The election of Donald Trump to the US presidency has been marked by a sharp turn towards economic nationalism. His 'America First' policy now threatens the rule based multilateral global trading system, a system the US has championed since the end of the World War II. The foundation of the multilateral global trading system is based on the application of rules which govern the conduct of trade and economic relations between countries. The purpose of these rules is to protect against unilateral actions or unfair trading practices by countries which harm the economic welfare of other trading nations.
Economic nationalism is an extension of what is known in economics as 'Mercantilism', a body of thoughts evolved since the mid 16th century. The mercantilists were primarily concerned with the relationship between a nation's wealth and its balance of foreign trade. At the same time as the mercantilists also recognised the growing power of the national economy and favoured the intervention of the state in economic activity to maximise national wealth or to put it simply, trade is to be considered as a zero-sum game.
Therefore, the mercantilist doctrine favours state intervention over other market mechanisms. It also emphasises state controls on external relations while mobilising internal resources to achieve the economic objectives. But the contemporary mercantilism in a wider sense is encapsulated in what is known as "Realism" in international relations which also tend to be a zero-sum game. This theory views that a country gains at the expense of another country or countries.
However, nationalism since the late 18th century was losing its momentum because of increased manufacturing activity needing overseas markets. Trade became for the first time an issue on its own right for negotiation to the exclusion of other issues as increased manufacturing not only led to increased exports but also import of increased volumes of inputs for manufacturing. This two-way trade flows also necessitated funds to pay for them. If a country can not export, it can not acquire fund to import, so free movement of goods has become mutually beneficial for all trading nations as exports pay for imports.
Advances in transport and communication facilitated movement of goods across borders thus undermining the purpose of borders. Also, the growth and increased importance of transnational corporations and their increased economic power have played a significant role in the economic decision making process of all major industrialised countries.
Since the high point in world-wide protectionism following the implementation of the Smoot-Hawley Tariff Act of 1930 in the US, the protectionism so central to economic nationalism has been abandoned by the US since the mid-1940s so much so that tariff as a share of the value of US imports fell to 1.2 per cent by 2008. This was possible because the US was very central to being successful in negotiating multilateral trade negotiations under the auspices of the GATT to reduce tariffs. This reduction in tariffs can, therefore, be attributed to multilateralism pursued by the GATT and its successor the WTO which led to new heights of global economic growth and integration.
The rise of economic nationalism in general and President Trump's economic nationalism in particular is, therefore, fundamentally at odds with the underlying principles of the multilateral trading system based on "positive-sum" game because both sides win. However, benefits may not be equally shared but both sides benefit. In fact, economic nationalism has turned trade relations as a "zero-sum" game where the goal is to derive relative gains as opposed to mutual gains. In essence, economic nationalism is seen simply as the pursuit of national interest through economic means using both tariff and non-tariff barriers. Therefore, economic nationalism is directly affiliated with protectionism.
However, if one takes a broad sweep of the rising economic nationalism, two broad perspectives emerge. That the resurgence or rise of economic nationalism has been accelerating and is a reflection of how far multilateral trade liberalisation or more precisely, what is known as globalisation can go and operate. This is because most countries' eagerness to export is not equally matched by their eagerness to import. These countries miss the point that every country's exports are another country's imports and to pay for these imports these countries must export otherwise trade flows will cease. Thus economic nationalism is attempting to put a limit on multilateral trading relationships. The other perspective views the rise of economic nationalism as part of a larger domestic pressure emanating from the post-Global Financial Crisis (GFC), poor economic performance of developed countries and now further exacerbated by the pandemic. Both views provide a rather quite pessimistic outlook for global trade.
Merchandise trade volume already fell by 0.1 per cent in 2019 but in terms of the US dollar value the decline was 3 per cent. This decline has been attributed to trade tensions and slowing economic growth. According to the WTO, world merchandise trade is set to decline by between 13 and 32 per cent in 2020 due to the Covid-19 pandemic.
