foreign assets. On this logic, the American trade imbalance cannot be rectified by the marketplace alone. Reversing this state of affairs requires a major shift in the mentality of exporting countries toward accepting foreign goods and capital. This sticks in the throat of those who prize national self-sufficiency and the moral fiber which comes from saving more than one spends. Such notions may strike many as incomprehensible, but previous generations of Americans understood it instinctively. Jefferson and other republican-minded Founders extolled the virtues of the Yeoman farmer, a self-sufficient individual who formed the bedrock of the nation. Nations in which landowners lived off tenant famers or serfs were spurned as weaker and less free. In the nineteenth and early twentieth centuries, the yeoman ideal underwent transformation, but most Americans identified themselves as producers rather than consumers. Only in the second half of the twentieth century did consumer logic fully displace earlier notions of producerist self-sufficiency. Traces of economic nationalism survive in America. It is no accident that the most successful American vehicles are trucks, powerful symbols of rural and working-class masculine patriotism. The fact that GM and Chrysler are being bailed out is partly because their products have been immortalized in song and film as national icons. Economic nationalism is not good for the global economy, and protectionism tends to encourage mediocrity. Nevertheless, economic nationalism is a fact of life for many of the country’s trading partners and the US must look to its long-term interests. This suggests that while free trade should be defended, America could benefit by reconnecting with its producerist traditions which emphasize the importance of saving and workmanship.