Clyde Prestowitz wrote in this 2021 book:
The United States got rich by imitating Great Britain and thereby marking a trail followed by Germany, France, Japan, South Korea, Singapore, the Netherlands, Switzerland, Sweden, Taiwan, and South Korea — all of which eventually became rich. The model was not one of free trade, open markets, and global investment. Rather, it was one of mercantilism and protectionism.
* Between 1700 and 1750, Britain’s home industries increased their output by 7 percent, while export industries expanded by 76 percent. As E. J. Hobsbawm notes: “The country which succeeded in monopolizing the export markets of a large part of the world in a brief period of time, could expand its export industries at a rate that made industrial revolution not only possible but virtually compulsory.” 2 It also tended to make such industries global monopolists.
* [Daniel] Raymond opposed Smith’s preoccupation with individual wealth, arguing that political and economic leaders should focus on the welfare of the nation and the overall society. Smith’s notion that consumers should buy imports when they are cheaper than domestic products, he wrote, risked “destroying the unity of the nation by dividing it into classes and looking to the interests of individuals, instead of looking to the interests of the whole.” Raymond argued that an individual “ought not to be allowed to afford patronage and support to the industry of foreigners, when his own fellow – citizens are in want.” 8 Unlike later economists, he did not assume that the winners from trade would compensate the losers or that a society was better off overall as long as trade produced net gains, even if the gains were monopolized by a very few at the top of the society.
* A crucial element of the American System was government backing of critical infrastructure and strategic industries. The first of these was the National or Cumberland Road. Begun in 1806, it created a paved connection from Cumberland, Maryland, to St. Louis, enabling travel from the Potomac River to the Mississippi in four days. Another important early project was the Erie Canal; completed in October 1825, it was a quick and huge success.
By far the most important project of the American System was the Transcontinental Railroad. In 1850, Congress authorized land grants to Illinois, Mississippi, and Alabama for construction of a rail line connecting Chicago to Mobile. By 1857, grants totaling 21 million acres had turned several railroad companies into America’s first truly big businesses. 11 Then, in the summer of 1862, Abraham Lincoln pushed the Pacific Railroad Act through Congress. The act called for the chartering of two separate companies — the Central Pacific and the Union Pacific — to lay tracks from the Missouri River to Sacramento. After much delay and stupendous feats of engineering, on May 10, 1869, the Central Pacific’s engine Jupiter and the Union Pacific’s Engine 119 stood nose to nose at Promontory Point, Utah, and the nation was connected from coast to coast by a ribbon of steel. Amazingly, although the government had lent the companies more than $64 million, by the end of 1869 it had earned over $103 million in return. More significantly, the railroad led to the creation of huge new markets and cities and transformed the nation into a true continental powerhouse.* In 1870, Great Britain produced 40 percent of the world’s steel, followed by Germany at 30 percent and the United States at 15 percent. By 1900, U.S. production was nearly 40 percent of the world total, with Germany second at 25 percent and Britain at about 20 percent. By 1913, the U.S. was making nearly half the world’s steel. 16
If we look more broadly at total manufacturing output, we find the same dynamics. 17 By 1914, U.S. GDP stood at $518 billion, more than double that of Britain and over three times that of Germany, while U.S. per capita income was $5,307, compared to $5,032 for Britain and $3,833 for Germany. America had become the richest country in the world, and it had reached this height by using high tariffs and a catch – up strategy that resulted in an annual rate of GDP growth of over 4 percent, while free trade, laissez – faire Britain could not maintain even 2 percent annual growth. 18 In the old tariff debates, it had been argued that protection of nascent U.S. manufacturers with initially higher costs than foreign producers would impose higher prices on consumers and inhibit economic growth. In fact, U.S. producers rapidly improved quality and exploited economies of scale, becoming the world’s low – cost producers even as they paid the highest wages and American consumers enjoyed the lowest relative prices.* The United States had morphed into the world’s biggest economy, but Britain, still with one of history’s biggest empires, remained diplomatically and militarily the world’s leading power. The British leadership was determined to recover its economic leadership, at least in finance and commerce, and despite what should have been glaring evidence that the laissez – faire system had contributed heavily to British decline, so strong was the belief in the system that the emergency measures instituted during the war were reversed. Government management of the economy was largely abolished, and most (though not all) tariffs were removed.
* By 1945, after a century and a half of “catch – up,” the American System of industrial policy, government – backed infrastructure, protectionism, and continual government intervention in the economy to encourage industrial development and direct war production, the United States emerged from the war as an unprecedentedly powerful hegemonic colossus. It accounted for half of global GDP, owned 70 percent of the world’s gold, had a monopoly on nuclear power, was the world leader in virtually every technology and every industry, owned the world’s main currency, was the leading world creditor, and had a chronic trade surplus. 26 It had more than caught up. It was all alone in a realm no nation had ever before inhabited.
