Trade Wars Aren’t the Way to Bring Back America’s Middle Class
Investment in innovation, not nationalist rhetoric, will bring the most good for the most people.
The United States has been by far the biggest beneficiary of global free trade, having thereby earned trillions since the modern framework for world trade was established in the post-WWII period. But the American free-trade windfall has not been evenly distributed, or even fairly distributed, with outsized proportions accruing to the top 0.1 percent, with little-to-none for the hardworking people providing the goods and services that make Americans so competitive on the world stage. For their part, the disenfranchised, or those who have been convinced they are about to become disenfranchised, can be understood in their support of something radically different. For once, it seems to them, the status quo that has oppressed them is fragile; maybe something could actually change. That that change could end up being even worse than the status quo must seem like a risk worth taking.
These folks, rightly perceiving they got the short end of the stick, are angry, want someone to blame, and thus they are easy marks when a populist comes along and tells them they are being fleeced by a foreign country. In the present U.S. situation, that’s China and Mexico. China helps this narrative by being protectionist and not letting America’s internet companies, banks, or other industries play on a level playing field, if at all, within its borders. China has its own reasons for this behavior, perhaps viewing it as restitution for centuries of being exploited by both literal and economic colonialism.
The solution then is to point our patriotism toward putting our own house in order and do something about inequity.
What we see now, then, is the economic benefits of open trade are hostage on all sides to nationalism caused by unequal and unfair distribution. Yet inequality is not caused by open trade itself, but rather by disproportionate hoarding of the benefits by a few. Trade itself is proven to grow the involved economies and can lift standards of living for most participants—and for workers in the participating economies, when they are treated fairly. The solution then is to point our patriotism toward putting our own house in order and do something about inequity. Until we do, there will be those who will use the fear and anxiety that come with inequality as a populist bludgeon to blame everyone but themselves, keep America’s have-nots whipped into a nationalist frenzy, and voting them into power over and over again.
Rather than erect tariffs and other trade barriers to prevent Chinese technology and Mexican-made goods from proliferating, we should prioritize better competing with those things. On the government side, maybe we focus less on massive tax cuts and plow more into research and beneficial infrastructure. On the corporate side, change the focus to fewer share buybacks and more reinvestment in innovation, new tech and R&D. These will have the effect of advancing tech and productivity to a degree that encroachment from Chinese competition won’t seem so threatening anymore and will bring the added benefits of creating good jobs and stimulating the economy. The latter effects also slow the widening of economic inequality, making us less vulnerable to populist rhetoric. This was the pattern in the 1950s and ’60s, the time of the great rise of the American middle class. Powerful special interests notwithstanding, there’s no reason we can’t have that economy again. The path to prosperity? Investment in innovation forever, nationalism never.
A shorter version of this post first appeared on FT.com