Economic nationalism, in essence, is the modern form of protectionism which has surfaced with the election of Donald Trump to Presidency. It runs counter to the process of globalisation. It is rather ironic given that the rise of US as the dominant economic power in the post-World War II period owes to a rule based liberal multilateral global economic order. In fact, the US itself was the major proponent of this order and helped to craft it. Overall, the rise of economic nationalism is symptomatic of a deeper economic and political process at work to push back globalisation, thus trying to start a process of 'de-globalisation'.
Former US Treasury Secretary Lawrence Summers recently opined, "In general, economic thinking has privileged efficiency over resilience, and it has been insufficiently concerned with the big downsides of efficiency". US economic policy planners of the Trump administration have definitely heeded to the advice to rectify the 'limitations' of current economic thinking as outlined by Summers. They are now pursuing to enhance the 'economic resilience' of the US economy instead of striving for efficiency gains. They are doing so by making concerted efforts to slowly but surely to dismantle the global rule based multilateral trading system by undermining and rendering the WTO ineffective, the very institution that upholds the principles of a rule based open multilateral global trading system.
An increasingly protectionist drive under the guise of acquiring 'economic resilience' by the US is heavily weighing on the global rule based multilateral trading system. It is more than a viral pandemic that is disrupting the global trade flows. This policy surprisingly has bipartisan political support in the US including a section of the US academic economists as reflected in Professor Summers' rather very unusual theoretical input in support of protectionism.
More fundamentally, the system that has helped to serve the economic interests of the US so far, is no longer capable of serving that purpose. Now the US has started the process of stripping off the very essence and meaning of the rule based multilateral trading system and regressing into pursuing its own self interest without any regard for global rule based international order whether that relates to trade, climate change, nuclear proliferation, arms control including any other treaties, agreements or multilateral institutions like the WTO or the WHO.
Now the US is in the process of a general reshaping of international trade relations by dictating the terms of any future trade agreements to make them favourable to its own economic interests while directing all efforts to dismantling and undermining the current multilateral trading system. The failure to complete the Doha round of trade negotiations of the WTO already signalled the beginning of that process quite some time ago. In fact, the chances that the WTO can deliver a multilateral round of negotiation to further liberalise trade and investment is practically zero. The worsening pandemic crisis in the US further added to accelerate that process which will lead to long-term serious negative economic consequences for the global economy.
In effect, President Trump's pursuance of economic nationalism has triggered an aggressive and accelerating US trade and strategic confrontation with China further adding to growing economic uncertainties. The trade war measures are even further widening as the Trump administration is increasingly becoming confrontational with the European Union (EU) over their moves to impose a 'digital tax' on revenues earned in their countries by US corporations like Google and Facebook and the like, notwithstanding other already existing trade and investment disputes with the EU.
But President Trump's economic nationalism in its operational mode is primarily driven to acquire capabilities to expand manufacturing activity onshore by reshoring them. The new manufacturing will be wholly technology-intensive and technology-driven enabling the US to acquire cost advantage. Not a very good news for the Trump support base most of whom have no post-secondary education or training. In fact, 44 per cent of the workforce in the US does not have any post-secondary education or training.
Whether such an economic nationalist agenda is safe to 'Make America Great Again" is not clear. Such a policy shift is huge for any government as it will require massive disruption and dismantling of an already well integrated existing global production and supply chains with the consequent flow on effects on the US domestic economy, many of which will not be very favourable at least in the short run. "In the long run we are all dead" as John Maynard Keynes said, so it is better to leave that aside because that would be highly conjectural, especially in the current uncertain global economic environment caused by the viral pandemic.
This resurgent economic nationalism could aggravate economic problems within the US with its already existing structural problems which will be further compounded by the stress created by the global economic dislocation. This will lead to lower economic growth and higher unemployment. President Trump will also have to convince captains of industry, in particular US transnational corporation to go along with his economic nationalist agenda as they have multi-layered investments around the world which confer massive profit opportunities relative to the domestic market alone. Without their support the whole project is a no goer.