Then it took a fateful new tack.* The Cold War led Washington not only to adopt free trade as its policy but to adopt unilateral, one – sided free trade. But according to the trade god, that was no problem, because even unilateral free trade was said to be economically more advantageous than protectionism.
* In 1941, economists Wolfgang Stolper and Paul Samuelson added the notion that over time, the costs of production, such as wages, would tend to converge among trading partners. In other words, if the United States and China engaged in free trade with each other, according to Samuelson, their wages would trend toward a median level. Chinese might find this pleasing, but Americans might not. This aspect of the free trade doctrine remained little discussed until very recently.
Under this model, as under Ricardo’s, comparative advantage determines one unique combination or equilibrium of production and trade that produces optimal results for each country and thus for the world. If you grant the assumptions on which this argument is based, its conclusions are mathematically irrefutable.* Japan after World War II was a country with a lot of inexpensive, relatively unskilled labor and few natural resources. American leaders and economists, in keeping with the orthodox economic doctrine, advised and expected Japan to produce low – tech manufactures such as toys and inexpensive textiles. In 1955, Secretary of State John Foster Dulles advised the Japanese to concentrate on exporting to Southeast Asia and forget about the U.S. market because Japan was incapable of making products Americans would want to buy. The chief U.S. negotiator with Japan on trade, C. Thayer White, in 1954 – 55 advised Japan to forget about creating an auto industry and simply import cars from America.
By 1964, however, Japan’s shipyards were building half the world’s shipping tonnage, the United States had recorded its first trade deficit with Japan, and the “Japanese Miracle” became widely acclaimed. For example, between 1964 and 1984, Japan’s auto industry captured a quarter of the world market. 14
I went to Tokyo in 1965 to study Japanese at Keio University and got to watch the Japanese Miracle unfold. Later, during the Reagan administration, I was counselor to the secretary of commerce, Malcolm Baldrige, and one of the chief U.S. negotiators with Japan during a period of maximum U.S. – Japan trade friction. In this role, I became friends with Naohiro Amaya, a former vice minister of the Ministry of International Trade and Industry (MITI) and one of the key architects of Japan’s postwar “catch – up” industrial policy strategy. He once explained to me the Japanese perspective on economic development and the Anglo – American orthodox trade theory. “We did,” he said, “the opposite of what the American economists said. We violated all the normal concepts. The American view of economics may help business to increase current production or to lower current costs. But research and development are necessary for the future, and it is a gamble. Businessmen are risk averse. They hesitate to take the gamble on new developments. Therefore, if the magic invisible hand cannot drive the enterprise to new developments, the visible hand of the government must do so.” 15
One of his colleagues at MITI, K. Otabe, added: “If the theory of international trade were pursued to its ultimate conclusion, the United States would specialize in the production of autos and Japan in the production of tuna.” But this would not create wealth and good – paying jobs for Japan. Therefore, the Japanese government believed that creation of certain industries was “necessary to diversify and promote the development of the Japanese economy.”
But wasn’t Japan a member of the GATT? Didn’t it agree to reduce its protective tariffs as a condition of joining? Didn’t it believe in free trade just like the United States? The answers are yes, yes, and no. Japan did become a member of the GATT in 1955 (at American insistence, over the objections of most European countries), and it did reduce tariffs, even getting most of them to zero by the early 1980s, but it didn’t embrace free trade. Like the United States of the nineteenth and first half of the twentieth centuries, Japan adopted a mercantilist, catch – up strategy. The country it was catching up to was the United States. It offset its tariff reductions by selling the yen in order to maintain its undervaluation against the dollar.
Moreover, tariffs are not the only barriers to trade. They are not even the most important barriers. Customs officials can delay inspections; safety regulations can be designed to exclude certain imported products. Sales of products like autos require dealers. In the United States, by law, the dealers are independent and cannot be controlled by the auto companies. But in Japan, Toyota dealerships are owned by Toyota and sell only Toyotas. If you, as a new automaker in the Japanese market, must build out your own nationwide dealer network, the cost can be prohibitive. For example, the Korean automaker Hyundai is internationally quite competitive, yet it has withdrawn from the Japanese market. Despite being a member of the GATT and a major international trader, Japan maintained a substantially protected market for key products for a very long time.
