A new economic nationalism
THE significance of President Reagan's new, more-assertive trade policy package goes well beyond its contents. The White House is taking a tentative but important first step toward jettisoning clich'es about a free-trade system that no longer exists. There's growing recognition that global political-economic realignment is tilting the world toward a new system that can only be described as neo-mercantilism. If so, it's an upheaval and an emerging context in which returning to old-style ``protectionism,'' with its tariffs and duties, or clinging to Truman-Eisenhower-Kennedy vintage ``free trade'' doctrines, could be equally ineffective. Arguably, both labels and economic theories come from a fading political-economic era. And a new synthesis may be necessary.
Most economists pay no attention to this kind of watershed possibility. But realistic legislators and politicians must understand trade issues in a historical and political context. Despite the focus on the overvalued dollar as the culprit in the United States trade crisis, the underlying problem may be more systemic in its nature.
Free trade is hardly the natural state of the economic world. Since the beginnings of ``modern'' history in the late 1400s, free trade has prevailed for only a century and a half or so, first under the aegis of 19th- and early 20th-century Britain, then with the backstopping of the mid-20th-century US. Moreover, the British and American free-trade hegemonies depended on each nation, in turn, enjoying a simultaneous worldwide preeminence in manufacturing, commerce, technology, and naval power. That kind of predominance and clout seems necessary to underpin history's occasional free-trade eras. The wishes of economists and pundits are no substitute.
Today's problem is that if US pro-free-trade political economics are winding down, no emerging power is on hand to take up the role America played in the postwar era. Japan -- the No. 2 economic power -- hardly qualifies; Tokyo's political economics are more reminiscent of yesteryear's mercantilism.
As for the case that US free-trade backing is increasingly exhausted, that need not depend on angry grassroots reports and sour public opinion polls. Here, too, British political precedents are instructive. In the mid-19th century, when Britain embraced free trade, that country boasted half the world's manufacturing production. This share slipped to 32 percent by 1870 and to just 15 percent by World War I. Major segments of British industry and the Conservative Party shifted toward protectionism in the 1890s and early 1900s, and the process accelerated after the Great War. Tariffs and Empire Protection were finally established in 1932.
Erosion of free-trade support in the US has followed a kindred chronology. The US that put in place post-World War II free trade accounted for about half the world's manufacturers. In recent years, that figure has dropped into the 20 percent range, and protectionism -- if that word applies -- has come on strong. Trade may be on its way to being a recurrent, systematic issue in US politics just as it was during the 1890-1932 period in Britain.
The doctrine of ``comparative advantage,'' first set forth in the early 19th-century, may be dated. There's a new vulnerability to the thesis that each country will, absent distortions, wind up producing what it does best economically. It makes less sense with economic realignment escalating so-called ``managed trade,'' increasing the roles of governments and instituting a kind of neo-mercantilism. Perhaps the role of government, its strategic assistance on one hand or passivity on the other, has become
a factor in national trade advantage.
Certainly the passivity of the Reagan administration has been a detriment to US competitiveness. For major elements of US agriculture and basic industry, the lack of any administration strategy for dealing with US international economic dilemmas and global realignment has been a latter-day tragedy. In mid-September, just days before the President announced his better-late-than-never blueprint, International Trade Commission chairman Paula Stern lamented that ``to win a war, you need a strategy. In inter national trade, however, we are operating with neither a battle plan nor a general staff. . . . Most of the authority needed to guide long-term action and coordinate tactics is already available to the White House. What is missing is the political will to exercise it.''
Alas, more than will has been missing. An understanding of political and economic history has also been missing. The President's bogyman citations of the Smoot-Hawley Tariff of 1930 as a principal cause of the Great Depression of the 1930s have misread not only economic history but political cyclicality. Smoot-Hawley represented the unfortunate, excessive consummation (and imminent dismantling) of more than a century of US protective tariffs. In 1985, by contrast, what we are looking at is the breakdown
of a liberal political-economic regime -- the four-decade free-trade system. This is the inadequacy now at issue.
In another sense, though, an even larger era is over. The terms ``free trade'' and ``protection'' both came into use during the Industrial Revolution of the late 18th century and the early 19th century, just like the philosophical terms ``liberal'' and ``conservative.'' Over the last few decades, though, industrialism has given way to post-industrialism, and yesterday's labels or policies don't meet current programmatic needs any better than they meet semantic needs. So far, all we have to cope with thi s upheaval is prefixism -- post-industrial, neo-conservative, neo-liberal, and now neo-mercantilist. Yet for all that the descriptions may be entirely inadequate, it is essential that policymakers recognize the transition.
Kevin Phillips, publisher of the American Political Report, is the author of ``Staying on Top: the Business Case for a National Industrial Strategy.''