Published: Tuesday, Mar 28, 2017
Posted : 28 Mar, 2017 00:00:00
The rise of economic nationalism: A serious threat to global economic stability
One of the most significant developments in 2016 threatening the existing global economic order was the rise of economic nationalism in Europe and a USA. Economic nationalism is not an economic doctrinaire view to explain how economies operate in the global economy. Rather it encapsulates a body of political arguments to safeguard certain perceived national economic interests when looked from a particular political angle. There is not much economics in it despite the fact that the word "economic" precedes the word "nationalism". The concept has some resonance to long abandoned and totally discredited economic theory espoused during the 15th to the mid-18th centuries called "Mercantilism". Mercantilism can be described as a form of aggressive economic nationalism and a harbinger of colonialism.
In the 21st century we have come a long way since the regressive ideas of mercantilism were debunked by none other than the original economic thinkers of the 18th century-Smith, Ricardo, and JS Mill. Thanks to recent political developments in Europe and USA, the concept has taken a whole new meaning, dimension and thrust. The term economic nationalism got currency now due to President Trump's chief strategist Steve Bannon when he declared at the Conservative Political Action Conference (CPAC) held recently that the Trump Presidency would deliver "an economic nationalist agenda". He described economic nationalism as the antithesis of globalism which is perfectly in tune with his President's drive to put '' America first" slogan. The President even went further in his inaugural speech to assert that "protection will lead to great prosperity and strength" for the USA. Leading economic analysts have described this economic nationalist agenda to be a hotchpotch of anti-trade, anti-immigrants, bullying of domestic multinationals who operate from overseas locations to relocate in the USA, and a very aggressive unilateralism and, when needed, also bilateral confrontation.
When it comes to trade if Trump follows through on his threats and imposes new tariffs on selected countries unilaterally in contrast to the Most Favoured Nation (MFN) principle, that will violate the World Trade Organisation (WTO) rules putting the global multilateral trading arrangement at serious risk. More importantly, with less trade how he is going to deliver a more prosperous USA remains a great economic mystery. Trump is definitely bothered by persistent US trade deficits which he describes as "unfair" and "unbalanced". But he does not seem to understand or care to listen to economists that trade deficits are not a good indicator of a country's overall economic well-being.
Furthermore, the trade deficit is correspondingly offset by capital inflows that generate capital account surpluses. The US trade deficit has been always lower during economic downturns and higher in times of prosperity. Any attempt to balance trade is a sure recipe for trade wars. Trade deficits are a multilateral issue, it cannot be dealt bilaterally. His choice of Wilbur Ross as his Commerce Secretary further strengthens his position of making of the fortress USA. Ross who enriched himself via protection remains very faithful to all-embracing protectionism. In a way Bannon simply echoed Ross's idea on economic nationalism.
Trump's idea to protect US manufacturing from global competition entails imposition of tariffs, export subsidies or even tax breaks. These are unlikely to serve the economic interest of the USA. Forced relocation of manufacturing to the USA will only intensify more automation. Price-hike resulting from tariffs will disproportionately fall on the poor who spend proportionately more of their income on consumer goods than the rich. Economist Peter Navarro, Trump's leading adviser on trade, now talks about de-globalising US manufacturing and that also signals efforts underway to radically reshape the US economy. In effect Bannon's economic nationalism will reward the non-tradable sector at the expense of the tradable sector.
A similar dynamic on economic nationalism is at work with immigration as well. It is now clearly evident that Bannon is in the driver's seat to push through Trump's economic nationalist agenda especially when it comes to immigration. The travel ban on seven predominantly Moslem countries was rammed through by Bannon against the advice to the contrary by Homeland Security Officials. Nobel Laureate Paul Krugman described the emerging white nationalist alliance between European neo-Nazis, Russia and Trump officials as the ''Axis of Evil''. Frederich von Hayek (another Nobel Laureate) from quite a different perspective than Krugman quite some time ago warned against economic nationalism. He pointed out that economic nationalists are often central planners and they always leave behind destruction in their wake.
Steve Bannon has also attacked legal immigration on ethnic and racial ground by announcing in a radio interview in 2015 that too many of the "CEOs in Silicon Valley are from South Asia (read India)." No wonder Silicon Valley is now planning to relocate foreign workers in Canada. This will be the beginning of what can be described as a massive brain drain from the USA.