Nor was it just Japan. The Japanese Miracle encouraged imitation. Singapore’s founding leader, Lee Kuan Yew, directed his officials to study Japan rather than focusing entirely on the United States or the United Kingdom for lessons on how to achieve rapid economic development.* When a new chip introduced by a U.S. maker first came into the Japanese market, it would enjoy robust sales. But a bit later, the Japanese makers’ sales would soar while those of the U.S. makers would collapse. The Japanese, of course, claimed they weren’t copying the American chips and that the U.S. producers’ falling sales must be due to poor quality, late delivery, or some other flaw. In response, the U.S. makers noted that sometimes there were mistakes in their own chip designs and that the Japanese chips contained the same mistakes, demonstrating that they had indeed copied the U.S. chips.
In any case, this was another example of doing the opposite of what the Americans advised. The Japanese government and industry understood that semiconductors would be the critical components of much future technology and of many advanced products for both consumer and national security uses. Their experience had convinced them that the American faith in market – driven comparative advantage as a kind of law of nature was not necessarily valid. They had shown that they could create comparative advantage in chosen industries through a combination of government support and protection with industry effort and competition.* whereas Americans like open spaces, open personalities, and open agreements openly arrived at, those terms are understood quite differently in Japan. There, one speaks not of open relationships but of close, tightly knit relationships, of loyalty to longtime suppliers even if their present prices are a bit higher than those being offered by a newcomer, of long – term relationships relationships rather than of the best deal today.
* We lost our machine tool industry [to Japan], our forging industry, our circuit board industry, much of our semiconductor equipment industry, much of our steel industry, our entire consumer electronics industry, most of our textile industry, and much of our auto industry.
* The main reason Washington could not convert Japan to its free trade faith was that the neoclassical Anglo – American doctrine was full of holes. This had been clear to the Japanese at least since the 1950s. In the late 1970s and early 1980s, it should have become clearer to the Anglophone world as well. Young economists like Paul Krugman, James Brander, Barbara Spencer, and Joseph Stiglitz had begun to question the assumptions underlying the divinity of that god. Krugman, who later received a Nobel Prize for his work, emphasized that much of world trade seemed to operate outside the theory — a discrepancy he attributed to the fact that the theory rested on shaky assumptions.
These assumptions include perfect competition (all markets are like that for wheat, in which no single producer or buyer can affect ultimate total production or final prices); eternal full employment; no costs attached to opening or closing factories; no costs for training new workers; no cross – border flows of investment; no costs of switching from production of one product (wine?) to another (cloth?); fixed exchange rates; no economies of scale (the more units of a product I make in a single factory, the lower the cost of each item); no technological innovation unique to one country; no increases in productivity; no spillovers of know – how from one industry to another; operation of factories at full capacity at all times; zero costs of entering or exiting a business; zero transportation costs; the ability of workers to switch instantaneously, with no need of training, and at no cost of moving from making, say, steel, to designing semiconductor chips; and finally, no offshoring of production (Ricardo had said in his original analysis that if British textile makers moved their factories to Portugal, his reasoning would not hold).* Cambridge University economist Ha – Joon Chang takes the discussion another step forward, to perhaps its most critical point. In his book Bad Samaritans, he argues that a nation may decide to subsidize a given industry because it wants or needs more advanced technology, for reasons of either national security or greater productivity and economic welfare. 18 In other words, Chang totally disagrees with Herbert Stein that it makes no difference whether a nation writes poetry or produces semiconductors. Poetry may be uplifting to read, but it doesn’t put much bread on the table or defend against aggression. Chang argues, in fact, that economic development is largely about acquiring and mastering advanced technology; countries need manufacturing and new technology because it is in advanced manufacturing that the greatest productivity gains are made. And because unfettered market dynamics tend to favor the early developers of a technology, countries that wish to develop the same capability at a later date sometimes have to defy the market and provide government support, even if that entails short – to medium – term losses. Chang says it’s like going to school. You sacrifice present cost efficiency and income for future productivity and wealth.
* Despite the practical and theoretical evidence of the past two decades, and despite the growing phenomenon of offshoring of manufacturing — something both Ricardo and Hecksher/Ohlin/Stolper/Samuelson said would never happen — U.S. economics professors, members of the Council of Economic Advisors, economics pundits, officials such as the U.S. trade representative and the secretary of the treasury, and writers of economics textbooks have found it impossible to abandon the old – time religion. Krugman himself insisted that his work was only theoretical, and that in the real world, an orthodox free trade policy was still best because political lobbying would prevent any strategic trade policy from following a sensible course. Well, perhaps. But Krugman is not an expert on either politics or trade negotiation.
* in 2001, former IBM chief scientist and Sloan Foundation president Ralph Gomory and former American Economics Association president William Baumol wrote the book Global Trade and Conflicting National Interests. 20 It may be the most important unread book of all time.
