by Michael Roberts
finance ministers of the top 20 economies (G20) meet in Buenos Aires,
Argentina, and the big topic for discussion is trade protectionism and the possibility of an outright trade war between the US and other major economics areas, particularly China.
There is a real concern that all the blustering by President Trump is
finally turning into reality and ‘The Donald’ is now going to honour
his promise to ‘make America great again’ by introducing a range of
tariffs, quotas and bans on various imports from Europe and Asia into
the US. Trade protectionism is coming back after decades of ‘free
trade’ and globalisation.
Up to now, Trump has only imposed tariffs (taxes or enforced price
rises) on steel and aluminium imports. But he has also pulled the US
out of the Trans-Pacific Partnership (TPP) and demanded a re-negotiation
of the terms of North Atlantic Free Trade Area (NAFTA). But there is
talk of more measures, including action to stop the free exchange of
intellectual property rights by US companies and other countries.
The steel and aluminium tariffs (facilitated by an old GATT loophole,
allowing countries to enact barriers for reasons of ‘national security’
(US defence spending consumes 3% of US steel output) are really small
beer on their own. In 2002 when the US last imposed steel tariffs, the
US produced almost as much steel as today. But now it produces it with a
small fraction of the 2002 workforce. Technology has boosted
productivity and created products that use less steel. So direct job
gains for US workers are likely to be small, if any.
Back in 2002, President Bush signed into law tariffs for certain
steel products following a spate of mill closures and surging imports.
The net effect on employment in the steel production industry was
minimal. But, according to a Trade Partnership Worldwide study, businesses that consumed steel products shed approximately 200,000 jobs, compared to the 180,000 employed in steel production.
pain was born principally by smaller manufacturing firms (smaller than
500 employees), which had limited room to negotiate on prices and
similarly restricted space to pass costs on due to price competition.
The Bush barriers were only in place for a little over a year, but the
impact was immediate as price distortions squeezed end users.
If the impact on the employment figures of effectively raising the
cost of steel was uppermost in Trump’s mind, he should have considered
the potential net loss of jobs in the car industry, the aviation
industry and the countless other manufacturers that depend on cheap
steel as a raw material. These companies are expected to pass on the
extra cost to their customers and suffer the usual consequences – lower
demand and a profit squeeze.
Moreover, since 2002, US steel mills have moved south and west, where
unions are weak and labour is cheaper. But now the industry has fewer
workers because it is increasingly automated. The Trump tariffs will not
bring any new jobs and certainly not in the old steel ‘smokestack’
regions that looked to him for help. The real hit will be on many
emerging economies. Canada and Mexico are exempt from the tariffs
because they are part of NAFTA. But Brazil is a big exporter to the US.
Canada and Brazil account for around one-third of US steel imports,
while China accounts for no more than 3%. With Canada exempt and China
unimportant, Trump’s ‘steel’ protectionist move is both weak and
Anyway, Trump’s claimed objective to ‘make America great again’ by
boosting steel production and other traditional industries means rolling
back the advance of technology to recreate smokestack industries. It
can’t and won’t happen. Trump’s claim that American workers have been
losing jobs in traditional ‘smokestack’ industries because of unfair
trade by other countries is bogus. The loss of US manufacturing jobs
has been replicated in other advanced capitalist economies over the last
30 years. This decline is not due to nasty foreigners fixing trade
deals. It is due to the inexorable attempt of American capital to
reduce its labour costs through mechanisation or through finding new
cheap labour areas overseas to produce.
The rising inequality in incomes is a product of ‘capital-bias’ in capitalist accumulation
and ‘globalisation’ aimed at counteracting falling profitability in the
advanced capitalist economies. But it is also the result of
“neo-liberal’ policies designed to hold down wages and boost profit
share. Trump cannot and won’t reverse that – on the contrary – with all
his bluster because to do so would threaten the profitability of
Nevertheless, it seems that Trump and his new ‘protectionist’
advisers are going to launch a series of measures against the imports of
other countries – particularly against China. But in the last 20
years, China has moved up the value-added ladder from basic industries
into higher and higher tech products. Indeed, much of the global flow
of technological innovation is now coming from China, not the US.
Efforts to punish China with tariffs could quicken this trend.
Typically, such businesses are highly adaptable in the face of
restrictions, shifting investment and capacity overseas. And China is
already moving in this direction with a huge rise in outward FDI. China
now ranks second only below the US in terms of outward investment. Its
stock of direct investment assets has been growing 25% annually hitting a
value of $1.3trn (see graph below). Two thirds of this outflow is
directed towards Asia (blue line). China is also pushing aggressively
into ‘the belt’ countries of its ‘one road’ project. That’s reflected in
its exports, with sales to these states double those to the US. So any
restrictive measures taken by the Trump administration against China can
only accelerate this reallocation process.
Also, while Trump and his new ‘protectionist’ advisers want to take
action against China and other ‘unfair’ trading nations, European and
Asian economies, along with the international agencies, want to hold the
line for ‘globalisation’ and ‘free trade’. The rest of the world is
still trying to lower barriers. The EU completed free trade agreements
with both Canada and Japan at the end of last year. Meanwhile Japan,
Canada, Australia, New Zealand, Mexico, Malaysia, Vietnam, Peru, Chile,
Brunei and Singapore ratified a revised TPP without the US.
And what Trump forgets is that now in world capitalism, it is not so
much trade, or even services trade rather than goods trade, that
matters; it is capital flows. And any full trade war would seriously
threaten US foreign investment just at a time when China is expanding
its overseas flows.
