At the end of World War II, the United States accounted for a disproportionate amount of the world’s gross-domestic product, the sum total of goods and services produced annually. Our unparalleled lead over other economic competitors was partly due to the devastation of European and Asian infrastructure and manufacturing as a result of the war. However, even in 1960 the United States accounted for 40 percent of the global economy. It was during the post war period much of the U.S. government’s approach to international trade was formulated. Today U.S. GDP accounts for a little over 20 percent of global output and economists predict our diminished lead to be eclipsed by China within a decade. Unfortunately, Washington has not adjusted to this new reality and applies essentially the same now questionable tactics that were used when we were dominant. Free trade has become the unassailable mantra even while policy makers have presided over the collapse of U.S. economic might relative to our competitors. Now when Donald Trump threatens to try something different they predict disastrous results.
The United States has demonstrably been losing on international trade both offensively and defensively for years. On defense, our government has never come to understand that free trade is primarily the mirage of 19th century British economic theory that has left that once proud manufacturing country with a New York City sized financial services hub and a few memorable castles in a verdant green countryside. Japan, followed by South Korea, Taiwan and China have followed successful mercantilist practices whereby they protect and nurture their industries while aggressively flooding less protected markets with their subsidized goods all the while paying lip service to American free trade dogma. Even Continental Europeans never bought into the fallacy of free trade. (Why even today does a Ford Mustang cost as much as a high end Porsche in Germany?)
In the late 20th century, when large U.S. companies needed access to new markets, they admirably learned to “think globally by acting locally.” Where trade barriers could be dismantled to the levels that made U.S. sourced goods and services competitive they were more than happy to encourage American policy makers in their Don Quixote quest. Other countries generally have much higher barriers to entry and whatever trade agreements could be struck were always asymmetrical: They reduced their barriers a little in exchange for essentially complete access to our marketplace. Since in the USA the consumer is kin,g this had the advantage of providing good products at the cheapest price. It also furthered America’s geopolitical goals to tie countries closer to us. Besides, the U.S. economy was so vast, what was a little unfair competition?
Multinationals adapted and the most successful ones became local players behind the lowered but still prohibitive trade barriers. They were fine with this compromise because profit margins were maintained, maybe even improved, and they could repatriate the profits. American policy makers proudly showed off the new access to foreign markets, particularly in the politically powerful agriculture sector, even though little benefit went to American workers or the communities that previously produced their goods and services. Economists authoritatively assured us that in the long run Asian mercantilism would be replaced by open markets and everything would balance. Of course, the Japanese, followed by their Asian neighbors, never really changed their policies. They just tinkered on the margins. (Ask any small U.S. manufacturer how successful they are selling products from America to Asia?) Decades later trade imbalances are swelling and reordering the global balance of power. Today there are few major economic powers where the U.S. does not run large multi-billion dollar merchandise trade deficits (goods and services) and in most there are huge overall trade imbalances.
I began my career working in the Department of Commerce’s International Trade Administration in the Trade Adjustment Assistance program, a small multimillion dollar program focused on helping U.S. manufacturers compete with imports. Harley Davidson, Lenox and a host of long gone U.S. manufacturers were our clients where we provided funds to create and implement strategies to turn them around. Since this kind of industrial policy is frowned upon the program was essentially defunded. So much for defense, not only did the technocrats make it easier for foreign manufacturers to enter the U.S. marketplace, they offered window dressing in support of American based manufacturing.
I moved on to the U.S. Export-Import Bank playing offense in America’s trade policy and found a mindset that financing support was only justified as a last resort. I have watched over the last several decades as the other ExIm Bank like agencies from Europe and Asia run circles around us. China has essentially weaponized its ExIm Bank spreading hundreds of billions of dollars around the world while our agency is essentially shuttered due to political gamesmanship. Indeed, our ExIm Bank has almost become irrelevant. Even its largest user Boeing has adapted by producing more of its plane overseas thereby using foreign government support. Boeing, GE, Caterpillar will continue to source more of their manufactured goods from countries that support them and will be fine. But small to medium sized manufacturers have far fewer choices unless they can follow suit.
The United States no longer commands the economic clout it once did and yet Washington continues to live in its own little bubble using the same formulas from the previous millennium. Now when industries like aluminum and steel are on their knees because of unfair competition some are more concerned that Harley Davidson (ironically the beneficiary of tariffs decades ago) or Kentucky bourbon will be hurt. While a trade war may not be the answer, continuing a defense of free trade looks a lot like the emperor having no clothes. The U.S. government has to do more to help manufacturers compete overseas if Donald Trump wants to be successful at rebuilding our industrial base. We are running out of time to implement both a better offense and defense if we want to avoid following Britain into becoming a diminished player in a world dominated by Asia with China as its leader.
Alan Beard is Managing Director of Interlink Capital Strategies a Washington, D.C.-based financial advisory firm and fund manger focused on exporting and foreign direct investment in emerging markets. A dual British-U.S. citizen, he has written several books and articles on international finance, been an adjunct professor at Georgetown University and advised various government agencies on finance.
The views and opinions expressed in this commentary are those of the author and do not reflect the official position of The Daily Caller.