Baumol and Gomory developed a series of models that more nearly approximated the reality of international trade by incorporating the effects not only of economies of scale but those of rapid technological changes and sudden shifts in productivity. Such a shift might arise, for example, when a company like, say, Intel places an advanced facility in a place like China. Unlike previous models, which incorporated only a few countries and products, the Baumol and Gomory model included large numbers of products and countries. It went far beyond Krugman in demonstrating how badly flawed the conventional wisdom is. Whereas the orthodox theory holds that there is only one win – win trade pattern, uniquely optimal for all trading partners, Gomory and Baumol found that there are many possible trading patterns, of which some are optimal for one party and others for the other parties, but that none is optimal for all parties at all times. In other words, while trade can sometimes be win – win, it is more frequently adversarial or zero sum (you win, I lose).
Again, think of Boeing and Airbus. A Boeing sale tends to be a gain for the United States and a loss for Europe; an Airbus sale is the reverse. (I know this is simplistic, but you get the point.) Depending on the relative economies of scale, levels of technology, rates of productivity, and industry or national strategy, any given country might produce amounts of a product that are not optimal for other trading partners. Take the classic case in which England produces all the cloth. Suppose the Portuguese came to see cloth as a high – growth market and wine, their area of comparative advantage, as a low – growth one. To ensure full employment for their rapidly growing population they might decide to kick – start cloth production with a subsidy, a ploy that eventually leads to much larger – scale production and lower costs in Portugal than in England, even without the subsidies, which have now been discounted. As the Portuguese take most of the global cloth business, they need so many workers that they turn their wine pressers into cloth makers. With no wine coming from Portugal and no work in the cloth mills, the British workers turn to wine making, precisely their area of comparative disadvantage. Here the introduction of economies of scale has turned the areas of specialization upside down, to the disadvantage of England and the global economy but possibly to Portugal’s advantage.
This example demonstrates another key Gomory – Baumol conclusion. Whether a country achieves large – scale production, innovation, or major jumps in productivity is largely unrelated to climate, geography, and national endowments like capital, land, and labor. Sometimes it results from a strategic choice to subsidize large – scale production. It may also come by serendipity — for example, if a Portuguese entrepreneur were to innovate the latest cloth fashion. The key point is that once achieved, economies of scale and technology innovations become barriers to entry for newcomers. Whether foreign or domestic, a new competitor will have to make an enormous investment to match the scale and technology of the dominant player.Economies of scale are more likely to accrue if, for example, the government adopts a favorable regulatory policy, constructs supporting infrastructure, uses government procurement to provide an early market, provides a special tax incentive, or takes any of several other steps to foster an industry. Governments can also do a great deal to help companies attain and maintain market dominance, including spurring innovation. In the 1980s, Intel benefited greatly from the U.S. government’s Minute Man missile program, from strong U.S. protection of patents and intellectual property, and from U.S. anti – dumping and market – opening measures toward Japan. Because countries with large numbers of dominant producers tend to be more prosperous than other countries (such producers are profitable and pay good wages), national leaders often pursue interventionist policies aimed at helping producers in their countries attain and maintain dominance. The European Airbus program, Japan’s development of its shipbuilding, semiconductor, and other industries, Taiwan’s semiconductor industry, China’s Made in China 2025 strategy, and the U.S. Sematech consortium are all examples.
As Baumol and Gomory showed, such national promotion programs are a key reason that the fundamental premise of free trade theory — that trade never hurts any trading partner — is also wrong. I have already noted the zero – sum character of the Boeing – Airbus duopoly. The ascendance of Korea’s semiconductor and semiconductor equipment makers tends to make Korea more prosperous at the expense of both the U.S. semiconductor and semiconductor equipment industry and the U.S. economy. The stark reality is that global trade can easily be adversarial.* Do we really want pure free trade in artificial intelligence technology today, knowing that the industry could someday be completely dominated by China or Russia? Probably not. Free trade cannot always trump national security, and the two are often not easily divided. In fact, based on their analysis of the many possible trade patterns for many trading partners, Gomory and Baumol found that a large share of trade fits into the adversarial, zero – sum category. For example, China’s subsidized exports of solar panels to the United States not only killed the U.S. solar industry’s sales but also its ability to maintain a competitive technological capability in a field it invented..
* Economists do know that what countries make tends to be both “path dependent,” meaning that what I make today is highly dependent on what I made yesterday, and subject to nonmarket intervention. Finland dominates global production of icebreaker ships. It has a long history of dealing with both ice and ships. Taiwan’s leadership in semiconductor foundries stems from the Taiwan government’s initial financial backing of entrepreneur and former Texas Instruments executive Morris Chang’s idea for the first such foundry in the 1990s. Economists also know that comparative advantage can be a handicap. Countries fated by climate, geography, or history to specialize in producing bananas, coffee, or potash are usually poor because people tend to use the same amount of these products regardless of the price, and costs tend to rise with greater production (diseconomies of scale). Free trade does not help these countries. It may do them harm as bananas (for example) from even poorer countries take over their markets.