Foreign trade now contributes relatively little to US corporate
profits. Back in the 1940s, foreign subsidiaries of US-based
corporations accounted for only 7% of all US profits – the same
proportion as exports. Globalisation of US corporate operations and
capital investment has changed that in the last 35 years. In 2016, the
share of domestic profits has shrunk to 48% of total profits, while the
shares of foreign operations and exports have grown to 40% and 12%,
Stimulated by Trump’s protectionist talk, the debate in mainstream
economics over whether free trade is better for every country and the
people living in them has also revived. The longstanding neoclassical
view is based on David Ricardo’s law of comparative advantage. In his
book On the Principles of Political Economy and Taxation (1817),
now over 200 years old, Ricardo argued that, although Portugal could
produce both cloth and wine with less amount of labour than England, both
countries would benefit from trade with each other. Because the
comparative advantage for Portugal with England is greater in the
production of wine than in cloth, it would still make sense for Portugal
to produce excess wine and trade that for English cloth. England in
turn would benefit from this trade, because while it still costs the
same to produce cloth, the price for wine would fall considerably. So
free trade is a win-win situation.
And yet the historical evidence for this ‘law’ is the opposite. Over
the last 30 years or so, the world capitalist economies have moved
closer to ‘free trade’ with sharp reductions in tariffs, quotas and
other restrictions – and many international trade deals. But economic
growth since the 1980s has been slower than in the 1960s.
Another conclusion of the mainstream theory is that free trade will
eventually lead to harmonisation and equilibrium in trade balances
through the adjustments in international exchange rates and production
costs. And yet there has been little such harmonisation. The US has
continually run a goods and services trade deficit over the last 30
years; and so have many supposedly ‘comparatively advantaged’ emerging
And as for harmonisation of incomes and employment, inequality of
incomes and wealth between countries and within them has worsened in the
last three decades, while 1.5bn workers globally are still without a
regular job or income.
Free trade has been no great capitalist success. And now
globalisation seems to have paused or even stopped. World trade
‘openness’ (the share of world trade in global GDP) has been declining
since the end of the Great Recession.
This has led to various mainstream voices suggesting that maybe
protectionist policies by individual countries might better for them. Dani Rodrik has been pushing this line;
reminding us that the US itself protected its domestic industry in the
1870s onwards to get it going; and Germany did similarly in the 1890s,
while Japan and other Asians followed suit in the post-war period.
Rodrik, Stiglitz and other ‘leftist’ mainstream economists who now
denounce the failure of globalisation really do so from the point of
view that free markets are fine as long as they are really free. But
they are not and so governments must intervene to reduce monopoly and
other distortions and to control and regulate financial speculation.
And internationally, you need proper and ‘fair’ agreements on trade to
protect the weaker national economies. Apart from this being a utopian
aim, this ‘alternative’ to unbridled ‘free trade’ is really an admission
that Ricardo’s win-win theory is faulty and disproved, even if there
were fully ‘free trade’.
Capitalism does not tend to equilibrium in the process of accumulation. As Adam Smith put it, in contrast to Ricardo, “When
a rich man and a poor man deal with one another, both of them will
increase their riches, if they deal prudently, but the rich man’s stock
will increase in a greater proportion than the poor man’s. In like
manner, when a rich and a poor nation engage in trade the rich nation
will have the greatest advantage, and therefore the prohibition of this
commerce is most hurtful to it of the two”. Capitalism does not
grow globally in a smooth and balanced way, but in what Marxists have
called ‘uneven and combined development’. Those firms and countries
with better technological advances will gain at the expense of those who
are behind the curve and there will be no equalisation.
Free trade works for national capitalist states when the
profitability of capital is rising (as it was from the 1980s to 2000)
and everybody can gain from a larger cake (if in differing
proportions). Then globalisation appears very attractive. The
strongest capitalist economy (technologically and thus competitively in
price per unit terms) will be the strongest advocate of ‘free trade’, as
Britain was from 1850-1870; and the US was from 1945-2000. Then
globalisation was the mantra of the US and its international agencies,
the World Bank, the OECD and the IMF.
But if profitability starts to fall consistently, then ‘free trade’
loses its glamour, especially for the weaker capitalist economies as the
profit cake stops getting larger. ‘Populism’ and nationalism rears its
head and mainstream economists opposed to ‘free trade’ become more
prominent. That was the situation in the 1870s and 1880s. That was the
situation in the 1930s Great Depression. That is the situation since
the early 2000s and especially since the end of the Great Recession.
US capitalism has lost ground relatively, not only to Europe and
Japan, but even more worryingly to the rising economic juggernaut that
is China, where foreign investment is strictly controlled and
subservient to the state sector and to an autocratic Communist elite.
The US is now in the same position as the UK was in the 1880s, only
worse. Trump is the consequence of that.
Marx and Engels recognised that ‘free trade’ could drive capital
accumulation globally and so expand economies, as has happened in the
last 170 years. But they also saw (as is the dual nature of capitalist
accumulation) the other side: rising inequality, a permanently floating
‘reserve army’ of unemployed and increased exploitation of labour in the
weaker economies. And so they recognised that rising industrial
capitalist nations could probably only succeed through protecting their
industries with tariffs and controls and even state support (China is an
extreme example of that).
But is free trade or protectionism better for labour and the working
class? It depends. Perhaps the answer is best summed up by Robert
Tressell in famous book, The Ragged Trousered Philanthropist, written in
1910 in the UK: “We’ve had Free Trade for the last fifty years and
today most people are living in a condition of more or less abject
poverty, and thousands are literally starving. When we had Protection
things were worse still. Other countries have Protection and yet many of
their people are glad to come here and work for starvation wages. The
only difference between Free Trade and Protection is that under certain
circumstances one might be a little worse that the other, but as
remedies for poverty, neither of them are of any real use whatever, for
the simple reason that they do not deal with the real causes of
American workers can expect nothing from Trump’s trade tantrums – indeed it can make things worse.
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