ECONOMY

Weaponised supply chains

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Much has been written about the US trade representative Katherine Tai’s speech from last week resetting the frame on US-China trade relations. But I’m not sure that it’s been given the proper due as a key turning point in the development of a post-neoliberal narrative. Just like President Joe Biden’s recent executive orders around competition policy, the speech represented a really new message about who the US economy is meant to serve. For the past half century, it’s been consumers, but this White House wants to focus on a different C-word: citizens.

Just as Biden made it clear in the EO that competition was no longer about driving down prices, but about the raising the wellbeing of workers, small businesses and communities, Tai is putting yet another stake in neoliberal conventional wisdom. This says quite plainly that America no longer expects China to make further structural economic reforms and bring its political economy more in line with the US, Europe or other liberal, market economies. 

Tai didn’t explicitly rule out better relations, but she made it quite clear that the US had left the era of Ricardian fantasy, in which countries happily and successfully pursue competitive advantage without any of the messy subversions of the real political economy.

Of course, some economists haven’t left that era — see here Paul Krugman’s evocation of David Ricardo in The New York Times, which came out a few days after my FT piece on why the left must give up on low rates as a balm for the troubles of the working class. 

Ricardo, of course, lived in a time before the internet and giant shipping containers made it possible for economic interests to be spliced, diced and spread globally in ways that I doubt the great man could have imagined (no, the East India Company isn’t the same thing as Apple, for all sorts of reasons). It’s one thing to trade Portuguese wine for English wool. It’s another thing to give up your entire industrial base to Asia, and then not be able to put masks on your citizens because the country that supplies 70 per cent of your masks, which has an entirely different economic and political model, decides to nationalise its personal protective equipment industry and (quite understandably) cover the mouths and noses of its own people first.

Tai actually laid out the failures of the “China will get freer as it gets richer” argument in her speech. As Swampians will know, I’ve never really understood why anyone thought that would be true. But as I think about that Panglossian idea now, it reminds me of another great man, Adam Smith, who thought that markets couldn’t work well unless both sides of a trade had a shared moral framework. Clearly, there’s a divergence between liberal democracy and state-run surveillance capitalism.

As part of my own book research on the post-neoliberal world, I recently went back to an incredibly prescient essay by Barry Lynn, which ran in Harper’s magazine in June 2002. It’s titled “Unmade in America”, and formed the basis of his book End of the Line, which is for my money the best thing ever written about global supply chains. It came out the same year as Tom Friedman’s book The World Is Flat, but had an entirely different worldview, one that turned out to be correct.

As Lynn wrote in Harper’s, “even as the corporations celebrate” the rise of the globalised industrial network, “almost no one asks what would happen if just one of the still very sovereign nations that underlie this web were to grab hold of a few of the strands and start yanking”. Indeed. He also points out that while the first wave of post-world war two globalisation involved European nations with quite similar values, each successive wave involved trade between nations with more and more political divergence, culminating of course with China’s World Trade Organization entry. 

The depth of this divergence means that ticky-tacky technocratic debates about the details of trade no longer matter nearly as much as the big existential questions about how we maintain economic growth and security in a world in which our key trade partner is also our key adversary.

Ed, any brilliant ideas there? Any other historical lessons we might study when thinking about this quandary?

Recommended reading

  • Continuing on the topic of supply chains and their discontents, I just finished reading Dan Breznitz’s book Innovation in Real Places, which provides yet more fodder for why Ricardian economics don’t really work as well as theorists think. It’s on the FT-McKinsey Business Book of the Year Award long list.

  • I’ve recently been introduced to Henry Farrell, a professor at George Washington University who studies clashing information orders, and has fascinating thoughts on how countries and companies leverage networks. His take on decoupling in Foreign Affairs is also worth a read.

  • And don’t miss my colleague Robin Wigglesworth’s deep read on the king of Wall Street (and progressive target number one) Larry Fink.

Edward Luce responds 

Rana, I’m afraid this is one area where we fundamentally disagree. Katherine Tai’s speech last week signalled two things. First the Biden administration would continue with Donald Trump’s trade policies, including phases one and two of the managed trade deal with China. As Fareed Zakaria writes very powerfully here this contradicts candidate Biden’s scathing critique of Trump’s approach to trade as damaging to US interests, and is unlikely to help US workers. Indeed, it has actually harmed the US middle class by pushing up prices and leading to 245,000 job losses. That’s generally what happens when two nations get into an escalating tariff dispute.

Moreover, requiring China to import hundreds of billions of dollars of US soybean, barley and other commodities comes at the expense of other exporters, many of whom are US allies. This also undercuts Biden’s vow to work with allies to manage the China challenge. The fact that the Biden administration has all but ruled out re-joining the Trans Pacific Partnership — now renamed CPTPP — and China is now knocking at its door, opens up a potentially disastrous vista for the US, and an entirely self-imposed one. 

Biden’s “Trumpism with a human face” approach to trade is badly flawed on two levels. First it largely misdiagnoses the causes of US middle income stagnation. Economies with far higher levels of open trade, such as the Scandinavians, have better middle class standards of living than America and considerably lower inequality. America’s move towards protectionism is thus based on a mistaken diagnosis of what has gone wrong. For the jobs churn in the largely white, male, blue-collar manufacturing sector, we should look chiefly to technology. To be sure, the favourable terms on which China entered the WTO in 2001 have not helped. But they pale against the forces of automation. Blaming China in particular and trade in general for America’s squeezed middle also underplays the impact of the sharp reduction in the US safety net over the last generation and the lack of investment in America’s labour force. Thankfully Biden is trying to redress that with his two build back better bills. 

The second misreading is that managed trade and “Buy American” posturing will serve the Democrats politically. I don’t see much evidence for that. Farmers in Iowa and Montana will vote for Trump whatever Biden does. He should be focusing on the intrinsic economic and geopolitical benefits of US commercial engagement in the Indo-Pacific, neither of which he is actively doing. America’s trajectory is a cause for deep concern. I’ve already alerted Swampians to Adam Posen’s excellent Foreign Affairs essay on this subject, “The Price of Nostalgia”. It is well worth re-reading. Scapegoating trade is an old diversionary tactic for a nation’s domestic woes that usually makes workers poorer and the world more dangerous. The tribulations of America’s middle class are largely homegrown. Trumpism Lite will only make them worse. 

Catch up on previous Swamp Notes on FT.com.

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