* A favorite argument of the apostles of orthodoxy is that “companies compete, not countries.” The idea is that countries are all pals while corporations chartered by those countries duke it out. This argument has always baffled me. Have economists never heard of war? Of course countries compete, in a variety of ways, one of which is certainly economic. Power does not accrue to nations of taxi drivers. China had comparative advantages in tea, porcelain, and silk under its old regime, but it became a poor and weak country. It is powerful today because it changed the composition and structure of its economy, and it did so expressly in order to compete. The notion that we should not be concerned when certain countries gain an edge in the production of certain products and in the development of certain new technologies is romantic in the extreme. Do we not care if China becomes the dominant player in artificial intelligence or super – computing? Such technology involves leading – edge semiconductor materials and processing technology. Do we not care if we lose leadership in those technologies, which is exactly what happens when U.S. – based production and R&D close up shop and move to China or Singapore for better tax breaks or better engineers? Of course we care.
* One thing they need to know is that in lieu of a meaningful, enforceable international economic agreement, mercantilism works. No country has ever become rich except by mercantilist practices. Economic theory cannot predict innovation, and it therefore cannot tell a country how to become rich. Think of recent examples such as South Korea, Taiwan, Japan, and China. None of them had many natural resources. None of them “did what the Americans said.” None of them adopted the “Washington consensus.”
* Leadership in key technologies like computer chips is not just an important matter for companies like Intel or Qualcomm. It is also important for national security, for both China and the free world. It would not be a positive development for the free world for all its countries to lose leadership in such an important technology. Countries do compete economically and technologically because they don’t share values, and they fear the forceful imposition of foreign doctrines and practices as well as the possible necessity to pay tribute of some kind.
* Finally, while there has been much talk of the gains of trade and the benefits of globalization, their costs have been ignored or downplayed. Typically, the analysis holds that while a few workers in an industry such as the auto industry may take a hit when imports take their jobs or reduce their wages, this loss is greatly outweighed by the benefits of lower prices to consumers, who far outnumber the autoworkers. Moreover, it is argued, the former autoworkers will find other jobs, so the net loss is only their wages for whatever period they were out of work and, of course, any continuing negative pay differential. There are several holes in this argument, but an important one is that the models used to analyze gains and losses of trade assume full employment. In the absence of full employment, loss of jobs in one industry tends to lower wages in other industries. Thus, the trade – off is not autoworker jobs versus all consumer prices, but all consumers versus all workers’ wages. That is not a slam – dunk for globalization. On top of that, the equations and models do not consider the global warming impact and cost of all the air travel and sea shipping entailed in globalization. Nor do they consider the cost to future innovation of the loss of important skill sets entailed by many aspects of today’s globalization.
Consider further the differences in the quality of pain and pleasure. Of course, it is nice to save a few dollars when buying shoes or a washing machine. But that pleasure does not equal the intensity of the complete loss of a job, or of a school system in a factory town when the factory closes. Moreover, the pleasure of inexpensive socks is fleeting, while the pain of the factory, school, and local water system going down is long lasting and has severe knock – on effects. These elements are never captured in the econometric models used to evaluate the gains and losses from trade, yet they are the most important elements. Look at the generations of costs incurred when a city like Detroit loses its businesses and its schools, and then its sanitation and much more, and consider that those costs are not just local. They ultimately hit the whole country.
Another way of considering the question is to look at the gap between rich and poor. It has widened dramatically in the United States and most other free world countries in lockstep with globalization. Even if there appear to be overall economic gains from globalization, the winners are clearly not compensating the losers, with the result that the society has become poorer even if the GDP numbers say it hasn’t. Some economists such as David Autor at MIT, Robert Scott at the Economic Policy Institute, David Dorn at the University of Zurich, and Gordon Hanson at the University of California – San Diego have recognized that neoclassical free trade and globalization doctrine is badly flawed and is a major factor in growing economic inequality and the rise of populism. But the mainstream of professional economists has yet to grasp reality. Because their models don’t incorporate the proper assumptions, the economists don’t see and therefore tend to reject these conclusions. But that doesn’t make the conclusions wrong.
Another key element never mentioned in the discussion of globalization is that investing in China, producing in China, and buying from China are all actions that directly strengthen the CCP and all of its activities, including the internment of Uighurs, the dredging and arming of artificial islands in the South China Sea, the attacks by Mainland Chinese students on Hong Kong students in Australia, and the spreading of propaganda through the distribution of China Daily via the Washington Post , and the recent denial of free speech and rule of law in Hong Kong. The total costs of all this and more that I could cite might make the price of “free trade” look like not such a great deal.
