20:55 JST, 3 November 2023
The relationship between politics and economics is not so simple that it can be explained simply by reference to what is known as “the separation of politics and economics,” even in times of peace without countries at war or international conflict. The political and economic dynamics of countries are driven by their citizens’ dissatisfaction with the status quo and anxiety about the future. Therefore, there are always factors that are prone to trigger conflict of interest between countries.
The more countries become friendly and dependent on each other in terms of ideological alignment or trade expansion, the more prone they become to harming each other, as in the hedgehog dilemma. The 1969 border conflict between China and the then Soviet Union and the Japan-US trade frictions in the 1980s, for example, show how fragile ties are between even friendly countries.
In liberal democracies, public sentiment substantially influences policy. When the external flows of advanced technologies increase to the extent that they threaten not only the domestic labor market, but also food and energy self-sufficiency and national security, the public must choose between prioritizing their country’s economic interests and national security .
Britain’s Brexit vote to leave the European Union and the election of Donald Trump as president of the United States can be said to reflect the political decisions of each population, encouraged by anti-globalization movements, to put the brakes on its policy of emphasize the pursuit of financial benefits. The COVID-19 pandemic, which has turned our lives upside down in recent years, and Russia’s invasion of Ukraine have helped sharpen criticism of the consequences of economic globalization that optimistically takes for granted “the separation of politics and economics.”
Trump, citing the need to safeguard US national security and domestic employment, has implemented a succession of protectionist trade measures, including raising tariffs on imports from China and other countries. He was criticized for implementing an anachronistic mercantilist trade policy. His approach to trade policy was similar to what 18th century European countries pursued as their national goals to maximize trade surpluses with territories under their colonial rule.
Warning from Adam Smith
There was a time when there was a consensus that the enhancement of foreign trade was the best means of promoting nation-to-people exchanges. However, Adam Smith, in his book “The Wealth of Nations”, severely criticized the mercantile system for encouraging the accumulation of gold and silver by accumulating trade surpluses with a combination of export subsidies and import tariffs.
There is no certainty that foreign trade will increase domestic employment while enabling privileged traders and large manufacturers to get very rich, he said. As a result, he argued, foreign trade would create conflict and hostility between the rich and the people on the street who were forced to buy imported goods at prices inflated by high tariffs.
Smith was extremely prescient in warning that the growth of foreign trade would result in economic inequality at home. He further argued that although foreign trade could potentially serve as a “bond of union and friendship” between nations, it would give rise to a remote cause of war because a nation could prosper only at the expense of its trading partners, a situation that would made them jealous.
Some 250 years later, the 21st century global economy has emerged in a new form with China embedded in it. China, for its part, has subsequently become a trading power that is seen, in Smith’s words, as “a source of discord and hostility.”
The political conditions and technological levels of products shipped abroad today are different from those of Smith’s time. However, there is one aspect that is common to the two otherwise distinct periods – the awareness of people in both periods that “the separation of politics and economics” is problematic, considering that the evolution of globalization would lead to inequality and political instability in interior. .
In fact, the pandemic caused a short-term contraction of trade in value terms, slowing the movement of capital and people. This does not mean, however, that the historical economic transition that is taking place continuously, albeit at a slow pace, is over.
In 2021, a year after the global turmoil caused by COVID-19, global trade recovered.
Communications and precision equipment and automotive makers, which have been suffering from semiconductor shortages due to supply chain disruptions caused by the pandemic, saw exports rebound quickly in value terms. Similarly, energy suppliers saw their exports in value terms recover by large margins in 2021 and 2022 thanks to sharp price increases.
Global trade statistics show that the pandemic has caused more damage to trade in services such as tourism and transport than trade in goods. However, in the first quarter of 2022, the former’s trade jumped by almost 90% compared to the previous year.
Although non-political shocks such as the COVID-19 pandemic affect all parts of the world indiscriminately and temporarily throw the economy off course, the recovery from the shock tends to be quite rapid. By comparison, the impact on world trade of protracted political rifts and wars occasionally threatens to seriously alter the very economic structure of the world.
The Russian invasion of Ukraine that began in February 2022 prompted some countries to rush to cut off trade with unfriendly countries as a matter of national security. The United States, for example, is hardening its policy to slow the pace of China’s technological progress by regulating shipments of dual-use goods to China that can be used for both commercial and military applications. Many countries around the world are now changing their trade policies, not only to protect their advanced technologies but also to secure energy and food imports.
Blocking China
After the Trump administration imposed additional tariffs on imports from China in 2018, US-China trade contracted in the short term, but, at the same time, the higher import tariff increased upward pressure on inflation in the United States. The current US administration of President Joe Biden has therefore been forced to choose between protecting US manufacturing workers and reducing inflation.
Washington has seen imports from China return to growth over the past year with the United States running an all-time bilateral trade deficit.
From a national security perspective, the Biden administration is now giving more weight to the question of how it should regulate exports of dual-use goods destined for China, such as chips, that can also be used for military purposes rather than protecting jobs within the United States from being lost to competitive imports from China.
In 2022, the World Trade Organization’s dispute settlement panel rejected Washington’s justification for invoking the aforementioned tariffs on Chinese imports, ruling that the US action was not “taken in time of war or other emergency in international relations” as defined in the global trade governance code. In a related development, the Biden administration enacted the CHIPS and Science Act, including government subsidies to attract investment by foreign semiconductor manufacturers to the United States. Lately, he has been focusing on forging international trade deals aimed at blocking China, stepping up measures to build a strong international network of supply chains and prevent Beijing’s military conversion of advanced technologies.
In short, the United States, with China in mind, has strengthened its policy and trade approaches to create a global cooperation framework that prioritizes trade and a network of supply chains with its allies and partner economies with βfriendly support ” mentality.
Economics can provide a clear explanation of the benefits of free trade and globalization. But how should people in a country that is economically prosperous thanks to free trade deal with a situation in which they face alarming difficulties, including worsening income inequality within it? Without proper scrutiny on this matter, the future of free and multilateral trade cannot be so bright.
Takenori Inoki
Inoki is an emeritus professor at Osaka University, where he also served as dean of the economics department. He was a specially appointed professor at Aoyama Gakuin University from 2012 to 2016. Prior to that, he was the director-general of the International Research Center for Japanese Studies from 2008 to 2012.
(The original Japanese article appeared in the October 29 issue of The Yomiuri Shimbun.)