"The Return of Economic Nationalism"
Op-Ed, The Providence Journal
June 20, 2009
Author: Eric Kaufmann, Former Research Fellow, Initiative on Religion in International Affairs/International Security Program
GENERAL MOTORS and Chrysler have been declared bankrupt. Meanwhile Treasury Secretary Timothy Geithner recently urged the Chinese 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 such societies as 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 U.S. economy toward its current crisis. Why? When China exports goods to the United States, it can do only two things with the U.S. dollars it gets: Buy American goods or buy American capital. Like Japan and several other developed economies, it has consistently chosen to accumulate U.S. 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 has been a flood of cheap capital into the U.S., preventing the Fed from raising interest rates to control asset prices.
The U.S. 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 their 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 Canadians 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 that lets economic nationalism thrive.
Overall, economic nationalists sacrifice material consumption for the national pride that comes with being a creditor nation that owns foreign assets. On this logic, the U.S. 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 that comes from saving more than one spends.
Such notions may strike many as incomprehensible, but previous generations of Americans understood it instinctively. Thomas 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 where landowners lived off tenant famers or serfs were spurned as weaker and less free.
In the 19th and early 20th centuries, the yeoman ideal underwent transformation, but most Americans identified themselves as producers rather than consumers. Only in the second half of the 20th 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 U.S. vehicles are trucks, powerful symbols of rural and working-class masculine patriotism. 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 U.S. 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 that emphasize the importance of saving and workmanship.
Eric Kaufmann is a research fellow at the Belfer Center for Science and International Affairs at Harvard's Kennedy School and an associate professor of politics at Birkbeck College, University of London.
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