Indeed, a very important revelation of the COVID – 19 pandemic has been that of the true costs associated with the China – anchored global supply chain. Heretofore it was widely believed that the most efficient and cost – effective way to supply many world markets was to produce components in a variety of global locations, fly or ship them to China (or, increasingly, manufacture them in China) for assembly by inexpensive or specially talented (or both) Chinese labor, and then ship them by boat and airplane to the world’s markets. The coronavirus, along with China’s Made in China 2025 drive for making all cutting – edge high – tech products in China, has sparked a deep questioning of the true costs and rationality of the global supply chain. Excessive reliance on supply from China has been seen to carry potentially high costs with it. Needed products might not be available. Or, if China is angry with you, they might be withheld. In addition, the air and sea shipping inevitably involved account for about 8 percent of global greenhouse gas emissions — and that number is rising. The costs of this have never been incorporated into the pricing of the supply chain. In the future they must be, and they could be prohibitively high. As European Bank for Reconstruction and Development economist Beata Javorcik says: “The quest to find the most cost – effective suppliers has left many companies without a plan B. Businesses will be forced to rethink their global value chains.” 2 Because of this and also because of new technologies like three – dimensional printing (a ball bearing, for example, can be printed at the auto plant just like a book instead of being manufactured in a factory and then shipped to the auto plant), future supply chains are likely to be more diversified and located much closer to the place of final sale than has been the case for the past thirty years.* Products and services freighted with national security significance cannot be valued on the same cost – benefit model as soybeans. The value of some things cannot be measured in terms of the dollar or yuan exchange. One of the best explanations of the decoupling urge has come from former Australian prime minister and China expert (and Mandarin speaker) Kevin Rudd. In a speech to Australia’s Lowy Institute on June 13, 2019, he argued that America’s first steps toward decoupling were not made by the Trump administration but by the Obama administration with its “pivot to Asia” policy.
More important, he noted, decoupling of the internet is occurring as a natural consequence of the two countries’ political systems, with other countries “increasingly caught in no – man’s land in between.” Digital payment systems like Alipay, WeChat Pay, Visa, and Master Card have already divided the world into different spheres of influence, and this division, he argued, is likely to widen in the digital global economy. Likewise, “the decoupling of the two countries’ telecommunications systems is also well under way.” But he added that these decouplings inevitably worry the managers of global supply chains and raise the notion that it might be safer to have alternative supply chains or perhaps no supply chains. And this, he noted, is before considering the likely economic, political, or strategic impact of artificial intelligence. “Are we,” he wondered, “at the beginning of the end of globalization?” Is the big question not where decoupling starts, but where it is likely to stop?* Over the past century, the United States has made every effort to become and remain the leader in those kinds of technologies because it knows that not to do so would be extremely dangerous to the survival of itself and other like – minded countries. To cede this kind of leadership to a global supply chain in order that corporations might make a few million or even billion more dollars could turn out to be extremely expensive to the country and its ideals.
The second factor is that in order to remain at the cutting edge of key technologies it is not enough to have good universities and laboratories. Much technology evolves in the factory or workplace. It is an iterative process. Moreover, the more industries a country contains the more potential it will have for iteration, combinations of different ideas and skill sets, serendipity, and technological advance thereby. Economics does not have an equation for innovation, but we know that a variety of skills and means of production helps. To lose that for the sake, again, of a few immediate extra millions of profits entails huge ultimate losses.
Finally, there is the cost of the possible failure of the supply chain. This was never considered in the past. Big, sophisticated global corporations like Apple, Cisco, GM, and on and on never considered it, and neither did major governments like those of the United States, Germany, Japan, the United Kingdom, and on and on. But, since the advent of the coronavirus pandemic in mid – January 2020, we have begun to pay the heretofore hidden cost. It is and will be immense. Surely, there must be a better way.
Indeed, the better way has already been advancing. Over the past several years there has been a decline of global exports for three major reasons. First, as China has become increasingly autarkic, it has been making more and more of its total product domestically. Thus, the chain has been gradually dwindling to the link between the production base in China and the location of the consumer. China will continue to import raw materials, but not key components. Second, the popular picture of the Chinese part of the supply chain — millions of manual laborers painstakingly assembling parts by hand — is false. The assembly of Apple iPhones in China, for example, is highly automated, and the same goes for almost everything else made in China. Labor costs in China are no longer low, and for an increasingly large range of products they are not a decisive factor in the location of the supply chain. Much more decisive are the investment subsidies, absence of labor unions, and absence of meaningful environmental, health, and other regulations, combined with a managed currency exchange rate that keeps export prices competitive. The third and most important factor ending the role of the supply chain is the combination of automation, artificial intelligence, and technologies such as 3 – D printing that enable inexpensive production close to the customer.* as Council on Foreign Relations China expert Elizabeth Economy says in her book The Third Revolution, China has become less liberal, more centralized, and more authoritarian as it has become richer and more powerful in recent years. 2 It is also clear that there is no comfortable middle ground. The more one invests and produces in China, the more one feeds the CCP – dominated machine while making oneself hostage to coercion by the Party.
