This is one for Mariana Mazzucato to digest. Two blades of the scissors: how to discipline the State - globalisation; how to discipline capitalist and other élites from abusing capital movements (globalisation) to undermine democracies.

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Financial Times

Financial Times UK22 Mar 2024

Economics

Beware, pro­tec­tion­ism is con­ta­gious

Raghuram Rajan The writer is a former cent­ral banker and a pro­fessor of fin­ance at the Uni­versity of Chicago’s Booth School of Busi­ness

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The push for inter­na­tional open­ness to trade and cap­ital flows has always been an elite project, but typ­ic­ally with enorm­ous bene­fits to the domestic con­sumer, and to poor coun­tries who develop by cater­ing to for­eign demand. But the great fin­an­cial crisis of 2008 des­troyed trust in the elite. One imme­di­ate cas­u­alty was glob­al­isa­tion. The obvi­ous costs of invit­ing imports, for instance in terms of lost domestic jobs, are easy for the pub­lic to see, while the bene­fits often require fur­ther lay­ers of explan­a­tion. Con­versely, pro­tec­tion­ism is an easy sell. It dom­in­ates the dis­course once trust is lost, even more so if one’s primary trad­ing part­ner has geo­pol­it­ical ambi­tions.

Rather than push­ing for a bet­ter glob­al­isa­tion in which past mis­takes are addressed, too many of today’s elite are will­ing to hedge it with enough caveats that it becomes rank pro­tec­tion­ism. For instance, US national secur­ity adviser Jake Sul­li­van’s evoc­at­ive pic­ture of shield­ing a “nar­row yard” of secur­ity-rel­ev­ant tech­no­lo­gies with “high fences” has expan­ded quickly into a much broader yard where any device or plat­form that col­lects inform­a­tion can be banned on secur­ity grounds, whether it be Chinese EVs or Tik­Tok in the US or Apple and Tesla in China.

Sim­il­arly, while it makes sense to exam­ine takeovers by geo­pol­it­ical rivals of com­pan­ies in defence-sens­it­ive areas, we now have the US sub­ject­ing the pro­posed takeover of stra­tegic­ally incon­sequen­tial US Steel by friendly Japan’s Nip­pon Steel to “ser­i­ous scru­tiny”.

Once open bor­ders are no longer the default, new imped­i­ments to com­pet­i­tion pro­lif­er­ate. Europe wants to keep out Chinese EVs because of the heavy state sub­sidies Chinese man­u­fac­tur­ers enjoy. At the same time, Europe sub­sid­ises green energy heav­ily, so its man­u­fac­tur­ers will have lower car­bon emis­sions, while it plans bor­der tar­iffs on high-emis­sion products made by for­eign man­u­fac­tur­ers, many of whom don’t have access to sub­sid­ised green energy. Every­one sub­sid­ises today, the ques­tion is where and by how much.

Indeed, why bother with tar­iffs when one can han­di­cap the for­eign com­pet­itor dir­ectly? Emer­ging mar­kets com­pensate for the lower pro­ductiv­ity of their work­ers with lower wages and longer hours. The rene­go­ti­ated USMCA requires a min­imum hourly wage for Mex­ican work­ers that make cars for the US. Mex­ican work­ers ought to earn more over time, but should that not be determ­ined com­pet­it­ively in Mex­ico?

Pro­tec­tion­ism is con­ta­gious. As the developed world turns its back on open bor­ders, poorer coun­tries are suc­cumb­ing also, with aver­age tar­iffs rising in LDCs over the past dec­ade.

The new elite project is indus­trial policy, with a focus on cre­at­ing national cham­pi­ons. Partly as a nat­ural con­sequence of the mar­ket fail­ures dur­ing the fin­an­cial crisis, partly from draw­ing the wrong les­sons from China’s state cap­it­al­ism, and partly from a desire for national secur­ity, faith in gov­ern­ment’s abil­ity to pick domestic win­ners has grown. A cur­rent focus is sub­sidies to chip man­u­fac­tur­ers, which allow polit­ical spon­sors to claim they are mod­ern­ising the eco­nomy even while pro­tect­ing secur­ity interests.

Yet even if coun­tries have the tech­no­lo­gical com­pet­ence to man­u­fac­ture chips, very few can bring the entire chip sup­ply chain within domestic bor­ders or reli­ably friendly shores. If so, the tens of bil­lions of dol­lars spent on chip sub­sidies will neither buy them secur­ity nor, given the likely glut in global chip man­u­fac­tur­ing, deliver a viable mod­ern industry. Put dif­fer­ently, Rus­sia has found ways to make chip-reli­ant arma­ments without a chip industry, even while being sub­ject to sanc­tions by major chip pro­du­cers.

Cross-bor­der invest­ment (as a frac­tion of GDP) has already slowed, so will trade and growth, espe­cially in emer­ging mar­kets and devel­op­ing coun­tries. The IMF pro­jec­ted 7.2 per cent growth for these coun­tries in 2006, but only 4 per cent in 2023. Low growth could increase internal polit­ical frac­tures within coun­tries and pos­sibly con­flict between nations, trig­ger­ing mass migra­tion and yet more pro­tec­tion­ism and gov­ern­ment inter­ven­tion.

To break this cycle, we need a dia­logue, per­haps start­ing with the US and China, on how the global sys­tem of trade and invest­ment can accom­mod­ate geo­pol­it­ical rivals, sub­sidies and new inform­a­tion-intens­ive products without break­ing down. This will require new rules of the game, more data and possi- bly new inde­pend­ent insti­tu­tions. And, of course, coun­tries will have to relearn the les­son that gov­ern­ments are not good at pick­ing win­ners.