The Economist wrote in November 2016 that ''new nationalists are riding high on promises to close borders and restore societies to a past homogeneity''. Protectionism and immigration exclusion retard growth, they do not stimulate it. President Trump is yet to realize that when a country decides to slap tariffs on goods coming into the country, it is a sure sign of its declining position in the league of trading nations.
The fact of the matter is that the global hegemony of the US economy is a thing of the past and the rise of China, in particular, has further given rise to a very considerable anxiety about its economic position (hence its political and military strength in the global context). Trump is a political and economic reaction to the crisis of the US economy in the 21st century which Obama could not satisfactorily address. Economic nationalism is linked to individual job insecurity and intolerance of others and authoritarianism. Populism is also antithetical to individual cosmopolitanism. Populism offers simple solutions to a very complex set of economic and political problems. Trump's solution to these complex problems is tax cuts, increased public expenditure (including increased military expenditure) and protectionism but nothing about inflation and rising public debt. This is an untenable situation and bound to fail.
However, this neo-nationalism is not a purely US phenomenon. It is also spreading across Europe. This is associated with a whole range of political positions from the far right to the far left and all others in between. They represent anti-globalisation, nativism, protectionism, ant-immigration and euroscepticism. Economic nationalism has found its expressions in the electoral victory of Trump in the USA and Brexit in the UK. We also have other world leaders who are pursuing similar nationalistic policy to strengthen their political position. . In Poland and Hungary power has passed on to xenophobic ultranationalists. The future of the European Union (EU) increasingly looks vulnerable and its experiment with post nationalism transcending national rivalries with a series of nested identities is also floundering. France and the Netherlands also look increasingly vulnerable facing threats from ultranationalists.
Economic nationalism in developing countries like Bangladesh takes a rather different route and legitimised from a different perspective. At independence Bangladesh pursued a dirigiste economic regime encompassing state ownership of almost all sectors of the economy with agricultural production being the exception. An all-embracing economic planning mechanism was put in place and that mechanism is still in existence albeit with minimal market intervention. While state ownership of manufacturing enterprises has been significantly reduced and private investment in all sectors of the economy has been encouraged since the early 1990s, a wall of protection against foreign competition still remains. These are all justified on the ground of promoting an indigenous class of entrepreneurs and creating an enabling environment for these entrepreneurs to help accelerate economic development.
But these policies ipso facto make no economic sense or make sense only in a specific or exceptional circumstances when economic security is perceived as a major concern. This is of course economic nonsense as we live in an interdependent world which guarantees the maximum economic security of all nations. The emerging entrepreneurs in Bangladesh also strongly canvass economic nationalism through the print and visual media as Bangladesh has no laws restricting media ownership by entrepreneurs in the manufacturing or other industries. Very often media ownership and other business interests merge together in Bangladesh and that spills over into politics. It is reported that some 150 prominent entrepreneurs or businessmen are members of the parliament.
With such strong links between media, business and politics, an enabling environment is created to use the power of the state to extract economic rent for themselves by embracing economic nationalism as reflected in protectionism pursued by the state. They have further been quite successful in creating an environment of economic nationalism glibly participated by the media though history tells us that populist economic policies always reduce overall economic welfare while benefitting a handful few. In that sense, economic nationalism is a dangerous idea spreading its wings ominously across continents.
There is no question that the rise of economic nationalism in the West poses a serious threat to global economic stability. The result of a full decade of protracted economic slowdown affecting developed economies including the USA, is that the global economy is now one sixth smaller than it would have been if the pre-global financial crisis growth trend were maintained. This growth crisis has brought growing unemployment and uncertain economic future even for those who are now currently employed. This has created a fertile ground for the far right political groups masquerading as economic nationalists to provide their own "all cure medicine" for the economic revival of their economies in the form of all embracing protectionism against goods, services, capital and labour. They are trying to turn the global market into a battle ground. But the medicine they prescribe is likely to kill the patient.
The World Trade Organisation (WTO) has warned against increased use of protectionism, in particular by developed economies despite their commitment otherwise. This rising economic nationalism if translated into action can have not only dire economic consequences but also can lead to global armed conflicts. We must not forget the lessons of history and must avert disastrous consequences of economic nationalism. It is time that countries strengthen their commitment to multilateralism which can only create an enabling environment for pursuing the goal of economic growth by stimulating cross border trade flows.
(Dr. Mahmood is a Senior Fellow of the Policy Research Institute of Bangladesh. He can be reached at Muhammad. firstname.lastname@example.org)