* The openness of U.S. society combined with the tightly closed nature of China enables Beijing to exploit American openness in ways that undermine free world values generally, and American economic, technological, and military strength specifically. To offset this dynamic, we must adopt the simple principle of reciprocity.
If the New York Times cannot be distributed in China, the CCP should not be allowed to own newspapers in America. If Amazon is limited in China’s market, Alibaba should be similarly limited in the U.S. market. If GE will have to move its avionics division into a joint venture with state – owned Avic, Washington will halt the move unless Avic drops state ownership and enters into joint development, production, and sales ventures with Boeing and Airbus for its planned new aircraft. Just as U.S. universities, nonprofits, and religious organizations are restricted in China, so Confucius Institutes and Chinese Student and Scholar Associations will be restricted or banned in the United States.
In October 2019, the Trump administration adopted a policy of requiring all Chinese diplomats to notify the State Department before meeting with American local or state officials or with educational and research institutions. This was in response to China’s long – standing requirement that U.S. diplomats get permission from Beijing before traveling inside the country or meeting with local officials and academics. The U.S. rule is not as restrictive as China’s policy, but it is a step in the right direction, and further such steps should be considered so that U.S. policy essentially mirrors that of China.
Chinese entities wishing to operate in the United States should be required to clear the same hurdles as free world entities wishing to operate in China. The same should apply to entities from other nonmarket economies. All investors from China and other nonmarket economies must be required to provide detailed data on their ownership structure, their investors’ and decision makers’ past and present political affiliations with the Communist Party, and their funding sources. Chinese – owned publications, educational programs, cultural exchange operations, and editorial contributors must be required prominently to disclose their funding or other ties to the CCP and the Chinese government. The disclosure would read something like this: “WE ARE FUNDED BY AND LINKED TO THE UNITED FRONT WORK DEPARTMENT OF THE CHINESE COMMUNIST PARTY.” The same rule must hold for entities such as the Confucius Institutes, Chinese Student and Scholar Associations, and all others that are engaged in presenting China to the U.S. public. The U.S. Foreign Agents Registration Act must be upgraded so that it applies to these groups. The current act, which contains exemptions for religious, scholastic, or scientific groups such as the Confucius Institutes purport to be, must be broadened to encompass all avenues of propaganda and influence.
In addition, representatives of corporations and organizations that do extensive business with China should be required to disclose this whenever they discuss China or the U.S. – China relationship in public. For example, the heads of the U.S. Chamber of Commerce and of the Business Roundtable often present themselves as the “voices of American business.” But many of their members are tightly tied to China and vulnerable to pressure from Beijing.* Many free world corporations now understand that their overreliance on manufacturing in China is a serious vulnerability and are already trying to move at least some future production to other locations.
* One alarming example is that a high percentage of the ingredients in drugs and much medical equipment widely used in America are now largely produced in China. Again, the pandemic has demonstrated why this is not wise or economically healthy for America. First, it imposes a strategic vulnerability on America, and second, China’s regulation of medical materials production, storing, and shipping is shockingly lax. There are many instances of major harm resulting from contaminated drugs in China. It is dangerous for America to be so reliant on China for medicines and medical materials.
* The other major part (actually more major than China) of the problem is the United States, which has steadily lost economic, industrial, technological, and governance competitiveness over the past fifty years. To some degree this was inevitable and even desirable as other countries recovered from World War II and as formerly underdeveloped countries like South Korea, Singapore, and China got on the path to development. But to a very large degree, America’s loss of leadership has come from poor, sometimes simply wrong, short – term – oriented, ill – coordinated, and often narrow and even selfish government, business, military, and academic policies. In short, Americans haven’t been playing the game as well as the Germans, Japanese, South Koreans, or Chinese. The most important step is therefore to raise the American game.
Grok says about this 2001 book Global Trade and Conflicting National Interests:
The authors challenge the assumption that free trade always leads to mutual benefits for all nations. They argue that in modern economies, trade can create significant conflicts of interest between countries, especially when industries are concentrated, and productivity improvements or technological advancements shift competitive advantages.
Modern Trade Dynamics: Unlike classical models focused on fixed endowments (e.g., land or labor), the book highlights how trade today involves manufactured goods, where economies of scale, innovation, and government policies play critical roles. This can lead to outcomes where one nation’s gain comes at another’s expense.
Trade Models Adapted: Gomory and Baumol develop mathematical models to show that under free trade, there are often multiple equilibrium outcomes, not a single optimal one. Some equilibria favor certain nations over others, leading to potential conflicts.
Policy Implications: The book suggests that nations may pursue policies (e.g., subsidies or tariffs) to secure favorable trade positions, as purely free trade doesn’t guarantee universal benefits. It emphasizes the need for strategic trade policies to protect national interests.
Origin: The book builds on lectures Baumol gave at the London School of Economics in 1994, later expanded with Gomory’s insights from his work on technology and trade.
Context and Reception:
The book was aimed at economists and policymakers but didn’t gain widespread public attention outside academic circles.
It’s part of the Lionel Robbins Lectures series, reflecting its academic rigor.
The analysis is grounded in free trade but critiques its oversimplified benefits, offering a nuanced view of globalization’s challenges.
Please give me a list of the most famous economists who had some doubts about the free trade orthodoxy.
Grok said:
Several renowned economists have expressed skepticism or nuanced doubts about the unqualified benefits of free trade, challenging the orthodoxy that it always leads to optimal economic outcomes. Below is a list of some of the most famous economists who have voiced such concerns, along with brief explanations of their views:
Adam Smith (1723–1790)
Doubts: While Smith is often associated with free market principles, he acknowledged limitations to unrestricted trade. In The Wealth of Nations, he supported certain protections, like tariffs, to defend infant industries or counter foreign subsidies. He also recognized national security concerns, such as supporting the Navigation Acts to maintain a strong British navy.Context: Smith’s skepticism was pragmatic, balancing free trade with strategic economic and security interests.
David Ricardo (1772–1823)
Doubts: Ricardo developed the theory of comparative advantage, a cornerstone of free trade advocacy. However, he expressed concerns about the distributional effects of trade, noting that landlords might gain disproportionately while workers could suffer. He also worried about diminishing returns in agriculture, which could complicate trade benefits.Context: His doubts focused on the uneven impacts of trade across social classes rather than rejecting free trade outright.
John Maynard Keynes (1883–1946)
Doubts: Keynes initially supported free trade but later advocated for selective protectionism during economic crises. In the 1930s, amid the Great Depression, he argued for tariffs and managed trade to stabilize economies, protect jobs, and address balance-of-payments issues. He believed unrestricted free trade could exacerbate unemployment and economic instability in certain contexts.Context: His shift reflected a focus on macroeconomic stability over ideological commitment to free trade.
Joseph Stiglitz (b. 1943)
Doubts: Stiglitz, a Nobel laureate, has criticized the way free trade agreements are implemented, arguing they often favor multinational corporations and developed nations over developing countries. He highlights issues like asymmetric benefits, labor displacement, and environmental costs, advocating for fairer trade policies that account for market imperfections.Context: His work, such as Globalization and Its Discontents, emphasizes the need for trade policies that prioritize equitable outcomes.
Paul Krugman (b. 1953)
Doubts: Another Nobel laureate, Krugman is known for his work on trade theory, including the New Trade Theory, which acknowledges that economies of scale and imperfect competition can justify strategic trade policies. While generally pro-trade, he has expressed concerns about the adverse effects of globalization on certain communities, such as job losses in manufacturing sectors, and the need for policies to mitigate these impacts.Context: Krugman’s skepticism centers on the real-world complexities of trade, including its distributional consequences.
Ha-Joon Chang (b. 1963)
Doubts: Chang, a prominent development economist, argues that free trade can hinder industrialization in developing countries. In books like Kicking Away the Ladder, he contends that developed nations historically used protectionist policies to grow their economies before preaching free trade to others. He advocates for selective protectionism to nurture infant industries.Context: His critique focuses on the historical and developmental inequalities perpetuated by free trade orthodoxy.
Dani Rodrik (b. 1957)
Doubts: Rodrik has been a vocal skeptic of hyper-globalization, arguing that unrestricted free trade can undermine national sovereignty, labor standards, and economic stability. He emphasizes the “trilemma” of global integration, democracy, and national autonomy, suggesting that countries may need to prioritize domestic policies over unfettered trade.Context: His work, such as The Globalization Paradox, calls for a balanced approach to trade that respects national priorities.
Notes:
These economists do not outright reject free trade but highlight its limitations, such as uneven benefits, labor market disruptions, or the need for strategic interventions. Their critiques often focus on real-world complexities like market imperfections, historical context, or distributional impacts.
